The government may have to resort, eventually and however unwillingly, to printing money, abandoned as policy and practice in the 1990, predicts T N Ninan.
The economy is getting painted into a corner.
Fiscal policy is boxed in by alarming numbers: Expenditure in the June quarter was 5.4 times revenue!
Monetary policy has no room for manoeuvre, because the policy rates are already negative in real (inflation-adjusted) terms.
While the government and the Reserve Bank of India find their hands tied, the resources available to the rest of the economy are constrained as GDP is expected to shrink by 5 per cent or more.
Corporate profits as reported have fallen by about 30 per cent this past quarter, and households are coping with job losses.
So the macro-economic ratios of savings and investment that underpin growth will dip.
And the government will soak up a higher proportion of the available savings.
These problems are not about to disappear into green shoots, but the June quarter's grim numbers mark the trough.
A recovery will come, but from what levels?
Government tax revenues, for instance, are down by a half in the June quarter.
Even if they double in the September quarter, the year's fiscal deficit target of just under Rs 8 trillion will have been massively exceeded midway through the year.
Even with generous assumptions about further revenue recovery in the second half of the year, the deficit could end up exceeding the 6.4 per cent of GDP, which was the high (or perhaps low) watermark set in 2009-2010.
In anticipation, the government has already upped the year's borrowing requirement by 50 per cent, to Rs 12 trillion.
It may need more than that, and bind monetary policy even more as the RBI plays its role of government banker.
And so we come to policy rollbacks.
Start with the assumption that a massive fiscal stimulus is the only answer, as it was in the wake of the global financial crisis when the fiscal deficit jumped from 2.5 per cent of GDP to 6.4 per cent.
That fired up a smart recovery; some would say too smart.
The difference between then and now is that the deficit and public debt were smaller then, so there was room for an outsize fiscal stimulus and expanded public borrowing.
This time the numbers are more stretched, so the government may have to resort, eventually and however unwillingly, to a policy rollback, and revive the automatic monetisation of the deficit.
In layman's language, that means printing money, abandoned as policy and practice in the 1990s.
Meanwhile, banks are headed for another dunking in a sea of bad debt and will need additional capital of Rs 4 trillion, judging by RBI estimates of potential bad loans.
Since that money can't be found, and more companies risk going under, the only way to keep the financial and corporate sectors functional through a fresh phase of the twin balance sheet problem is to roll back policy on another front.
This the RBI has just done by reviving the discarded tactic of kicking the can down the road, via loan restructuring.
If macro-economic management is constrained enough to force rollbacks, what of longer-term policy?
The government's moves so far have been to ease labour policy (via the states), invite foreign investment in new sectors (like coal mining), encourage import substitution, and improve the transport infrastructure.
These will make a difference, though all of it not necessarily for the better.
The pushback against imports from China (which account for a significant chunk of the non-oil deficit in merchandise trade) is understandable, but the broader lack of conviction that open trade can benefit India has led to the embrace of long-discarded Congress policy by the government, otherwise keen to shed all remnants of Congressism.
So we have two more policy rollbacks. To higher tariffs and, after three decades, the re-birth of import licensing.
The discarded policies now revived did not yield great results the first time round.
This government thinks it can do better.
Good luck to it, but in the meantime it seems only divine intervention can stop the Covid juggernaut, which started and sustains the havoc.
If only religion could serve as something more than a government's opium for the people.
Feature Presentation: Aslam Hunani/Rediff.com
