India’s war of the Mandarins leaves companies as victims


Singapore: First they conveniently lost their voice; then they miraculously got it back. But now that the pundits of India’s economic establishment are talking again, all investors hear is discord.

The biggest casualty of the war of words between the finance ministry in New Delhi and the central bank in Mumbai is India Inc. Without clarity on where policymakers want the cost of capital to be, reasons for highly indebted companies to restart work on mothballed projects, or dream up new ones, are being drowned by doubts about profitability.

The battle of the mandarins has its origin in the 8 November demonetisation. The ban on Rs500 and Rs1,000 notes removed 86% of the currency in circulation from a cash-dependent economy. It also made officials wary of doing or saying anything that would amount to questioning the weird economics of the move.

Gadfly was surprised when, amid an extreme cash crunch in December, the Reserve Bank of India (RBI) didn’t cut its policy rate by even a quarter percentage point. At the time, though, Arvind Subramanian, the chief economic adviser in New Delhi, described the non-action as a “brilliant call.”

Then last week, when the RBI again stood pat, the same official protested loudly, saying the economy had decelerated from last July, and substantial monetary policy easing was warranted because inflation-adjusted interest rates were too high, corporate and bank balance sheets too weak, and the investment impulse too anemic.

While GDP showed evidence of a protracted slowdown in the March quarter, much of what Subramanian now says held true even before that report. For instance, a four-year drought in private-sector investment is visible in corporate data.

A Gadfly analysis of capital expenditure by India’s top 100 companies by market capitalization shows that it would be a lot worse but for Reliance Industries Ltd.’s spending spree in recent years, including the $30 billion it invested in a new telecom network.

Oddly, the RBI refuses to wake up even now. Inflation could dip below the lower end of the monetary authority’s target range of 2 to 6% this month, according to Bloomberg Intelligence economist Abhishek Gupta.

Deflate the 10-year government bond yield by 2%, and the real risk-free rate works out at 4.5%. Who would put up new factories at such a cost?

Having bungled its inflation forecast, the RBI is now acting all wounded that the finance ministry is encroaching on its independence by demanding that members of the monetary policy committee meet with it before interest-rate decisions.

The bickering is pointless. Investors don’t particularly care about the timing of India’s rate cuts. Abundant liquidity means stock prices can afford a longish separation from subdued corporate profits. But job creation is paying a price.

Capacity utilization in India was below 73% at the time of demonetization. Everything that’s happened since then—a strong rupee, the collapse in bank loans—was predictable.

By refusing to speak truth to power when they should have, the technocrats have collectively let India Inc. down. Blaming one another won’t restore their credibility.