Read Editorial with D2G – Ep CCLXVIII (268)

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MEANINGS are given in BOLD and ITALIC

Reserve Bank of India Governor Urjit Patel’s emphasis (special importance, value, or prominence given to something) on the vital importance of protecting domestic macroeconomic stability could not have come at a more crucial juncture (a particular point in events or time). With the Centre in the process of finalising the Union Budget, Dr. Patel has stressed the need to ensure that it does not stray from the path of fiscal consolidation, at a time when the external environment is already adverse (preventing success or development; harmful) and likely to remain uncertain for the foreseeable (able to be foreseen or predicted) future.

That the clamour (a loud and confused noise) for a sizeable fiscal stimulus (a spur or incentive) is likely to grow louder as budget day nears is a certainty, given the signs that an incipient (beginning to happen or develop) demand slowdown may have been exacerbated (make (a problem, bad situation, or negative feeling) worse) by the cash crunch caused by the withdrawal of high-value banknotes. Within the government too, the temptation to loosen the purse strings to assuage (make (an unpleasant feeling) less intense) adverse reaction to the demonetisation decision is likely to be high.

It is in this context that the RBI chief’s reminder to the Centre that “borrowing even more and pre-empting resources from future generations” cannot be a short cut to achieving durable long-term “higher growth” is significant. With the general government deficit among the highest in the G-20 economies, Dr. Patel reiterated (say something again or a number of times) what several of his predecessors including Y.V. Reddy have harped (talk or write persistently) on: high levels of government borrowing tend to crowd out private investment and paper over the urgent need for more abiding ((of a feeling or memory) lasting a long time; enduring) reforms.

Specifically, the RBI chief has suggested that government expenditure be ideally reoriented towards creating more public infrastructure such as expanded railway networks and urban mass transit systems that would help boost productivity even as it leads to reductions in the oil import bill and provides the collateral benefit of improved air quality. And in what could be seen as an expression of assertion (a confident and forceful statement of fact or belief) of the RBI’s independence of thought, Dr. Patel spoke of the risks that policy interventions in the form of government guarantees and interest rate subventions (a grant of money, especially from a government) pose.

While not directly alluding (suggest or call attention to indirectly) to Prime Minister Narendra Modi’s announcements last month, which included a doubling in credit guarantees for micro, small and medium enterprises, the RBI chief said that “large credit guarantees also impede (delay or prevent (someone or something) by obstructing them) optimal allocation of financial resources and increase moral hazard.” With such guarantees only adding to the government’s liabilities and raising the risk premium on its borrowing, the better solution, he suggested, would be to resolve constraints such as transaction costs related to clearances and the taxation bureaucracy. As Dr. Patel said, “it is easy and quick to fritter (waste time, money, or energy) away gains regarding macroeconomic stability”. But, as he added, it would be “hard and slow to regain them”.