Subir Gokarn signs off addressing four broad economic themes

A change in roles means that this will be the last column of this series.

Looking back over the almost three years of “Muddy Waters”, I see four broad themes that have taken up much of my attention. I will use this opportunity to reflect on the current state of affairs in these themes.

First, there is the global situation. The past three years have been extremely turbulent; more so, these disruptions were caused by a variety of factors. In 2013, the prospect of the rollback of its unconventional monetary policy by the US Federal Reserve shocked global financial markets. The Greek default dominated the stage for several months, but has been in the background for the past few. China took the spotlight this year, with changes in its currency regime, but more broadly, the slowdown in growth and the emergence of significant excess capacity. Commodity prices crashed in 2014, derailing the growth trajectories of many emerging economies, including three of the BRICS countries. And so on.

Against this backdrop, it is striking that India has emerged as a relative safe haven, with macroeconomic conditions returning to levels of comfort similar to those seen in the early stages of the 2003-08 boom. Sharply lower oil prices have made a significant contribution to this, but policy actions that helped contain food inflation pressures and narrow the current account deficit also made a difference. The key difference between that phase and now is the level of investment. The investment-GDP ratio began climbing rapidly in the early 2000s as a result of global momentum and the domestic push on infrastructure. The first factor is absent today, with global overcapacity being a deterrent to investment. The second has been sluggish, but recent developments that I will address next offer prospects for revitalisation.

The second theme relates to the problems we have had with our infrastructure strategy and potential solutions. The massive build-up of non-performing assets from the infrastructure sectors on the balance sheets of banks reflects the difficulties in financing infrastructure development by bank loans. It turned out that neither the concessionaires nor the banks were able to handle the multiple (and often unanticipated) hurdles that projects had to deal with. These escalated costs and pushed back revenue streams. The one clear realisation that has emerged from this experience is that, at least in the early stages of a major project, public finances are the best way to deal with the various risk factors.

The establishment of the National Infrastructure and Investment Fund, which has been concretised recently, offers a potential solution. In its ideal form, it should leverage an initial budgetary contribution to raise funds, through both credit enhancement and debt issuance, to quickly push a set of major projects that have stalled to the finish line. It can then, like private equity funds do, exit these and move on to the next cohort. Importantly, the effectiveness of this mechanism will not be determined by financial capacity alone; it will also have to bring into play the ability to co-ordinate and resolve conflicts across multiple agencies of government at all levels. This obviously sounds very challenging, but a few early successes should provide momentum to the process.

The third theme is the persistence of food inflation. During 2014, both governments took politically bold decisions to limit the increase in procurement prices of rice and wheat. This was reinforced by the new government’s open market sales of both cereals. These actions helped dampen the inflationary impact of, particularly, rice prices. However, as recent developments have demonstrated, these measures do not address the fundamental causes of the problem. This year, tur dal prices repeated a pattern last seen in 2009, with much greater intensity. Onion, potato and tomato shocks have been felt periodically. The simple explanation is that supply is just not keeping pace with demand for all these commodities.

On the demand side, diversification of diets, in and of itself an extremely positive development, is the driver. Unfortunately, on the supply side, an incentive structure that has favoured cereals over the other commodities has deterred both growth in area cultivated and, most importantly, investments in productivity enhancement. Vegetables have relatively short cropping cycles, so their inflationary impact is not persistent. However, pulses are long-cycle crops, so this year’s shock is likely to persist at least for a year, even taking into account imports and de-hoarding. This clearly has implications for monetary policy. In short, the current dynamics of food prices are both welfare-depleting and impact macroeconomic management. Structural solutions must be found.

The fourth theme is financial inclusion. Universal access to the banking system through the Prime Minister’s Jan Dhan Yojana was a major development. This was complemented by the creation of two types of niche and differentiated banking models. Both the payments banks and the small finance banks reflect a strategic emphasis on “doing things differently” in order to meet the needs of a very large previously unbanked population.

Very importantly, the creation of the pipeline, which is effectively what the account openings represent, has been supplemented by the availability of products that provide good value propositions for the newly banked constituency – credit, life insurance, accident insurance and pensions.

This is a virtuous combination of access, affordability and quality that should serve as a platform for a range of public services – health and education, in particular. In both these sectors, evidence suggests that the combination of these three attributes is not being achieved. While each of these sectors has their special attributes and challenges, the access-affordability-quality framework provides a useful way visualise the roles of differentiated models of delivery in order to meet very diverse needs in both domains.

Let me end by thanking the editorial and web teams of the newspaper for their very efficient support and, of course, most importantly, the people who read, were stimulated by and responded to the columns.