The Reserve Bank of India (RBI) released its Mid- Quarter Monetary Policy Review on September 16, 2011. Inflation on a year- on- year basis is close to 10 per cent and the official indices grossly underestimate the actual rate of inflation. There is a need for concerted measures-- monetary, fiscal and supply side. Inflation hurts the weakest segments the most and the interests of the Common Person are best served by a strong, unswerving antiinflationary policy. Inflation militates against the objectives of financial inclusion and hence inflation control, as an objective, has to override all other objectives of economic policy. Policymakers and opinion makers often refer to the trade- off between growth and inflation. Medium/ longterm growth cannot be achieved in a milieu of high inflation. It is only in an environment of price stability that it is possible to sustain growth. Personally, I am of the view that a real rate of growth of 7 per cent with 3- 4 per cent inflation would be preferable to a 9 per cent growth rate with a 10 per cent inflation. Taken to its logical extremity, my viewpoint would be that if a zero inflation rate results in a zero rate of growth, so be it. I am fully aware that the powerful lobbies would not countenance such a situation. From a pragmatic viewpoint it would be best to target to achieve the lowest possible inflation.
The problem is that the government is not able to drastically cut the fiscal deficit in the interest of controlling inflation and it won't let other wings of policy to work in that direction. This is a clear case of precept ( intent of policy) and practice ( actual operations) being at total variance. Witness the overt warnings by top government honchos just before the September 16, 2011 monetary policy review that the RBI should change tack and pause on any further hikes in the RBI policy interest rate as it would be counter- productive. The RBI deserves full credit for interest rate tightening, albeit by a baby step of a 0.25 percentage point increase. The damaging outcome of the government's pressure on the RBI could be to either pause or undertake a token increase in interest rates in the RBI's October 25,2011 Mid- ear Policy Review. It almost appears certain that after October 25, 2011 the RBI would not be allowed to undertake any further monetary tightening. Here is an instance of the powerful lobbies effectively working against the interest of the Common Person. Now what are the ground realities? The pronouncements that inflation would come down in the ensuing few months is nothing but a statistical gimmick. All that this implies is that over the previous high level of inflation, the rate of increase in inflation would be lower than in the past. But to the Common Person, what is relevant is the level of inflation and no policymaker or opinion maker is of the view that the level of inflation will fall in the ensuing few months. On the contrary, there is still considerable suppression of inflation in the system. Either the government would allow administered prices to rise or the fiscal deficit would widen-- either way the Common Person's woes would increase. There would be increases in prices of LPG diesel and possibly kerosene. Increases in electricity and milk prices are also on the anvil. Given the method of fixing procurement prices of food grains ( based on input costs), despite record harvests, food grain prices will rise impacting on the weaker segments of society.
There is a myth that for successful financial inclusion interest rates should be kept low. If deposit rates for No Frills accounts are artificially kept low, the disadvantaged would be pushed out of the financial sector which would be the negation of the avowed objective of financial inclusion. It is erroneous to argue that to provide credit at reasonable rates of interest to the disadvantaged requires that deposit rates be kept low. In actual fact, what is important to the weaker segments is the availability rather than the cost of credit. In the absence of adequate availability of credit, the weaker segments are thrown in to the clutches of money lenders who charge rates of the order of 60 per cent per annum; even pawn shops charge as high as 36 per cent per annum. If financial inclusion is to be successful, interest rates on deposits and borrowing should not be kept artificially low.
The Savings Bank interest rate is a clear illustration of how the system thwarts the integration of the disadvantaged into the financial sector. The RBI in its Discussion Paper had mooted the issue of deregulation of the Savings Bank interest rate. The banks have raised a furore that there would be a major deposit interest rate war. Some banks have openly voiced their plan to offer higher interest rates to larger depositors and lower rates to smaller depositors. Some banks have mooted a threat that in the event of deregulation they would impose heavy charges on No Frills accounts, effectively bidding good bye to financial inclusion. Now how should small depositors respond? First, to the extent small depositors put their funds in term deposits, they should go in for longer maturities as deposit rates are likely to fall in the ensuing year. Secondly, Savings Bank holders should start withdrawing their funds and storm the State Bank of India ( SBI) counters as the SBI offers 7,5 per cent for deposits as short as 7 days without any penalty for early withdrawal; in effect, these short term deposits are akin to Savings Bank Accounts. Once Savings Bank account holders move funds to SBI, other banks will offer competitive rates for short term deposits. Thirdly Savings Bank account holders should rally behind the All India Bank Depositors Association ( AIBDA) by making small voluntary contributions to the Association's corpus so as to make the Association an effective voice for the small depositors. Inherent in the RBI's functions is to bear the burden of criticism for undertaking right policies and the Common Person should be fully supportive of the RBI.
FPJ
