Taming inflation, protecting growth - Hari Shankar Singhania

The central banker of an emerging economy has the unenviable task of striking a balance between growth and inflation. They must not kill growth in the war on inflation. RBI Governor D Subbarao is one such governor. He represents the central bank of a leading emerging economy, where inflation is crawling up while growth is decelerating. On June 16, he made his mind clear when he had observed, “some short-term deceleration in growth may be unavoidable in bringing inflation under control and the RBI needs to persist with its anti-inflationary stance.” What is noteworthy, however, about his ‘anti-inflationary stance’ is the small steps he takes, so that growth is not hurt. For this, he has earned criticism. According to critics of the baby steps, in the last 15 months the repo rate has been increased 10 times, by a cumulative 2.75 percentage points, but with little effect on inflation. There is, accordingly, a suggestion that RBI needs to re-think its strategy. However, such an assessment is misplaced. So far, inflation was being driven largely by food and commodity prices, and RBI action could have had very little effect. Naturally, inflation was inching up, in spite of many hikes in the policy rate. Like central banks everywhere, the RBI had to take small steps to express its concern and readiness to act. While big steps could be damaging, baby steps could be intimidating. Further, so long as inflation was seen as a supply side constraint, there was no point in RBI displaying its killing spirit. The context has changed now. Commodity price inflation has spread to manufactured products and is pushing core inflation. Couple this with food price inflation, and there is the risk of a wage-price spiral. Further, oil prices are posing a serious threat. If the government allows a full pass-through of the rise in oil prices, headline inflation would hover around the double-digit level and seriously cripple growth. Given this, it is time to declare war on inflation, before it spins out of control. It is rightly felt that in the war on inflation, growth can wait. The RBI governor has once again increased the rate by only 25 basis points, but at 7.5 per cent the repo rate is sufficiently growth-constraining. Further hikes will follow if the present action is not seen to be effective enough. However, the question of trade-off between inflation and growth still remains. We cannot ignore the interests of growth, as otherwise there is the risk of stagflation. Growth must wait at a level the economy can live with. What is that level where we can ask growth to wait and not fall further? What is the degree of freedom for the RBI with regard to rate hikes? What is the limit beyond which the rate should not be pushed further? It is difficult to answer such questions, but a realistic assessment of the current situation may be useful. The global economy is once again in crisis, with the advanced economies standing on the precipice of stagnation. We, in India, cannot escape the effect of the crisis. The RBI governor is right in pointing out that “recent global macro economic developments pose some risks to domestic growth.” What he means is that our GDP growth will be affected in any case, and the situation may be worse if inflationary trends remain unabated. The question is, to what extent we can sacrifice growth and still retain the growth momentum? During the crisis of 2008-09, our GDP growth had fallen to 6.8 per cent, but then, with the onset of recovery, it went up to 8 per cent in 2009-10 and 8.5 per cent in 2010-11. The slowdown fever had, however, started, beginning in the second half of the last fiscal. In the fourth quarter of 2010-11, GDP growth declined to 7.8 per cent, from 8.3 per cent in the previous quarter. In the current year, no one, including the RBI, expects growth to be above 8 per cent. But it is imperative that we halt the deceleration, as we also try to contain inflation. It is important that we also provide a cover for the economy to achieve the minimal expectation of 8 per cent growth, or around 8.5 per cent. Take this as the benchmark for the current year. Will this be difficult to achieve, if the RBI goes in for a further rate hike of, say, 25 or 50 basis points? In my view, the RBI can have this leverage in controlling inflation and we can still have more than 8 per cent growth, provided some care is taken to ensure that the business environment is not disturbed and business confidence is boosted. At this moment, when the RBI has to perform its role, the government must ensure that the economy runs smoothly in spite of various anti-corruption drives and civil society movements. All centrally sponsored schemes need to be carried through in earnest so that resources allocated for the purpose are fully utilised. Intelligent fiscal consolidation also helps. It is also important to ensure that infrastructure projects are not hampered due to lack of clarity and uncertainty on matters relating to land, environment, forests, rehabilitation, etc. Such matters have been seriously hurting the investment climate in the country, and are contributing to the slowdown. On their part, commercial banks should be judicious in credit allocations. They may pursue a discretionary policy on supply of credit and lending rates. They have a critical role to play in this moment of crisis. Interest-sensitive but employment-intensive sectors (such as small and medium enterprises) can be spared the full rigours of the credit squeeze and the burden of high lending rates. In the war on inflation, the RBI and commercial banks can work in partnership. While the former controls inflation, the latter can protect growth.

The author is President, JK Organisation, New Delhi BS

“Education, skill development must be integral to growth process”



High growth : Reserve Bank of India Deputy Governor K.C. Chakrabarty addressing ‘Voice of Tomorrow'

COIMBATORE: Education and skill development should be an integral process of the growth process in the country, according to Deputy Governor of the Reserve Bank of India K.C. Chakrabarty. Speaking at ‘Voice of Tomorrow – Fuel to Excel,' organised by the Indian Chamber of Commerce and Industry, Coimbatore, and The Hindu here on Saturday, he said that youth and entrepreneurs would be the voice of the future. It should be a collective aim for all to enable the country register 10 per cent growth for the next 20 years. India is the only country where the working population will increase for the next 20 years. In such a scenario, education and skill development should be an integral part of the growth process. “If we are not able to create skills of global standards, the demographic dividend will be a demographic disaster,” he said. The education process should be vocation oriented and industry-institute interaction was important for this. Skill gap would be costly for the economy. Infrastructure was another important sector. Energy security and alternative clean energy were needed for the manufacturing sector to grow. Innovation was needed in food and energy. Successful models in a State should be replicated by other States too. Technology should be used more effectively to bring down the cost of production. As the economy grows and with a huge young population, more would aspire for high quality education. After their education and getting employment, the next requirement would be quality shelter. On the lines of food and education for all, the endeavour should be towards shelter for all. There would be tremendous credit demand for education and housing. And education and shelter should be available at affordable costs. “Inclusive growth should be the goal of the entire society,” he said. The RBI plan was to ensure that in the next five years, every individual and household in the country should have access to banking services. This would enable people to participate more effectively in the economy and society. Millions of micro and small-scale entrepreneurs should be created. “High growth is not sustainable with high inflation,” he said. M. Narendra, Chairman and Managing Director of Indian Overseas Bank, said India now offered several opportunities. Hence, it was important to not just prepare for the present but for the future too. The country should be able to achieve the current rate of growth for the next three or four decades. It should address issues such as development of human resource, infrastructure, urban and rural areas and economic reforms. The country had a large youth population and they were the greatest strength. He urged the participants to work hard, aim high, have a broader vision of their endeavours, and break boundaries. Industries should focus on the customer and follow the best management practices. It was important to reach out to every one. Economic inclusion would be a co-ordinated effort. Former presidents of the chamber K.G. Balakrishnan and D. Balasundaram, chairman of the Bharatiya Vidya Bhavan, Coimbatore, B.K. Krishnaraj Vanvarayar, and vice-president of the chamber P.R. Vittal also spoke. M. Krishnan, President of the Indian Chamber of Commerce and Industry, Coimbatore, said in an effort to commemorate 82 years of the chamber's activities here, it was organising 82 programmes with different concepts. The objective was to ensure economic development here and provide a forum for the youth and entrepreneurs to interact with industrial leaders. D. Raj Kumar, Regional General Manager of The Hindu, Coimbatore, said this was the second programme in the ‘Voice of Tomorrow' series. The aim was to enable future leaders to emerge from this platform. D. Nandakumar, secretary of the association, spoke.

Hindu 

Flat of RBI official burgled at Ultadanga Quarters

Cash and ornaments worth Rs 7 lakh have been stolen from the Ultadanga quarters of a senior official of the Reserve Bank of India who has recently been transferred to CAB, Pune.  “One of the residents of the RBI quarters at Ultadanga saw the door of Assistant General Manager Jawahar Lal Sau’s flat ajar around eight last night. We rushed in to find the flat burgled,” a police officer said.  Sau had left for Pune with his family a few days ago. But he was yet to shift his belongings from his fifth-floor Ultadanga flat. He flew down to Calcutta this morning after being informed about the theft.  Sau has said in his police complaint that gold jewellery weighing 300 grams, some silver utensils and Rs 30,000 in cash had been stolen.  “The lock on the flat’s main door had been broken open. The cupboard had also been broken and the flat ransacked,” the officer said.  “There are no CCTVs in the building. We are trying to prepare a list of people who visited the building in the past three-four days,” said an officer of the anti-burglary cell of the city police. The house of a group-D staff of the RBI in Narkeldanga, around 2km from Ultadanga, was also burgled yesterday evening.  Gold ornaments weighing 180 grams and Rs 20,000 in cash were stolen.

The Telegraph 

Mukherjee to pay three-day visit to United States from June 27

Union Finance Minister Pranab Mukherjee will leave on June 27 for a three-day visit to the United States during which he will hold bilateral meetings wth US Secretary of Treasury Timothy Geithner and interact with business and industry. On Monday evening, Mr Mukherjee will deliver in the keynote address, along with Mr Geithner, at a conference on the theme "US Indian Economic and Financial Parternership". The conference is being organized by the Confederation of Indian Industry (CII) in collaboration with Brookings Institute of US.  The different sessions of this day-long event will also be addressed by Mr R.Gopalan, Secretary, Department of Economic Affairs, Dr Kaushik Basu, Chief Economic Adviser, Ministry of Finance, Mr Subhir Gokarn, Deputy Governor of the Reserve Bank of India (RBI) and Mr U.K.Sinha, Chairman, Securities and Exchange Board of India (SEBI), among others.

http://netindian.in/news/2011/06/25/00014026/mukherjee-pay-three-day-visit-united-states-june-27

BOB convenes meeting of State Level Bankers Committee

The 109th meeting of State Level Bankers Committee functioning under the convenorship of Bank of Baroda was held on 20th June 2011 at Jaipur. Namonarayan Meena, Minister of State for Finance in Govt of India presided over the meeting, which was attended by Rajendra Parikh, Minister of Industries and Economic Affairs, Government of Rajasthan State, M.D. Mallya, CMD, Bank of Baroda, N.S Srinath, ED, R.V Verma, Chairman of National Housing Bank, Deepali Pant Joshi, CGM-I-C, RBI, Shiv Kumar, MD, SBBJ besides other dignitaries of various Public Sector Banks and state government. The committee discussed various aspects of financial Inclusion Policy of Govt. of India and RBI for implementation by Public Sector Banks.

TOI

25 paise coins to go off circulation from June 30

KANPUR: Coins of 25 paise and lesser denominations will be withdrawn from circulation from June 30. They will not be accepted for exchange at bank branches and RBI issue offices.  The Reserve Bank of India has, therefore, appealed to the public to exchange these coins at branches maintaining small coin depots or at offices of the Reserve Bank. Assistant General Manager of the bank J.P.Singh informed that the exchange facility at bank branches or the Reserve Bank offices would be available till June 29.  It is important to mention here that in the exercise of powers conferred by Section 15A of the Coinage Act, 1906, the Government of India has decided to withdraw the coins of denomination of 25 paise and below from circulation with effect from June 30. From this date, these coins shall cease to be the legal tender for payment as well as on account.

TOI

Fuel price hike to add 30 bps to WPI inflation - Oil Secretary

The government's decision to hike fuel prices is expected to add 30 basis points to the country's headline inflation, Oil secretary G. C. Chaturvedi told reporters on Friday.Persistently high inflation, which hovered above 9 percent in May, had prompted the Reserve Bank of India (RBI) to raise key interest rates 10 times in just over a year. The RBI last week signalled more increases to come even as growth in Asia's third-largest economy is slowing down.

Reuters

Growth in banks' earnings may drop: Analysts

Dwindling demand for loans, shrinking margins and higher provisioning requirements are likely to drag the earnings of banks in the coming quarters, industry analysts said, giving more credence to concerns of a slowdown.........

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‘Growth can wait, not inflation’

Bimal Jalan is a former Governor of the Reserve Bank of India (RBI), a former member of the Rajya Sabha and a well-known author on policy regimes. In this interview with Olga Tellis, he urges that inflation be tackled on a priority basis through a coordinated approach in the whole of the government and believes that drop in investment is a cyclical issue that can be dealt with as we have sufficient resilience.

Q. There is a lot of concern about dwindling investments, both domestic and foreign. How do you see these things?

A. Any dip in investment, or in buoyancy in the market is a concern. But the greater concern is that of inflation, and the perception of lack of governance in the wake of the 2G spectrum and other scams. There is a feeling that the government is not as effective as it should be and that there is lack of co-ordination between different parts of the government. These are more fundamental issues. Issues like drop in investment are cyclical issues and can be dealt with. India has the resources with a 35 per cent domestic savings rate and investment at 37 per cent of the gross domestic product (GDP) that is one of the highest in the world. This short-term dip doesn’t mean much. The growth in quarter on quarter terms is not so worrying as the medium-term worries about corruption and non-governance. These are very fundamental issues that are affecting the country and the economy.

Q. What about fall in portfolio and foreign direct investment?

A. I am not worried about fall in portfolio investment as that concerns the stock markets. If the markets go down, it will affect some people. But it is not a priority as we already had excess inflows and added them to our reserves. Direct investment is more important, as also is the climate in the country and whether we will generate a unified voice on issues that affect governance.

Q. There is also concern that government is not going ahead with reforms like the Land Acquisition Act.

A. Land acquisition has been a problem since our Independence. And despite all this India has been recognised as an emerging global power. So, these are not immediate issues. The real question is the confidence, ability and political will of the government to tackle rising corruption at the political level. Now the Supreme Court has entered in the picture with the 2G scam.

Q. Do you feel that the RBI and the government are playing a losing game in tackling inflation? Despite all the rate hikes, inflation is still at over nine per cent.

A. It cannot be a losing game unless you make it so. Inflation should be tackled effectively as it affects people at large. What is worse is “inflationary expectations”. If people expect inflation to go up, they will automatically buy more than they need if they have the liquidity. The problem is that there are too many voices saying things like “after the monsoon, food prices will come down”, or “after the harvest, prices will come down”, and then non-food prices go up. If RBI measures do not lead to a fall in food inflation, we have the resources to do what we want. We can import.

Q. So far, it is growth that has been going down and inflation has been rising. What does this indicate?

A. How do digits matter — 8.7 or 8.5 per cent etc? We are still a country with high growth rate. If there is a conflict between growth and inflation, there should be a concerted approach to tackling inflation and there should be definitive action, no matter what happens to growth in the short run. India’s resources are much greater than ever. We are adding to our reserves but not using them. There are tradeoffs in the economy. It is not so simple as people think and there must be a concerted effort to tackle what we consider to be the priorities. These are certainly inflation and corruption at the moment. Oil prices are high but we have controls, and we have not raised domestic prices as much as the rest of the world. They should be raised so that there is a one-time effect. There has to be a coordinated approach and action rather than just relying on rain clouds.

Q. Would you say that there is limitation to monetary policy tackling inflation?

A. There has to be a unified view that inflation needs to be tackled and that whatever needs to be done in monetary, fiscal and trade areas will be done. Some dip in growth may be the cost, that if tackling inflation means taking unpopular actions we are willing, we are willing to do whatever is necessary even if it displeases specific interests.

Q. Does this mean that the government is not doing its bit on the fiscal front?

A. I don’t want to blame anyone. In a political system there are multiple centres of power and different ministries have their own focus points. But if there is a national problem, say inflation, we need a consolidated effort and policy overriding the specific interests of different ministries.

Q. So, are you optimistic about the future, or pessimistic? Do you see government taking action where necessary?

A. I am optimistic, but not about the immediate future. I am sort of disappointed with the drift in policy and decision-making. But we have the ability and the capability. Responses are coming in as people are fed up with corruption and inaction on priority issues such as inflation and corruption and priority governance issues. To take a longer-term perspective, we have passed through various crises in the ’70s, ’80s, ’90s and I have no doubt we will overcome the present problems.

Deccan Chronicle

Markets can digest only one more RBI rate hike: Analysts

The stock markets indicate the collective opinion of investors, and they are now indicating nervousness. The markets are reflecting the investor's nervousness on the growth story, and on the inability to control the macroeconomic environment.  The markets are ringing alarm bells that inflation continues to be higher than expected despite a hefty cumulative increase of 325 basis percentage points in the policy rates since early 2010. Also, there are increasing indications of a moderation in growth. The Reserve Bank of India (RBI) embarked on a rate hike programme to control the inflation rate and maintain growth. Interest rates systematically went up throughout 2010 and 2011 but inflation too continued to rise unabatedly . The rates have been hiked to such an extent that now the interest rates are beginning to hurt growth, but the inflation rate is still showing no signs of slowing down.  This is a double whammy, as the stock markets, the basic fabric of the growth story, is being threatened. On the one hand, the RBI is increasing rates but this is not supported by fiscal measures. The government, through its various guarantee schemes, is indirectly introducing a stimulus in the economy which is supporting the demand for goods and services.

ET

RBI fines co-op bank in Bengal

The Reserve Bank of India (RBI) has imposed a penalty of Rs 2 lakh on the Suri Friends' Union Co-operative Bank Ltd located in the Birbhum district of West Bengal for violation of provisions relating to sanctioning of loans. According to a release by the RBI, the co-operative bank was penalised following a show-cause notice issued by the central bank.

Business Line

India's long-term equity story good: Analysts

Analysts believe the long-term market fundamentals are intact, based on the strong prospects of economic growth here. However, investors should remain cautious.......

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SBI chairman to attend bankers’ meet

Top French honour for Maharashtra economist



VITALINFO extends best wishes to Dr. Narendra Jadhav, former Principal Adviser & Chief Economist, RBI



Mumbai, June 24 (IANS) Renowned economist and Planning Commission member Narendra Jadhav has been honoured with the “Commander dans l’Ordre des Palmes Academiques” (Commander of the Order of Academic Palms) award — one of the oldest French civil distinctions, a statement said Friday. The honour will be formally conferred on Jadhav July 14, the French National Day. A former vice chancellor of Pune University, Jadhav is also a member of the National Advisory Council, an academician and a writer. He is the first Indian to be accorded the honour originally founded by Napoleon Bonaparte in 1808 to honour members of the University of France. In 1955, it was established as an order and awarded to eminent acdemicians, authors, artists, scientists and professionals for their contribution in various fields like social movement, culture and education. The Ordre des Palmes Academiques comprises three grades and commander is the highest among them, the statement said. The honour recognises Jadhav’s fight against prevalent discriminations and inequalities in India. In the past few years, he has been actively involved in democratic struggles against caste-based discriminations and socio-economic inequalities in India.

http://www.thaindian.com/newsportal/uncategorized/top-french-honour-for-maharashtra-economist_100545278.html 

Inflation expectations

...........It is highly significant that even when the RBI lowered the growth estimates and increased those of inflation thereby differing sharply from the official position, the government has backed the central bank. More realistic growth and inflation estimates, and greater cohesion between the government and the RBI are all vital ingredients in a well thought ....................

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India to tell Pak to stop fake currency

The Finance Ministry has created a separate directorate of currency ( DoC) to deal with the problem. The directorate is examining incorporation of additional security features in the currency notes to make counterfeiting very difficult.Sources said the new security features will be incorporated in the new series of the bank notes to be issued in 2012........

Details 

BANKING FOR THE MASSES

RBI has mandated that 40 percent loans must be to preferential sectors sector out of total loans. However, our bank distributes more than this i.e. 45 percent loans are to the preferential and weaker sectors. This consists of loans taken by customers from the low income group for starting small businesses....

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India's Growth- Inflation Dynamics

The so- called growth inflation dynamics is a reflection of our policy maker's sensitiveness to corporate sector concerns. The same RBI had no qualms about endorsing an interest rate of 26 per cent for micro finance institutions ( MFIs). The gensis of this growth- inflation dilemma may be traced to the accommodative monetary policy pursued by the Reserve Bank of India ( RBI) beginning September 2008. This policy, as the RBI.......

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Aadhar will reach target: Nilekani

Bangalore: One of independent India's most ambitious endeavours, Aadhar, (the Unique Identification Number-UID), seems to be on course in achieving its target as Aadhar cards have been issued to over one crore people.  Speaking at a seminar organised by NASSCOM on Aadhar and its functioning, Chairman of the Unique Identification Authority of India (UIDAI) Nandan Nilekani said they were in talks with NASSCOM on whether they could provide a platform for their services.  He stated that they are working closely with the Finance Ministry and the Reserve Bank of India (RBI) to ensure that they facilitate financial inclusion. "This ID would reduce entry barriers for people," he said and added that many had enrolled in UID but were yet to be issued the numbers. "This process would leap frog from an environment of no identity to one of online identity," he said.  Pointing out that there were many people in the country with no government documented proof of their existence, he said that the transition from "no identification to online identification" would be achieved. Confident of reaching their set target of issuing Aadhar cards to 600 million people within five years, Nilekani said that the IDs would also provide for a National Portable Identity.  He said that the facility (UID) could also be used for procuring LPG connection, mobile sim cards and opening bank accounts among others.  He said UID is being used as a proof of address and identity in Sikkim and Tripura states.

IBN Live

Banks Deputy Manager held for cheating

BHUBANESWAR: A deputy manager of a private bank was arrested by police for allegedly bungling a whopping Rs 1.3 crore from the bank over the last several years. Purna Sarkar, Deputy Manager (Clearance) with Kotak Mahindra Bank, located at Kharavel Nagar, was arrested on charges of cheating and forgery after the bank lodged a complaint with the police. Sarkar, who was in charge of cheque clearance at the bank, used to bungle with the instruments since 2009, bank sources said. Instead of getting the cheques passed through the RBI clearing house, he would cleverly park the instruments in Kotak Mahindra Security Ltd, another arm of the company which dealt with shares and equities. Most of the investments were made in the names of his family members.  Since he was head of the clearance, he knew of methods to evade attention of the bank. Sources informed that the matter came to light once RBI sent details of the cheque clearances electronically to the bank’s corporate offices in Delhi and Mumbai. Earlier, soft copies were being sent and Sarkar used to manipulate them. Once the matter caught the attention of bank’s big wigs, an internal investigation started and the North Eastern head of the bank Sanjiv Upal was given the charge of the probe. He apparently found huge discrepancies and the responsibility was fixed on Sarkar, who confessed to the bungling of Rs 1.3 crore. However, instead of cooperating he tried to evade action and a complaint was lodged with the police. He has been booked under Sections 420, 467, 468 and 471 of the IPC.

IBN Live