The other way, he said, was to undertake a devaluation of the rupee. I asked whether it should be 15 percent or 20 percent and he said that’s a matter of judgement to be exercised by the Reserve Bank of India
Two questions then arose. One, whether this would not amount to restricting imports from all countries. Two, whether this would not attract the attention of the US government, which has a watch-list for those it calls currency manipulators.
My own view is that the rupee has already depreciated by nearly 11% in the last 12 months and a more accelerated depreciation to reach Rs 82-85/$1 would be a more prudent way of achieving the same objective. After all, step-devaluations have their downside, which, to a large extent, can be managed by better exchange rate management.
In other words, since the Indian exchange rate is in any case a managed float, some dexterousness there is needed.
The other problem that the economist and I discussed was of deficient demand. Here, the problem seems to be the difficulty in identifying which segment of demand needs to be addressed first—consumption demand or investment demand.
Given the current excess capacities, it is obvious that the government must focus its attention on consumption demand.
However, this is easier said than done in a country like India where the consuming class, whose increase in consumption would make a substantial difference, is very small. For example, the demand for consumer durables comes from no more than a 100 million people. These people constitute the income class, which the finance minister identified as those earning above Rs 2 lakh a month.
Even if income tax rates were reduced for them, the problem would still remain of how to get them to move from a precautionary mode to a consuming mode. In other words, having taken the horse to the water, how do you get him to drink?
There is no simple answer to this question. All we can do is wait for acche din.
The other suggestion made by the economist was to render unto the States what is theirs. To a very large extent, the government has indeed been doing this. In three months, it has transferred about Rs 2.3 trillion to the States.
And remember, this is without any recourse to monetising any deficit yet. Also, most of the calculations for the transfers were made before the revenue implications of Covid-19 were known. So, we can expect far larger transfers to take place in the next few months.
To conclude, I would reiterate my view that although the Modi government does all the right things on economic policy, it does so in such a low-key manner that it does nothing to change the mood in the country, which continues to be severely depressed.
Therefore, Mr Modi needs to make some big bang announcements when he addresses the nation on August 15.