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Stop prompting RBI on inflation

This Congress-led UPA government appears to be almost equally unhappy with the working of all other independent democratic institutions. Somewhat frustrated, it continuously sermonises them – Parliament, the judiciary, election commission, comptroller and auditor general (CAG), opposition ruled states, the media and even the Reserve Bank of India (RBI) – on how they should run their affairs in the interest of the nation, albeit the Congress party. It is like the pre-emergency period in 1995 under the then control-freak prime minister Indira Gandhi.

Bedeviled by bad criticism from various quarters against governance deficit, economic mismanagement, corruption, political favouritism, regressive policy towards opposition parties and states and falling economic growth rate, the government seems to be getting increasingly intolerant towards those other democratic institutions. It looks as if Congress and its faithful in the government are suffering from a persecution syndrome as the party prepares to face a fresh Lok Sabha election next year or sooner. Congress blames everyone else for the ills of the nation and economy. Its latest face-off with the RBI governor on bank rate is one such example.

Even before the presentation of the 2013-14 budget, the finance ministry has been constantly prompting RBI to make credit cheaper as it feels high credit rate is at the root of the economic slow-down. The RBI had resisted such posturing by the finance ministry under Pranab Mukherjee, now the country’s President, but lately capitulated to a small extent to the ministry’s constant cacophony in conjunction with the big business although the economy continues to be under high inflationary pressure. Statutorily, the credit policy, which is linked with inflation and money supply, is in RBI’s domain. Money and inflation control are two key functions of central banks all over the world. Democratic governments do play some role in these regards through fiscal policy. Few will agree that the Congress-led government has played its part to control prices. Food inflation, which concerns the common man the most, is nearing 11 per cent.

The constant increase in the prices of petro-products, coal, over 80 per cent of which go into electricity generation, fertilizer and pesticides and cash doles under various government social sector schemes have their adverse impact on price inflation. Increased money supply is further fanning the inflation. Higher bank rate, which, no doubt, contributes to higher cost of production and services, is a universally practiced central bank tool to restrict money supply by disciplining consumption and encouraging consumers to invest in various term deposits. RBI can’t and shouldn’t act differently just to please the government and the business community at the cost of the economy and the common man, the lower income group, in particular. The latter are the worst sufferers of inflation and purchasing power erosion.

Unfortunately, an unhealthy controversy is brewing up between RBI and the finance ministry or the government on the issue of bank rate cut when there should have been none. This is more so when two former high-profile RBI governors – Manmohan Singh (1982-85) and Chakravarthy Rangarajan (1992-97) – are at the helm of the present government’s economic policy making apparatus. Both former finance minister Pranab Mukherjee and his successor Palaniappan Chidambaram felt that the high interest rate regime had choked the growth of consumer demand and industrial production and supply obstructing the economic growth. They may be right to an extent, but not quite.

After the customary post-budget board meeting of RBI, Chidambaram said: ‘On the fiscal consolidation path, the government has walked the talk. RBI will, of course, take into account the overall broad economic situation’ before taking a call on the interest rate at its next meeting on 19 March . RBI is being repeatedly prodded by the government to lower interest rates to boost housing construction and industrial production, among other basic activities, and economic growth. Lower home loans and softer hire-purchase rates will bring consumers back into buying homes, automobile, white and brown goods among others. While Rangarajan talks about ‘stagflation’, Economic Affairs secretary Arvind Mayaram says there is a case for giving further impulses (meaning rate cut) for growth.

The country’s central bank has, however, resisted such suggestions citing the continuing high rate of inflation and large fiscal deficit. RBI feels that price stability is more essential to both consumers and investors to make informed choices and contribute to the growth, short and long term. In fact, RBI Governor Duvvuri Subbarao has gone up to the extent of telling commercial bank chiefs that the government does not have the fiscal capacity to continue with its welfare programmes at the current level. Chidambaram’s fiscal consolidation effort as explained in his budget speech is certainly laudable but a lot more need to be done on the policy front to pep up the economic growth, making it less dependent on internal demand-supply situation alone.

Lastly, there is no historical evidence that GDP growth and bank  rates move in opposite direction. Lower interest rates need not necessarily mean higher economic growth, or vice versa. The bank rate in Japan is the lowest in the world. But, it is not helping the export-led Japanese economy grow. The domestic lending rate in the United States too is among the lowest but that is not currently helping the economy and employment situation.

On the contrary, Indian economy grew steadily, though at a slower pace, through the early 1980s despite lending rates being as high as 18 to 20 per cent and overdraft rate reaching the roof at 24 per cent. There was no pressure on RBI and its the then governor, Manmohan Singh, to reduce the bank rate, which was deliberately marked up to check the double-digit (11-12 per cent) inflation. The crux of the current low GDP growth lies in the government policy, embracing globalisation without improving price competitiveness. The current lower economic growth has more to do with trade and current account deficits than high bank rates. (IPA)
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