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Viral Acharya’s final message to the government

Viral Acharya, ex-deputy governor of the Reserve Bank, who resigned and ended his stint a few months earlier than expected, had a final, hard hitting message for his colleagues and those in the government.

It is widely believed that Mr. Acharya, who, like the former Governor of the RBI, Urjit Patel, resigned, as the Modi led BJP government was continually infringing on the central bank’s autonomy and attempting to dictate terms to it. Just like in the US, where Donald Trump has been continuously pressuring the Federal Reserve to cut interest rates, it has become a common phenomenon to see autocratic leaders trying to enforce their will on central banks.

Acharya, who is known as a man that does not mince his words, had one last message for the government before he returns to his teaching career in the US.

He said that the Indian economy risks crowding out of private borrowings due to high government borrowings. He also stated that government would be borrowing in excess of ₹ 7 lakh crore to cover its fiscal deficit position, which is pegged to be 3.3% of GDP. Further, it will also raise extra budgetary resources by borrowing indirectly through public sector enterprises. The risk of so much government borrowing is that it comes at the cost of private borrowings. Also, such borrowings could keep interest rates high, and worse, could render monetary policy actions ineffective by interfering with monetary policy transmission. No wonder, in spite of interest rates cuts in the last three monetary policy meetings, we are not seeing banks cut borrowing rates, neither are home loan or car loan EMI’s becoming less.

He explained that since the government has such a high borrowing, the limited banking resources that remain, first go towards larger, higher rated corporates and therefore it is the small and medium sized enterprises that are worst impacted.

He suggested that the government can reduce its dependence on borrowings by displaying some fiscal discipline. Large farm loan waivers, welfare programs, unnecessary subsidies and other measures of populist spending the government embarked on prior to elections only add to the fiscal strain and come at the cost of investment, which is at a multi-year low currently. He also suggested further divestment in public sector enterprises.

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