The economic and the political: A paradigm shift in the Indian Economy

From a larger state of affairs, it seems that the Indian economic system has long maintained a structure where there is a middle ground between a free-market and a centrally planned economy. The government and the Reserve Bank of India have played vital roles in maintaining that balance, through two of the most important instruments that influence the economy: the fiscal and monetary policies respectively. With significant power and leaders in both institutions, it is not unreasonable to expect friction between the two over the years, as each strives to attain their end. There have been cases where former RBI governors have voiced their dissent towards the government’s push for moves. Yet while the RBI and its autonomy have been long-drawn subjects into the economic discourse in India, both the government and the RBI have managed to keep their disputes at bay, as they endeavor to maintain a structural equilibrium.

But what happens when there is a paradigm shift in the notions and approach to economics in the country? In light of the recent moves by the government and the slowing economic growth for the past 4 quarters, it is definitely imperative we understand the impact of government ideology on the Reserve Bank’s policy and ask whether the balance that has been institutionally maintained due to the separation of the fiscal and the monetary policies is threatened.

When the 2008 financial crisis broke out, the government and the RBI functioned in tandem with each other, performing their respective functions. The government employed measures from its fiscal policy, including tax reliefs and increased public expenditure to generate employment and public assets, whereas the RBI applied a multitude of liquidity enhancing measures in order to counter the fall in growth rate. Moreover, it was the RBI governor at the time, Dr. YV Reddy whose tough lending standards were credited to be able to contain India’s fall in the Growth rate, as the growth rate in 2008-09 stood at 6.7%. The separation of the fiscal and the monetary measures as evident, yielded modest results and ensured efficient performance of both institutions.

It is worth noting that for more than 8 decades, the central government has held the power to cease a form of currency as legal tender but only twice before 2016 has this power been exercised. The only time demonetization happened post-independence i.e. 1978, both houses of parliament had passed the legislation to allow for the implementation of the scheme. However, in 2016, it was strange to see that the Modi government decided to take covert action and execute this as an unexpected move. While the policy was supposedly recommended by the Reserve Bank of India, it is apparent that a major government intervention in the monetary policy had taken place, which while in its power, is not a route most governments prefer to take. Moreover, the precedence that the political narrative seemed to have taken and the projection of Modi as the face behind this policy, collectively undermined the economic facet and situation, something which cannot necessarily be embodied culturally.

What is particularly odd is that even after the demonetization scheme was announced, all that the RBI’s press statement says about the rationale behind it is to curb counterfeit notes, black money and illegal terrorist funding. Indeed, the pertinent question arises as to why, being a financial institution, should the RBI be tightlipped even after the move, just because the political nature of the move was covert. Surely, serious concerns about the RBI’s changing dynamic are now emerging.

The concept that lies at the heart of the issue deals with the political influence on economics. The interplay between the political and the financial is a widely prevalent concept across the world. In many countries, there is an established notion of ‘Corporate Political Activity’, which involves firms attempting to shape government policy in order to favor them. Such a system has its own downside in a country with a mixed demographic like India, which is why we seek to maintain the balance. However, while such an exercise may be unfeasible, it is strange to see that the converse is being applied. The Modi government’s recent moves, including demonetization, the Goods and Services Tax, and the RBI’s recent ban on Letters of Undertaking [LoUs] are bent on pushing the firms to make a compromise for what is being projected as collective good. Sadly, there is a categorical problem with such decisions, irrespective of their intent.

Primarily, not only are these decisions politically and ideologically driven, but rather the economic aspect of these decisions is being heavily subverted. With themes such as anti-corruption and commoners’ fight looming heavily with demonetization, the political connotation that the government seeks to attach to this scheme is so massive that any opposing discourse on it, particularly that of the actual economic situation receives massive backlash and is painted in bad light. By bringing in this moral consideration into the ambit of the debate, the actualities, such as economic slowdown, are masked as irrelevant. Hence, the political has heavily diminished the significance of the economical.

What is noticeable is that the resulting decisions are formed based on a very politically skewed image of the economy. And all this is coming at the cost of government’s significant impact and intervention in the RBI. While the jury may still be out on demonetization, what is clear is the fact that financial decisions driven by such ideas can cause major problems in the economy. Such decisions if repeated, no matter whatever intention they are proclaimed to be fulfilling, cannot happen without significant collateral damage to the economy, a damage the people of this country are less likely to be willing to bear every successive time.

Vaibhav is a second year undergraduate majoring in Economics. He has diverse interests such as politics, literature and tennis, and loves to engage in endless discussions on anything remotely related to them. He loves writing and believes that it allows for a thoughtful consideration of inputs, making it much better than impulsive responses. Among other things, he loves playing tennis, reading new books, quizzing and listening to varieties of music.

3 Comments

  1. ganesh purohit Reply

    A very mature look on how politics and central bank work and its effect on the economy and impact on the country. Good article.

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