An employment-oriented economic policy (The Hindu)

Mains Paper 3: Economy
Prelims level: MGNREGS
Mains level: Employment issue

Context

• The macroeconomic policy pursued in the past five years needs overhauling. The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.
• This has contracted demand. That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance.
• The rationale given for one is that it is conducive to private investment, said to be shy of fiscal deficits and held back by inflation.
• Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.

Inflation targeting

• Now, while fiscal consolidation was something the Narendra Modi government had inherited, it has taken credit for having moved India onto the path of ‘inflation targeting’.
• Arguably though, India has seen a virtual inflation targeting since 2013 when the policies of the RBI became more closely aligned to the practices of central banks in western economies.
• Thus in 2013-14 the real policy rate saw a positive swing of over four percentage points, and it has more or less remained there.
• Admittedly, at double digits, inflation had been high in 2012-13 but that could have been due to abnormal hikes in the procurement price and not due to runaway growth.
• However, as the theory underlying inflation targeting asserts that it reflects an over-heating economy, an interest-rate hike is triggered.
• The high interest rate regime in place since 2013 could not but have had a negative impact on growth by raising the cost of capital to industry.
• The negative impact of a high policy rate may, however, have appeared elsewhere too.

Reviewing RBI’s role

• A regime of high interest rates can be bad not only for investment — and thus for growth and employment — but also for financial stability.
• Sharp increases in interest rates can trigger distress.
• A trade-off between low inflation and financial stability could emerge depending upon how the former was purchased. If low inflation is achieved via high interest rates it can trigger financial instability in two ways.
• The first is via the direct impact on the cost of financing in a floating interest-rate regime; a higher policy rate translating into a higher borrowing rate.
• Second, if rising interest lowers growth, revenue will grow more slowly for firms.
• Both these mechanisms can render once-sound projects unprofitable, leaving banks stressed.

Steps need to be taken

• Experience suggests that it must be tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
• It goes without saying that the Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
• At the same time, the RBI’s leadership may want to reflect on the mindset that leads to publicly lecturing the government of India on the fate of incurring the “wrath of financial markets”.
• Whatever be the compulsions of securing the balance of payments, such a view privileges the interests of international finance capital over the public interest in a democracy.
• It also suggests that the movements in the financial markets are to be treated as the bellwether in economic policy-making.
• Actually, over the past 30 years, from Mexico to southeast Asia, financial markets can be seen to have been fickle, self-serving and capable of causing great harm as they switch base globally in search of profits through speculation.

Job creation

• Even as we shift towards macroeconomic policies that maintain the level of aggregate demand, we can assist the unemployed by strengthening the employment programme we already have, namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
• Three actions may be taken towards this end.
• First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment.
• This is unacceptable, especially in this digital era when beneficiary identification and money transfer are cheap and reliable.
• Second, as has been suggested, there is a case for extending the MGNREGS to urban India for there is unemployment there.
• Of course, some rationalisation of existing public expenditure would be needed to generate the fiscal space needed, but we may yet expect a positive sum outcome when this is done imaginatively.

Conclusion

• However, as with macroeconomic policies, a thorough review of how the MGNREGS works on the ground is necessary.
• In the context, we often find a reference to “asset creation”.
• This is an important criterion but we need not rule out the provision of public services under the scheme.
• The point is to ensure that we have desirable outcomes beyond just the job statistics.
• There is reason to believe that this matter is given no importance in the implementation of the scheme at present. An example would make this clear.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to Central Bureau of Investigation (CBI) and Central Vigilance Commission (CVC), consider the following statements:
1. Both CBI and CVC were established on recommendations of the Santhanam Committee on Prevention of Corruption.
2. CVC exercises superintendence over the functioning of the Delhi Special Police Establishment (CBI) insofar as it relates to the investigation of offences under the Prevention of Corruption Act, 1988.
3. CBI is statutory body while CVC is nonstatutory body.

Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: B

Mains Questions:
Q.1) The crucial link between macroeconomic policy and unemployment has not been flagged. Critically examine the statement.