The process involves, over and above the ritual sacrifice of a bull and a ram, the community of Israelites providing Aaron with a goat; Aaron is supposed to lay both his hands over the goat’s head and confess to all the sins of Israelites.
This goat, with all the Israelite sins now laid on its head, is then sent out into the desert to forever bear the community’s guilt and suffer desolation in a barren landscape. Thence was born the concept of a scapegoat.
Almost 2,500 years later, in present day India, the political and industrial classes seem to have put their hands on the head of Reserve Bank of India (RBI) and cursed it to forever bear the cross of all economic ills, regardless of where they originate.
All eyes are on newly appointed RBI Governor Sanjay Malhotra to see how he adjusts to life at the head of an organization that has become the favourite punching bag for politicians.
Various ministers, government officials and sundry industry representatives have been hinting at RBI culpability in India’s economic slowdown and have called upon its monetary policy committee to cut rates in support of growth.
The debate began with this year’s Economic Survey claiming that the flexible inflation targeting (FIT) framework should not target headline inflation, but instead focus on inflation that excludes food prices.
Both Union commerce minister Piyush Goyal and finance minister Nirmala Sitharaman have since then made demands for policy rate cuts and endorsed the Survey’s suggestion.
An impression has been created that India’s FIT framework is failing the country on growth, although the fact that changing it would require legislative amendments has gone unmentioned.
Interestingly, the outgoing RBI governor Shaktikanta Das summoned some empathy for the mythical goat during his farewell press conference: “Growth is impacted by a multiplicity of factors, not just repo rate.” Significantly, this solidarity found forceful expression only on the last day of his tenure.
The billion-dollar question that needs to be answered is why private investment has continued to disappoint through both high and low interest rate regimes and despite the government’s aggressive capital-expenditure programme.
The previous episode of low interest rates saw Indian corporates deleverage their balance sheets but fail to invest in fresh capacity. Conversely, many large Indian industrial groups are preferring to invest their surpluses in overseas capacity.
Data available for April-November 2024 shows overseas investment (equity plus debt) totalling $12.2 billion, in addition to $15 billion in guarantee issuances. Outflows under the liberalized remittance scheme have jumped from $27.1 billion in 2022-23 to $31.75 billion in 2023-24.
The ministers need to deconstruct another puzzle for the public: the reason industrial capacity utilization has ranged around 75% for close to 10 years. This indicates stagnating consumption demand, which is independent of interest rates but is overly influenced by inflation rates.
With consumption demand showing no signs of breaking out, Indian industry’s capital expenditure reluctance seems understandable.
Add rising unemployment to the mix and the demand situation indeed looks grim. Unable to reverse wage stagnation through policy intervention, political parties are opting to transfer cash directly to households.
According to PRS Legislative Research, while nine states have budgeted over ₹1 trillion for direct and unconditional cash transfers to women beneficiaries, the actual outflows may exceed ₹1.4 trillion.
As economist Pulapre Balakrishnan recently wrote in a column, the ministers’ interest rate demand amounts to a supply-side solution for a demand-side problem.
Recent news reports cited an industry lobby chief executive ponderously exhorting the government to stick to its fiscal deficit targets. Industry lobbies should instead be conducting a survey of their constituent members, probing reasons for their reluctance to invest in India.
This report should then be shared with the government as well as the general public.
There is no denying that RBI errs on many judgement calls, especially its recent guidance record on inflation and growth.
The added tragedy is that RBI officials have chosen to fashion recent central-bank reports as plugs on government economic administration, instead of speaking the truth to fiscal authorities about the slowdown.
Worse, blame-shifting has been institutionalized through FIT rules: a failure to discipline inflation over a specific period requires RBI to submit a report to the government explaining the reasons for missing the target.
Unfortunately, that report is never made public even as politicians mould negative public perceptions of RBI.
Sanjay Malhotra, as part of a long-honoured tradition, is yet another finance ministry mandarin pitchforked into the Mint Street corner office.
The road from North Block in Delhi to the RBI headquarters in Mumbai is littered with many signposts, most of them prodding the governor to remember where his loyalties lie.
Many past governors managed to stave off pressure from Delhi while remaining true to their central banking responsibility. Time will tell how Malhotra, another steeped-in-Delhi bureaucrat, negotiates this dynamic.
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