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Medium term challenges
In the age of instant gratification it is not suprising to find debat an economy policy focusing on immediate results. The casuality in this process is a perspective assessment in the Macro Economics overview

This seems to be the age of instant gratification. So it should not be surprising to find debate on economic policies focusing on immediate results. Policy makers also seem to be taken in and flattered by the hyped-up media attention creating the impression that their policy moves would have immediate impact on the macro-economy. For instance, our media seeks the RBI Governor’s policy stance after almost every data release. It is difficult not to get flattered in the face of such constant media attention. Policy makers also inevitably assume in such an environment that their every policy move would have an immediate impact on many of those economic variables. 

The casualty in this entire process is a perspective assessment of what has transpired in the macro economy over a medium term and a perspective view of what is to be done in the ensuing period.
A case in point is the media debate surrounding the issue of hikes in the price of petroleum products. More generally, a nuanced and perspective long-term view has been absent regarding the tariff hikes on various public goods and services by various state governments and the prospects of more such hikes in the ensuing period. A related issue is the high level of debt incurred by various state governments.  

As the essential spending component rises, households generally would have that much less to spend on other goods and services. Overall spending in the economy in that environment would either remain stagnant or even fall. 

This should be the classic adjustment to a supply-side shock. A large supply-side shock inevitably leads to a slowdown in spending / overall economic activity as long as the supply-side shocks are not accommodated through wage /income increases, unmerited subsidies, easy credit or soft interest rates. A safety net for lower income households, though, would be critical in that scenario.  

Now, can you relate this to the large food price increases we have had in recent years? Everyone knows that there have been large increases in the international prices of oil and the landed cost of our oil imports in the past many years. How do you think overall personal consumption expenditures at the national  level should have reacted in the face of these large supply-side shocks?  Should there not have been some moderation in the growth rate of overall consumption expenditure as households adjusted to the shocks? 

On the contrary, because the large shocks have been accommodated through unmerited subsidies, income increases and crucially through soft interest rates, nominal consumption expenditures have increased some 150 per cent in the past 6 years, whereas in ‘real’ terms they are up only some 50 percent .

The share of food / essential expenditures in overall expenditures has continued to decline despite the large price shocks. This means prices of consumption goods and services have grown at a CAGR of some 20 per cent. That is the rate of inflation we have been facing in the past 6 or 7 years.

Now, looking at this history, have not the various supply shocks over the past several years been accommodated through easy liquidity and soft interest rates ? That is the most critical lesson and message to be gained from the experience of the last decade and more. But, is this issue getting any sustained and informed attention in the debate forums across the country? 

Banking organisation and financial inclusion

An equally critical issue is the problem of large-scale financial exclusion. Here too, one does not find perspective assessments of the situation but only a perfunctory treatment. It is assumed that once the RBI gives out new banking licences, the problem of financial exclusion would be solved overnight. 

But, what has been the experience in flogging the same horse of achieving financial inclusion through the banking sector in the past many years? Does not the experience call for some out-of-the box thinking on this issue? 

The near continental physical dimensions of our country and the extent of financial exclusion call for creative approaches to financial sector and banking regulation in the country. Novel approaches to deposit insurance can be one such alternative strategy in promoting developmental finance. It can help spread financial awareness and inclusion. But, is anything like that being even thought at all? 

In this regard, the recommendation of the Damodaran Committee to enhance the deposit coverage to Rs.500,000 from the present Rs.100,000 is interesting. Going further, the Committee had even said that “a way should be found out to insure 100 per cent of deposits by making necessary amendments in the relevant acts”.

Given the organisational landscape of banking, some brainstorming on deposit coverage could well be in order. It can potentially generate ideas and proposals.

Now, why cannot deposit coverage be enhanced only for the old private sector banks? More broadly, why cannot deposit coverage be provided even for non-bank financial intermediaries up to a certain limit based on some rigorous operational and prudential parameters? 

The Raghuram Rajan committee, in 2008,  proposed the creation of small, local deposit-taking banks as a key strategy to achieve financial inclusion. 

Why cannot significantly higher deposit coverage be considered for at least such institutions even though the Rajan committee has not specifically recommended this. 

But, is there any debate at all on these  lines? 
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