Navratri and Diwali have traditionally been the most festive seasons not just for millions of Indians, but for manufacturers and service providers who count on consumers loosening their purse strings to buy what they really do not need.

Policymakers in New Delhi appear to have woken up from their crises-induced numbness to ensure that the market for superfluity stays alive and kicking.

Fiscal initiative

Late last week, North Block promised public sector banks additional liquidity if they would be kind enough to dispense concessional loans to buy two-wheelers and consumer durables in the festive season.

This googly from North Block must have had the RBI’s consent, but at first glance, it had the hallmarks of one-upmanship: If the central bank wishes to play spoilsport with rigid key rates, North Block could do the right thing for consumers yearning to spend on more than just unsafe fire-crackers.

Last week’s gesture does smack of those perverse incentives — for short-term gains and targeted constituencies — that had become an article of faith with policymakers in the pre-liberalisation era.

It could also have been inspired by the success of an earlier measure. In 2009-10, the debt waiver and Sixth Pay Awards led to a spurt in consumer spending, staving off the immediate effect of the financial crash of 2008.

The expansion of demand for household durables and two-wheeler purchases led to a temporary spike in growth.

That is what North Block hopes to achieve, but this time without the burden those dole-outs dressed up as “stimulus packages” imposed on the fiscal. Now, the banks have been given the option: If you want more funds on the cheap, promise to pass them on for that scooter or motorcycle.

It could work precisely because the incentive is selective. It could backfire because of the moral hazard it contains: The real estate and housing sector will clamour for similar benefits to rid itself of a growing inventory and falling demand. And, why not?

If the Government is keen on using the route of consumption demand for a recovery to growth — surely an erroneous way to try to climb out of a trough — then, it only stands to reason to extend the generosity of cheaper public funds for a wider swathe of consumption “needs”?

But the RBI may not be willing to play along. The new Governor has admitted to high consumer inflation — Extending concessions of cheaper funds for consumption will drive up prices. At the very least, expect the interest rate picture to become distorted. If banks bite at the North Block lollypop, decades of effort by the central bank to standardise interest rates will have been unravelled.

The festive season may turn out to be a boon for manufacturers of two-wheelers and fridges, if banks play ball.

Allure of gold

It will be certainly prove a windfall for gold smuggling — that hoary practice brought down to a trickle through fiscal sense and rational policy. Over the years, Indians from across the income spectrum have been able, as a consequence, to indulge in their passion for the yellow metal.

Now that indulgence is extracting a price. The gold-consuming public could have hardly cared for the current account deficit every time it shopped at the souk in Dubai. That’s the job of North Block.

But the government has turned the other way, going back to pre-reform measures to deal with gold imports, while taking an altogether more benign view of oil consumption.

The auto is a symbol of modernity; oil the lubricant of growth. Two generations of Indians — one starved of both, the other born after 1991 to their enchanting possibilities — can hardly be expected to conserve what they have just begun to enjoy? But gold! That’s another matter. Why not curb gold imports? Precedents exist… We’ve done it before, haven’t we? Used taxes to taper demand? If high interest rates can discourage demand for two-wheelers, would not higher duties work the same way on gold imports?

In June, the Government raised the import duty on gold from 6 per cent to 8 per cent, as part of a steady increase since December 2011, when it was around 1 per cent. This has been accompanied by a string of restrictions by the RBI such as curbs on bank credit for the overseas purchase of gold.

Enter the smuggler

The curbs appear to have worked in restricting imports. But smuggling has apparently increased manifold from Dubai, Bangkok, Singapore and overland from Nepal. That’s because demand has far outpaced falling supplies. The duty spikes have reduced supplies — official supplies — not demand. Nor have the controls shifted preferences to some other metal — platinum for instance. The shortfall in gold is being filled in by unofficial imports. This brings us back to first principles — using fiscal policy or quantitative restrictions to control demand patterns or preferences is a tricky thing in any society, particularly so in India where more than economic considerations work to influence choices.

Prohibition to curb tippling failed in the US; gave rise to the mafia, and the word “bootlegging”. Some reputed brands of scotch whisky were brewed in Canada and smuggled across to a thirsty republic.

Never a good economic proposition, it failed in India too. Some States sobered up to that recognition, the fact that they were losing huge revenues to the neighbourhood hooch maker. In the mid-seventies, Maharashtra lifted prohibition, allowed sugar co-operatives to manufacture what came to be called “country liquor” at more or less competitive prices.

Fiscal stimulus

In the bargain, the policy drove illicit liquor, always a lethal and poisonous brew, out of existence and earned the State huge exchequer revenues and a reputation for enlightened policymaking.

Then the State got greedy. Every Budget, revenue ministers would raise excise duties on country liquor; as a result, demand would shift back to the hooch made in slums and in shanties across towns or to adulterated “feni” smuggled in from Goa.

Those taxes could not have abolished the urge for happy hours. But they could have been used judiciously to alter demand away from the hard stuff to more moderately alcoholic beverages, away from liver-gutting IMFLs to wines and beers.

Admittedly, such fiscal initiatives would benefit some stakeholders — vineyards and vintners, drinking public — and hurt others, sugarcane barons, Scotch smugglers, state revenues. But they would address a higher social need in a way prohibition could never. The recent fiscal and policy incentives do not have any long or exalted view of growth. If they did, then taxes would be used to discourage two-wheeler usage and fuel consumption in general as national priority.

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