Here’s a $64-billion question: in the ongoing debate about the changing role of central banks, are central bankers expected to inflate feel-good news while downplaying the depressing parts? Recent statements by Reserve Bank of India (RBI) governor Shaktikanta Das draw attention to some of these contemporary dilemmas confronting central banks.
The RBI governor, in copybook central banker mode, has duly pointed to a systemic risk routinely discounted by large commercial banks: high levels of staff attrition. Most leading private banks have experienced 30-40% attrition rates on an average during 2022-23. One of the reasons for the high turnover levels is growing demand for experienced hands from non-banking finance companies and freshly-minted fintech firms. Private banks hit by high attrition rates have maintained a nonchalant exterior, claiming that exits were largely concentrated at the junior and entry-level positions, leaving their core institutional knowledge and expertise unaffected.There are many ways to unpeel this. One, entry-level human resources policies in banks and other financial service providers often resemble feudal systems, over-working executives and under-paying them. But, more importantly, a large proportion of the staff heading for exits is from the sales function because these employees are unable to cope with the aggressive and unrealistic (even unethical occasionally) sales targets typically set for loans, credit cards or insurance products. In essence, most private banks have become sales factories, calibrated with perverse incentives and carrying seeds of future crises.
But questions about a central banker’s role have been revived by the RBI governor’s growth optimism. At Business Standard’s recent banking conclave, Das exuded confidence: “The second quarter GDP number, as and when it is released, at the end of November, in all probability will surprise everyone on the upside." This implies that GDP growth for the July-September quarter is likely to exceed RBI’s projections of 6.5%. And, even though he added a caveat that RBI’s current priority was inflation over growth, the upbeat growth messaging, shorn of the economy’s current structural weaknesses seemed, well, Panglossian.
The dispute here is not over the growth trajectory, but the nature of growth that has emerged from current systemic and structural fragilities. The buoyancy over GDP growth data for the second quarter of 2023-24 glosses over stagnating rural demand, which has impacted the second-quarter financial results of most leading consumer products companies. For example, the media release issued by FMCG company ITC Ltd states: “Consumption demand has been relatively subdued especially in the value segment and rural markets on the back of sub-par monsoons and persistent food inflation which saw a sharp spike during the quarter." Hindustan Unilever CEO Rohit Jawa has stated: “We delivered resilient and competitive growth… in a challenging operating environment, marked by subdued rural demand and heightened competitive intensity."
Other studies have also corroborated rural income stagnation. Market research agency Kantar’s FMCG pulse report for September shows that consumption of FMCG products in rural areas continues to trail urban areas: volume growth (in moving annual terms) for rural areas was only 2.8% compared with 6.1% for urban areas.
Rural demand never really recovered from the ravages of demonetization and the two covid waves. Other factors, such as unseasonal rains during April-June as well as erratic monsoons during July-September, have not only affected crop sowing patterns but dampened output and incomes. In addition, September inflation in rural areas has been higher compared with the urban areas: 5.3% versus 4.65%. The combination of higher prices, lower incomes and employment volatility has affected demand and consumption.
However, RBI’s October bulletin sees it differently—“Rural consumers also appear to be ready to join the party"—and claims that joblessness fell in September, even though its high-frequency indicators for rural areas shows incipient signs of stress. It is curious that RBI’s radars have picked up signs of rural recovery which have gone unperceived by every other agency. Ignoring the irony implicit in this, it is indisputable that the central bank is expected to communicate tail-risks associated with lopsided GDP growth trends. This astonishing disregard for rural stagnation also shows up in the minutes of the monetary policy committee (MPC) which met during 4-6 October, 2023. None of its members raised concerns over rural distress and the impact it could have on their mandate. The minutes allude to a revival in rural demand, unmindful that this revival has been repeatedly suggested over many previous MPC sittings but continues to remain elusive.
The continuing rural stagnation should ideally focus the MPC’s attention on the distributional effects of monetary policy, or how monetary policy affects inflation and purchasing power along different income points. But, more importantly, it also ironically focuses the arc-lights on a current central banking predicament: whether central bankers should become growth evangelists or knuckle down on growth-enabling monetary policies. There is a subtle difference between the two approaches.
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