The monetary policy measures, announced by Dr. Subbarao, Governor, Reserve Bank of India (RBI) on 16th September had an element of drama. First, Dr. Kaushik Basu, Chief Economic Advisor, had openly expressed his view that there should be a " pause" in the process of monetary tightening. His opposition to hike in interest rates was based on the recent experience of Turkey. Despite high inflation Turkey began lowering interest rates from the middle of last year. What happened was interesting. Turkey's growth rate rose comparable to China's growth rate. Inflation far from rising eclined from 10 per cent in April 2010 to around 5 per cent. The counter argument is that Turkey lowered interest rates not so much with the objective of controlling inflation as to counter massive capital inflows. Dr. Basu also cited the empirical experience of South Korea during the period 1956 to the 1970s when high growth co- existed with high inflation. Dr. Basu needs to be reminded that such random examples of empirical experiences have hardly any relevance for contemporary policy making India. As the World Bank's Growth Report has emphasized. " There is no generic formula for growth.”
Each country has specific characteristics and historical experiences that must be reflected in its growth strategy". This is equally relevant for controlling inflation. Inflation in India has some distinct characteristics, as we will presently explain. The point is that such open disagreement of the Ministry of Finance was an embarrassment for RBI. The second dimension of the dramatic element was the reaction of the private corporate sector, which has all along been pampered by Governments and RBI. In the September policy measures, all that happened was a hike in the policy repo rate that is the rate of which RBI lends to banks by 25 basis points from 8 per cent to 8.25 per cent. The corporate sector's argument is that this is the 12th rate hike in the last 18 months and such aggressive monetary tightening will hurt the growth of the economy. Dr. Subbarao is dubbed as " a man killing India's growth". An objective analysis would show that all this is exaggerated and there is little substance in it. For instance, even a 12 times hike in interest rate translates in only a 3 per cent increase stubbornly high inflation even a much higher increase is called for. If we look at the experience of the 1980s, we realize that such increases were implemented without much fuss.
What is wrong is perhaps the so- called " baby steps". It would have been more appropriate to have achieved this objective by bigger steps. The appetite of the corporate sector for cheaper loans is insatiable. Even if this 3 per cent increase in the repo rate translates itself into say 1 per cent increase in bank's lending rate it would not hurt corporate sector. Because interest cost forms only 5 per cent of total costs in any industry. All the sound and fury made by the corporate sector has thus no concrete basis. The critical line in Dr. Subbarao's statement is " Meanwhile, inflation remains high, generalized and much above the comfort zone of the Reserve Bank". Inflation as measured by head- line year- onyear Wholesale Price Index ( WPI) rose from 9.2 per cent in July to 9.8 per cent in August 2011. Food inflation which hurts the middle class and the poor most is at near- double digit levels. What is more, this sort of inflation persists despite comfortable stokes of rice and wheat, and normal monsoons. Advance estimates for the 2011- 12 Kharif season indicate a record production of rice, oilseeds, and cotton. Perhaps, this inflation is being " driven by structural demand- supply imbalances and cannot be dismissed as a temporary phenomenon". Dr. I. G. Patel, former Governor RBI, used to repeatedly emphasise that our blessed country is not exempt from basic monetary laws. Money supply ( M3) growth at 18.7 per cent in August 2011 was higher than the projected growth of 15.5 per cent for the year. Similarly nonfood credit growth at 20.1 per cent in August 2011 was above the indicative projection of 18 per cent for the year. The marginal increase of 25 basis points in the repo rate announced by Dr. Subbarao is the minimum he could have done. All the sound and fury generated by the measure does not signify much. The hike in the repo rate is symbolic and not substantive. Banks are unlikely to transmit the rise to borrowers. Perhaps some marginal rise in home loans or loans to real estate is possible. The corporate sector will not suffer. The question of killing growth Risks to India's robust growth may arise from other sources.
Dr. Subbarao points out " Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand". The faltering US recovery and the Euro crisis endangered by the debt problems of Greece and other countries would affect India's exports. Fortunately, India has already diversified its exports and areas other than the U. S. and Europe today account for a substantial proportion of India's total exports. This should save us from a serious dent in our exports. RBI is no doubt fighting a brave battle against the stubborn inflation. But this action needs to be reinforced by measures in the real sectors. First, we must seek to bring down the open market prices of rice and wheat. Fortunately, we have enough stocks of rice and wheat with the Food Corporation of India ( FCI). But unfortunately we are treating FCI as a glorified go- down keeper. We should activate FCI to intervene in the market by unloading its stocks with a view to bringing down open market prices of rice and wheat. FCI should become a market maker. Similarly, recent experience has shown that prices of other food items like vegetables and fruits have contributed significantly to rise in the prices of essential commodities. Here the problem is that the profits of intermediaries are very high, with the share of the farmer in the consumer rupee continuing to remain low. Streamlining the marketing arrangements of such commodities should receive immediate attention. We seem to be waiting for Wall Marts to solve the problem of linking the farmer to the consumer, eliminating unnecessary intermediaries. But we have our own model of milk marketing in the Anand dairy. If we are able to replicate such marketing models in respect of other essential commodities, we could not only succeed in controlling food inflation but also improve levels of farm incomes. We should learn to contend with these more mundane realities.
FPJ
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