Crisis and macroeconomic policy

Macroeconomic Policy in India since the Global Financial Crisis

Author: Sebastian Morris

Publisher: Springer

Pages: 260

Price: Rs 14,081 

The period beginning with the global financial crisis (GFC) 2007-08 to date has been tumultuous throughout the world and more so for India given that there has been a major regime change in between. There is a growing despondency about India’s below-par economic performance. Various authors have explored sub-periods and topics (GFC, inflation targeting, the goods and services tax, demonetisation) separately. There is a compelling continuum in the Indian context and a need to look at this whole period comprehensively in one place. This book presents a complete review of the significant events, policy initiatives and their impact on our economic sluggishness and the few successes in between.

Although the book has an academic tilt, the content is lucid and intelligible for lay readers. Econometric analyses and data tables abound but the results are decoded side by side for easy comprehension and the arguments have been advanced in simple, lucid English with jargon kept to a minimum.

To get a comprehensive review of monetary policies, taxation initiatives, GST, an evaluation of the government’s performance, burning issues such as inflation, joblessness, stalling growth, reasons for moribund manufacturing, trade and industrial policy issues for this time period in one book is indeed welcome. Most of all, the book wisely avoids wasting pages on noisy events and topics, so it has a manageable size of 260 pages.

There is a good discussion about the Covid-19 disaster and the book is unsparing in pointing out several areas where the government has muddled through listlessly, even as it gives credit where due. Similarly, there is a good discussion on GST. But the book stops short of recommending possible broad schematic ways forward, at least as a guide for the future. The discussion on the failure of manufacturing is also insightful and comprehensive.

Chapter 7 is the star of the show. While many commentators may have made similar arguments in bits and pieces, it presents a comprehensive critique of the Reserve Bank of India’s (RBI’s) disconnected (from reality) approach to monetary policy on flawed models where symptoms dominated analysis and main objectives are somewhat forgotten. The Chinese and ELG (export- led growth) models, as the book points out, have done a far better job. Both have ensured that the tail of monetary policy does not wag the dog of economy, growth or employment.

The author is at his caustic best when he observes, “If we consider the RBI’s position, then it is tantamount to taking upon itself what it can never do … Then we come back to the huge punishment that such a policy would impose on the rest of the economy, which it has done over the period since 2012-13.” The RBI itself has admitted often in its monetary transmission studies that the pass-through to the ultimate borrower is too feeble.

This reviewer believes that had the RBI governors walked their way to their office from Churchgate and VT once a week and talked to common men, pushcart vendors, shopkeepers and office-goers, the central bank’s policies would have been far more focused and meaningful.

While the author is critical about the government on fiscal management, GST and Covid-19, the book seems to lay a large share of the blame for our economic morass on RBI and its currency rate management during the last 13-14 years, clumsy inflation targeting and faulty exchange rate determination for defending the rupee.

The government on its part appears to have mistaken the guardrails in fiscal management for objectives adding loads of problems to the cause of employment generation. The book argues that the government should actively engage in a dialogue on the coordination between monetary and fiscal policies. A reasonably knowledgeable government could negotiate these things rather than assume these are beyond bounds by taking a household budgeting approach (and the current government is surely wanting in this aspect).

It is puzzling, however, that the book has not gone beyond cursory mentions of the abandoned land reforms, stalled labour reforms, the Insolvency and Bankruptcy Code, ease of doing business and so on, all of which have a major bearing on economic sluggishness.

It is also difficult to agree with the author on terms of trade vis-à-vis agriculture. While the book points out adverse movements since 2018, what it ignores is the 14-year onslaught on manufacturing before that when the terms of trade moved against industry. On an indexed basis, manufacturing was getting Rs 67 in 2019 against Rs 100 in 2004-05 (equating what agriculture got to 100 in both years). Manufacturing could not have covered this up through productivity gains. When saddled with the responsibility for creating new jobs, including for those getting released by the agriculture sector, what is the point in handing over all its gains to agriculture?

There is some avoidable duplication between the first and last chapters. The book needs one more round of spelling and grammar checks. What requires more urgent editing is the steep price tag. Mercifully, the various chapters (each has its own reference and bibliography) is available for separate download.

The book is worth a read for all those interested in our economy — students or commentators of various tints — not least because most arguments are data-anchored but devoid of spite.  

The reviewer is author of Making Growth Happen in India (Sage)