Exclusive | RBI macro-prudential actions may have contributed to the deceleration of the demand, says Cea Nageswaran

The macro-prudential actions of the Bank of the Reserve of India (RBI) may have been necessary at different points over time, but have also contributed to a deceleration in credit growth, cushioning economic activity and hiring, according to the Chief Economic Advisor V Anantha Nageswaran.

Nageswaran addressed concerns about the growth of consumption, a key component of economic activity, stating that, although fluctuations have occurred, deceleration cannot be attributed to a unique cause. He pointed out that before 2024, there was a widespread concern about a recovery ‘in the form of a K’, particularly with respect to the lagged consumption of rural India. However, he argued that these concerns have dissipated as rural consumption has shown strong performance, indicating a cyclical problem instead of structural.

Nageswaran suggested that the issue of urban consumption is a mixture of cyclic and structural factors. He stressed that changes in private sector contracting and compensation practices in the era after COVID have played an important role in current consumption trends. These changes, together with the actions related to the credit of the Central Bank, have influenced consumer spending patterns and economic activity.

His comments come in the context of the Government’s economic survey, which projects the growth of the GDP of India between 6.3% and 6.8% for fiscal year 2016.

Literal transcription:

Q: The feedback we have received from all sectors, economists and other interested parties, it is very clear that the survey has always been realistic in its growth estimates, in its growth projections and those are the comments that occur at this time also. . But if I can address the general issue of the survey, it has used the words deregulation and regulation for 350 times in the economic survey of 480 pages. Then, in the context of the government that talks about the deactivation of the animal spirits of corporate India, do we have a demand problem or do we have a regulation problem? Has regulation continued chaining the spirit of animals?

Nageswaran: It does not have to be mutually exclusive, and deregulation or basically eliminating fear of growth in our commercial companies has been a lasting problem over the years. While much has been done in the last 10 years or so, both at the level of government of the Union and at the level of the state government, much remains to be done. And that in itself could address the problem of demand because it can stimulate a virtuous circle of economic activity that leads to greater contracting, compensation and growth of income and, therefore, the growth of demand as well. Therefore, they are not mutually exclusive, they are interdependent.

In fact, addressing the aspect of deregulation can also address the demand challenge, either in the short or medium term.

Q: If you had to articulate the industry’s desire list. Let’s address consumption. How worried is the growth of consumption today? The industry is saying that more must be done, fiscal relief should be given, consumption coupons must be on the table, are you worried about the growth of consumption?

Nageswaran: The industry can have a list of demands, some of which can be mutually inconsistent.

However, in terms of consumption, up to 2024 there was a lot of conversation about K -shaped recovery in India, rural India that is left behind, etc. But now, that is suddenly out of the window because the history of rural consumption of India is doing quite well. Then, it turned out to be cyclical and not structural in that regard.

In terms of growth of urban consumption, yes, you can call it a quasi -cyclical and quasiestructural problem. Once again, the response is not necessarily with respect to the government, but also with respect to how things may have changed after coefficient in terms of private sector contracting and compensation practices. That also has much to contribute to the slowdown in consumption that we can have experienced.

We could focus on the multiple macro-prudential actions of the Central Bank, which were necessary at different points, but collectively, they may also have contributed to a slowdown in credit growth, cushion economic activity and hiring.

So, in that sense, yes, consumption is an important pillar of economic activity. But if we should do it and call it a serious structural problem, I have my doubts. I think it is a combination of both, and a result of multiple developments, and not just a particular argument. But mainly, one can consider the practices of the labor market after COVID in the private sector, short -term actions related to credit, etc. Those are important determinants of the consumption slowdown.

Q: Let me address the other ‘C’, and that is capex. Now, once again, the government has been doing heavy work, which has also been recognized and articulated through the course of the economic survey. When I talk about the witness that moves from the government to the private sector, again, I will ask this in the context of the industry’s wishes: 20-25% of Capex growth, are those reasonable questions? Are those reasonable expectations, given the fact that the government has been making record numbers in regards to Capex?

Nageswaran: I believe that the deceleration in the expense of Capex, in terms of public investments, is something that is horcated in the governments of the Union and the State in regard to fiscal year 2015. Yes, there could be a restriction of capacity with Regarding spending by the public sector. When I say the public sector, deliberately, I do not use the word “Government of the Union”. I refer to the entire public sector, which includes state governments. Therefore, therefore, it is necessary for the private sector to analyze the need to increase investment and its implications for demand. Because ultimately, in an economy, it is the private sector that is mutually endogenous.

The private sector is made up of homes and companies. The public sector, fiscal policy and external demand, foreign trade, both are exogenous for the system. Therefore, the private sector can do a lot to stimulate demand and, therefore, justify their own investments, and that is where they must focus. Otherwise, asking the government to increase capital investment, lower taxes, keep interest rates and maintain low tax deficits, these are not a set of recommendations or mutually request consistent by the private sector.

Q: The survey says yes, the government needs to continue spending on the development of infrastructure, not only during the next year or five years, during the next decade, to achieve the type of growth rates we aspire. But would it be fair temperament, then, the expectations of the way we observe the growth driven by CAPEX, especially by the government?

Nageswaran: I believe that investment in infrastructure, both in terms of renovations, both Brownfield and Greenfield. But, again, the way we see it, we need, therefore, return to the public-private association model and how it can be revitalized, because the demands of public resources from several investment angles, not only the physical infrastructure , but also related. For the energy transition, related to soft infrastructure, etc., it will always be there, given our size, and that is something that we must take into account. And that is why the way we approach this will have to change.

Q: The impulse of this survey has also been in the responsibility of the private sector. You talk about self -illuminated interest in the private sector to make more to stimulate jobs, to stimulate demand. I don’t want to put words in my mouth, but I want to ask you, is there a feeling of frustration? Is there a feeling of disappointment? Are you talking about the corporate sector that swim in profits, about the private sector that had not lived up to its end of offer? I’m not putting words in your mouth. Do I ask you to comment if there is that feeling of frustration and disappointment?

Nageswaran: Not at all, at all. There is no doubt of frustration or disappointment, because economy and economic activity are a continuous phenomenon, and what I am writing is continuous. It is not something that we hope they will act within a particular term, and they did not act and, therefore, there is frustration. But what I am writing is valid today, it will be valid five years later, it will be valid even 20 years later. Therefore, there is no doubt that frustration or disappointment intensifies. If we look at the survey, we do write about the fact that in Japan after World War II, there was a pact between the government, the private sector and the workers that basically caused its economy to become a first world country . And that is the type of compact we should have in this country.

We also write about this in July and that is what we are expanding at this time. So, as you said correctly, you are not putting words in my mouth and did not pronounce those words. These are natural obligations in all sectors of the economy for medium -term growth. There is nothing to be frustrated or disappointed at this time.