We have just witnessed some defining moments in our economy, and polity. Expect voters to vote on performance, not ideology; expect large interest rate cuts, and even some tax cuts.
It is a relief that both the people and the government get it. The people were first bombarded by the terrorists, and closely following, the most irresponsible and just plain bad reporting by the media. When will it be the case that anchors, and TV journalists act their function — report responsibly on the news, not manufacture opinion? Instead we had the sorry sight of the media making the news as one anchor sought to out-stupid the other by mis-reporting terrorism, and by reporting what should not have been reported (the movements of the commandos).
It was against this tragedy that the voters went to the poll in several states of India. Hoping to cash in on the mayhem, the BJP ran some obscene ads on terror and weak governments — hint, hint, if we had been in power, the terrorists attack wouldn’t have happened. If you are wondering about the sanity of these ads, spare some condemnation for some Western reporters, make them British. Research should verify that these are the same lot (mostly self-consciously and pompously “liberal” — the kind that gives liberalism a bad name) who believed that 9/11 happened because of poverty, or worse, inequality increase; now they write that Mumbai terrorism occurred because the Indian Muslims face extreme discrimination — hence, few outlets other than terrorism. Never mind that Muslims in India show the fastest increase in education, along with the SC/STs; never mind that relative incomes of Muslims to non-Muslims has stayed the same for the last thirty years. The faster increase in education implies that over the next decade or so, the relative position of Muslims and SC/STs will improve.
This was the “input” that voters, educated or not, received as they proceeded to vote in five states of India, spanning from the north-east to the centre. In Delhi, an urban constituency and one most likely to be susceptible to the overtures of the political opposition, there was an additional factor — anti-incumbency. Chief Minister Shiela Dixit was running for an unprecedented third term. She was bound to lose.
Well, she won almost two-thirds of the seats. Across the states, the voters voted for the “most likely to succeed” candidate; the personally non-corrupt BJP CM of Madhya Pradesh, Mr Chouhan, won as well. Terrorism was not observed to be in play anywhere. It was as if the voter decided that the system may have been at fault, but not any individual political party. Nor was inflation a concern for the voter. Indian politicians have acted on the belief that no matter what the source of inflation, the “dumb” Indian voter always rejects the incumbent, regardless of the fact that inflation might have been caused by a spike in the world price of oil. Respected Indian analysts and policymakers also believe that a drought in Australia is worthy of tightening monetary policy at home. Heartening to see the voter behave much more responsibly than politicians/experts.
There was even some good news on the economic front, something of a horror of all horror movies this year. Yet another defining moment. After wobbling till mid-October, the government has (partially) redeemed itself by finally getting it. Small steps in monetary and fiscal policy have been taken, but these are giant steps for a government that until yesterday was, at best, floundering. In reducing repo rates by 300 basis points and pointing towards some fiscal stimulus, the government has delivered more than what was expected, but considerably less than what is needed. But there is hope — the body language, and words, of the RBI Governor and other policy officials is that the government stands ready to act, and act quickly and decisively.
We have to empathize with those who get it in government, because they face considerable pressure from the habitual monetary and fiscal hawks in the system. As with any other fundamentalists, the facts don’t matter for the hawks — only ideology does. Thus, you had the unseemly sight of these hawks (aided by experts in the media), arguing for rate hikes in July and August and September and early October. These same experts were also warning us that the world was facing a slowdown unmatched in modern history. The two contrasting views — I never got it, and still don’t get it.
Fundamentalism doesn’t change — it just finds new veneers. Now the talk is that we don’t have fiscal space, or that we blew our wad by not cutting fiscal deficits when the going was good. Wrong on several counts — the last five years have seen the largest reduction in consolidated above-the-line below-the-line fiscal deficits India has ever seen — some five percentage points in five years. If one was to believe the noise, one would have thought that, at a minimum, the fiscal deficit had not declined at all. Again, if fiscal deficits are not increased when there is the Greatest Global Slowdown, then when? Finally, complaining about fiscal deficits in the present circumstances is akin to a doctor worrying about cholesterol in a patient dying of cancer.
The latest data on industrial growth and inflation point to an urgency. Industrial growth year on year is zilch. And regarding cholesterol, sorry inflation, the bare facts, if the policy hawks want to note, are as follows: For the eight months of this fiscal year (April-Nov), inflation is running at an annual rate of 5.9 percent; seasonally adjusted, 3.9 percent; since June, minus 3.3 percent. What is needed: immediate removal of all the cesses, surtaxes, and gratuitous taxes in the system (including the fringe benefit tax). Reduction in the repo rate to 4 percent, reverse repo to 2 percent, CRR to 2 percent. Then watch for a month, and if need be, reduce rates further — and perhaps even reduce corporate and income tax rates.
The author is Chairman, Oxus Investments, a New Delhi-based asset management company. The views expressed are personal.