M.D Nalapat is the Editorial Director of The Sunday Guardian.
‘Raghuram Rajan claims that inflation hurts the poor. It does, but not as harshly as unemployment.’
he uptick in economic growth has been because of Prime Minister Narendra Modi's fast-tracking of decisions, and has taken place despite RBI Governor Raghuram Rajan's obsessive focus on dampening economic performance by an elevated interest rate regime. Although numerous reasons have been brought forward to explain the BJP's poor performance in the just-concluded Assembly bypolls in Karnataka, MP, Punjab and Bihar, a simmering discontent over the economic situation is not among the causes mentioned. However, the fact is that jobless growth has persisted into the NDA's period in office, and this has combined with a perception that the NDA has thus far not differed very much from the UPA in matters of economic policy. Although Prime Minister Modi is very quietly ensuring that tweaks across the spectrum of governance take place, which, over time will vastly improve the delivery of services to the citizen by the state, this has been imperfectly communicated thus far, with the result that the first signs of a loss of confidence are emerging. Should the NDA lose more than a couple of seats in the coming Gujarat and UP assembly by-elections, the stage will be set for anti-Modi groups and parties to coalesce into a united front, the way the anti-Indira groups did in 1977, although this time around, the BJP is still likely to prevail, even if there is a high index of opposition unity. That is, if Raghuram Rajan permits.
The RBI Governor, who was the personal choice in 2012 of both Wall Street as well as (then) Prime Minister Manmohan Singh for his present job, has ignored the imperative of growth and concentrated only on inflation-targeting. In this, he has rigged the game by ensuring that the Wholesale Price Index (WPI) gets replaced by the Consumer Price Index (CPI), which is always higher. Rajan's determination to keep interest rates high was clear by his first saying that a bountiful harvest would cause inflation and so rates needed to be high, and very soon changing that to claim that a bad harvest would boost prices, so interest rates needed to remain elevated. Either way, the Indian consumer and businessperson lose. Buying a car or a house becomes unaffordable for millions, thereby constricting demand. And domestic companies, who pay double digit interest rates for their capital requirements, are made to compete against foreign companies who get loans at derisory rates of bank interest. Acchhe din, all right, but only for FIIs and those making FDI, not for Indians. The manner in which hot money is being chased since the time when Palaniappan Chidambaram was Finance Minister of India, has resulted in those with foreign passports taking loans from banks in the United States or in Europe and investing that money in Indian banks, thereby gaining several points in interest. Rather than go through such a high-cost route, it would have been better for the state to have itself borrowed such funds from banks abroad!
Raghuram Rajan, who seems to be looking at the Managing Directorship of the IMF as his next job, claims that inflation hurts the poor. Indeed it does, but not as harshly as unemployment.
As economists less wedded to Chicago School monetarist dogma than the RBI Governor have pointed out, a somewhat higher rate of inflation is more than bearable if there is double digit growth, whereas to a person who is lacking work, even constant prices are unbearable.
Although the textbooks that he is following so blindly may not agree, in the real world, food inflation is the result of supply and distribution, hence higher interest rates are ineffective in curbing them. And in a context where inflation in manufactured goods and in services has remained low (at about 2%), killing growth in these high-employment sectors through an elevated interest rate policy simply serves Wall Street at the cost of the domestic economy.
Hopefully, the Finance Ministry will at some stage point this out to the RBI Governor, who thus far has been treated as deferentially by the NDA as he was by the UPA.
Rajan is given credit for "stabilising the rupee". The fact is that the currency stabilised immediately after The Sunday Guardian exposed the cabal of short-sellers behind the rupee's fall in value, thereby exposing their speculative assault on the currency.
For too long, India has scant need of a Central bank that looks after the interests of foreign investors at the expense of domestic interests. Rajan needs to accept that central bankers in the countries he admires and whose logic he follows with fealty have ensured ultra-low interest rates.
Unless the RBI Governor switches from a destructive monetarism to the same passion for growth as Prime Minister Narendra Modi has, it is the UPA which will increasingly be smiling at every election held in a country where rigid adherence to Chicago School dogma is killing prospects for the double digit growth the poor of India need and deserve.