Diehard Debt and the Devil in its Details

Let’s face it, the Indian economy just cannot afford to give the idea of equity the go-by

‘Between stimulus and response, there is a space. In that space is our power to choose our response. In our response lies our growth and freedom’—Viktor E Frankl, psychologist and bestselling author of Man’s Search for Meaning

It’s a pity, really, how easily people let that space get cramped. And that goes even for those who like to base their response on facts, as a couple of market spectacles of the past fortnight illustrate. The first was the ejaculatory exuberance to the US Fed’s decision to keep its QE-3 stimulus exercise of loans-loans-and-more-loans going, a case of financial markets making Chairman Ben Bernanke blink. And the other was the moans-moans-and-more-moans of investors and businessfolk back home who felt let down by the RBI’s repo rate hike to contain inflationary impulses in the Indian economy, a case of domestic markets reading Governor Raghuram Rajan wrong. Both betray market reflexes conditioned by the bizarre belief that the ideal response to a crisis caused by money twisted by money-makers to make more money is—hold your breath—yet more money.

Monetary policymakers may be at a loss for ideas, but market players appear to have forgotten that a policy of throwaway money—at zero real interest rates—constitutes a ‘new normal’ only in an ironic sense, its sanction derived from Great Recessionary fears rather than any extra-ordinary flashes of economic genius. In theory, if zero rates prevail across the entire economy, one would have a ‘liquidity trap’: a frigid state of affairs in which nobody lends anybody else any money because what one gets back may actually be worth less than what is lent, thanks to the risk of a spurt in inflation.

Ah, but that hasn’t happened, has it? The reason it hasn’t explains an aspect of it that ought to make zero-rate policy upholders squirm. A central bank policy of super-cheap money is not only abnormal, it is inequitous in the extreme. Zero-cost funds get funnelled into the top of a financial pyramid for banks to lend at a profit and devolve to sundry users who pay higher and higher rates of interest the lower they are in the hierarchy. So while dominant companies get big loans at low rates, a subziwaala finds that moneylenders still charge an annual rate of over 50 per cent—as it works out—on overnight loans for daily operations. Why, even Citibank, that charmed ‘Citi’ which apparently ‘never sleeps’, charges a usurious 39.5 per cent interest on its credit cards. That this bank’s former chief Vikram Pandit has been asked to aid India’s ‘financial inclusion’ effort may well be taken as a sign of somebody’s sense of humour. But then again, given his financial familiarity, it might reflect a seriousness of intent instead. It takes a banker to catch a banker.

So far, official measures to smoothen the ‘transmission’ of monetary policy to ease credit for common folk have proven futile, even as the adverse fallout of super-cheap cash—inflation being the most glaring—batters those who are farthest from the currency printing presses. The inequity of it may not bother those who consider themselves close to those presses, but another distortive effect of this manic monetarism might: as America’s post-9/11 stimulus showed, such a central bank response need not stimulate anything other than an orgy of financial excess and resource misallocation, which is what gave the world its Great Recession.

Maybe it’s in the nature of markets to react how they do, but the transmission of investor instincts from Wall Street to Dalal Street would probably be a disaster if it gains sway over Indian policy. In that context, the RBI’s resistance of market pressure on its credit policy is reassuring. It suggests concern for everyone, not just a favoured few. In contrast, the Centre’s reported plan of a ‘selective stimulus’ programme is an outright horror. If put in place, special credit for a few chosen sectors of the economy would imply blatant rate discrimination… as if Gujarat’s tax credit for Tata Motors at a rate of 0.1 per cent wasn’t enough of an outrage.

Can an India that’s still wracked by divisive tugs even afford to give equity the go-by? The country’s emergence so far has been way too uneven, and it’s a fair bet that India is way too stratified for a top-of-the-pyramid model of governance to do its economy at large any favours. And, sadly, it may stay stratified until the country’s collective choice of response turns really Rawlsian: everyone insists on a model one could happily live with even if everyone were suddenly and randomly reborn as somebody else.

About The Author

Aresh Shirali