Dr. Urijit Patel’s Contribution to Economic Development of India

AUTHOR- Nimisha Khattar

Popularly known as the Inflation Warrior, Dr. Urijit R Patel, has been associated with RBI since 2013. He has played a key role in formulating and shaping the monetary policy of India. With his appointment as the new RBI Governor, we can expect the government to continue with the existing macroeconomic policy.

An Economist from Yale University, Dr. Patel, believes that in order to make India a country characterized by stable growth, inflation needs to be in control. Dr. Patel has brought about many significant changes. Adopting Consumer Price Index as the base, instead of Wholesale Price Index, for measuring inflation in an ‘inflation targeting approach’ was one revolutionary reform.

Dr. Patel has been a great critic of the excessive government spending and subsidies. Time and again, he has emphasized the need for a discipline in fiscal expenditure. In order to control inflation, since the degree of correlation between monetary policy and fiscal policy is high, the greatest contribution by Dr. Patel has been to keep inflation in the targeted rate bracket of 4% ± 2% in the recent years.

Apart from his contribution in controlling the inflation by increasing the interest rates and reducing fiscal expenditure, one of the smart moves that Patel committee came up with was setting up a team of six members instead of one alone, for deciding the policy rates. This has led to minimization of risk and has helped in making the process a democratic one.

Considered as an owl (a symbol of wisdom) by the ex-RBI Governor, Dr. Raghuram Rajan, Dr. Patel had been advising central government on some major issues as well – like the development of debt market, growth of foreign exchange market and the banking sector.

Thus, it can be concluded that Dr. Urijit Patel’s contribution played a massive role in the economic development of India and going by the logic of keeping repo rate higher than the CPI, as remarked by him in the committee recommendation, let’s also keep our faith in the owl higher and stronger.

Asset Quality Review – Pros and Cons

By – Vishaka Sivanainar

The RBI implemented “asset quality review” (AQR) as a component of their annual financial inspection (one-off exercise) in order to gauge the true efficiency and health of Indian banks. AQR was implemented by RBI governor Raghuram Rajan because he believed the Indian banking system required “deep surgery”. AQR diminished the profits of most public banks and several private banks.

The pros and cons of AQR can be easily understood with the help of an analogy. University XYZ publishes the results of students below the 10th percentile on the notice board. The aim of this practice is to point out the defaulters and ensure that they follow stricter academic discipline in the future. The display of marks negatively motivates the students to work harder. The weaker students begin to recognize their flaws at an earlier stage. However, since the university is new it might not be the right time to implement this policy. If this were to be made an annual exercise, it would actually bring down the goodwill of the university.

Similarly, AQR is carried out to ensure credit discipline is maintained among banks. The defaulters are highlighted and this information is made public. The negative exposure that the banks receive will affect their stock prices in the share market which is an indication of the lowering of public confidence. Higher provisioning leading to lower earnings will make the banks reluctant to lend. The process might lead to capital shortfall which would call for infusion from the government. Since India is a growing economy it is improbable to allow AQR to become an annual practice because it would be an unfair representation of the Indian banking system.

However, this tool has myriad benefits as well. Banks were given too much forbearance in comparison to other corporates, with stringent regulations their activities would be tracked meticulously. The implementation of aforementioned norms would lead to banks being more prudent. Banks will start recognizing stress early with respect to loan repayment and can adjust the terms accordingly.

Despite the noteworthy cons, we may conclude that AQR would be a boon to the banking industry and Indian economy. It would result in the improvement of governance, sustainable and profitable promotion of economic growth. It would also increase transparency, which will allow the public to better understand and trust their banks.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

Impact of Negative Interest Rate

By Payal Sachdeva

The concept of “Negative interest rate” was flourished after 2008 financial crisis when all other means to reinvigorate the economy had been exhausted. It is a monetary policy tool employed by central banks to combat deflation. This tool was first adopted by Sweden’s central bank in July 2009 when the overnight deposit rate was lowered to -0.25%. European Central bank did the same in 2014 followed by Bank of Japan recently which has resulted in $10 trillion worth of government debt carrying negative yield.

A common misconception with the concept is that the depositors think they need to pay interest for their deposits to the bank. However, this is not true. Usually, commercial banks are required to keep a certain amount of money as reserves at their central bank as a safeguard against bank runs and to accommodate for last minute loans. The central banks generally pay the interest rate on these deposits, however, in Japan and Eurozone, banks have to pay central banks for parking their reserves.

Since commercial banks are charged for parking their reserves with the central bank in negative interest rate regime, they prefer to park that money with other banks to manage liquidity and meet the reserve requirements at a lower rate with an intention to earn some interest. Since a lot of banks try to get rid of their excess reserves, the competition pushes the interbank rate down which enables banks to pass on the benefits to their customers in the form of lower mortgage, personal loan, education loan etc. This is the ultimate objective of lower interest rate – to encourage investment and consumption, thereby stimulating the economy. Also, it might encourage investors to seek avenues abroad for better returns, which eventually leads to the depreciation of the currency due to the currency outflow. This would in turn boost exports to revive the economy. Euro has depreciated against the dollar by 20% since ECB introduced negative deposit rate.

However, a major concern is that banks would be unwilling to increase the lending as the profit margin between lending and deposit rate squeezes when they absorb the cost of negative interest rate. Though central bankers say it’s too early to gauge the impact of interest rate, they predict that if more and more central banks use this tool, it could actually lead to a currency war of devaluations.