Monday 4 July 2011

Retro RBI is not only living abroad, but in 70s (Sunday Guardian)

Activists of Janata Party burn an effigy of Prime Minister Manmohan Singh during a protest against the hike in the prices of petroleum products, in Kolkata on Tuesday.
urjit Bhalla is that rare economist who does not forget that he is in India while giving prescriptions, as witnessed in his op-ed in The Indian Express of 23 June, where he shows up the hypocrisy in the RBI assumption that high interest rates are needed to fight inflation. The Central bank seems to believe that they are in the UK or in the US, while working out their nostrums. Even worse, not in today's UK or US, but that of the 1970s, the period relevant to the textbooks that they by-hearted. Mathematical scribbles complete the illusion of infallibility, especially in Manmohan Singh's India, where textbook economists are revered.
These worthies, many of whom adorn the upper reaches of the Ministry of Finance and the Reserve Bank of India, would like the rest of the country to believe that the 8% growth rate of the economy is because of their wisdom, when in fact India ought to have been growing at 15%, the rate achieved by China during an equivalent period in the reform process. Across the board, there are hurdles to efficient functioning and to expansion absent even in the highly-regulated EU. Crossing each requires cash, lots of it and little in rupees. These days, the babus and politicos sniff at anything other than euros or dollars, although a few are these days willing to accept the Chinese RMB. At least in Mumbai and Delhi, most of the "speed money" invested in getting the correct decision is paid in offshore accounts, far away from the risk of detection by the media or the public.
Of course, travel patterns of family and (often very charming) "friends" of our policymakers would reveal their good taste. These days, most of the higher echelons of India's Beltway refuse to settle for anything less than the best of Europe or (for those with slightly less refined sensibilities), North America. Sons, daughters, in-laws and others settle down in foreign climes for "study" or "work". Any relative or dependent of a senior policymaker (joint secretary and above, including ministers) who travels or lives in a high-cost location ought to make the details public, so that Arvind Kejriwal may begin the process of finding out exactly how Junior is able to pay his fees and meet his other expenses in the UK or the US on Papa's derisory (in hard currency terms) salary. Both Sonia Gandhi and Manmohan Singh have frequently spoken about corruption. Now is the chance for them to do something about it, rather than simply wail into the wind.
Returning to the RBI, that instrument of torture — which takes its cues from The Economist, a magazine that enjoins upon India to do exactly the opposite of its panacea for Europe. The magazine backs low interest rates in the US and in Europe, while calling for repeated rate hikes in India. Given the adoring glances that RBI governor
D. Subbarao throws at western bankers, this brutal advice is being followed to a degree that has choked investment (and consequently job creation) in Indian corporates. Even Subbarao knows that high interest rates make no dent on an inflation caused by supply bottlenecks, but in his zeal to become the toast of London and New York, commonsense gets ignored.
However, say this for him, he has not made the extravagant claims of his predecessor Yaga Reddy, who — with characteristic modesty — claimed to have "saved Indian banks from the subprime mortgage crisis".
Yaga Garu seems unaware that 40% and sometimes more of the value of property in India gets paid in black, because of onerous taxes and duties in transfer of assets. This gives a huge cushion to the banks in cases where property values come down, in a way that was not available to them in the US or in Europe. To claim credit for a healthy situation created not by RBI policy but by rampant undervaluation of property is to be dishonest, but as long as The Economist cheers, who cares? Let the financial companies who brought the world economy to the edge of collapse with their greed in 2008 operate freely in India and repatriate huge profits back to their home countries, with the blessing of the RBI and all policymakers whose offspring are given high-paying jobs in such entities.
Bhalla has shown up the mendacity of the RBI by, for example, pointing out that regulation of savings rates only helps to keep them low, rather than prevent them from falling, as the RBI claims will happen. Will things change and interest rates for loans and regulations preventing output increases come down? Sadly, Manmohan Singh seems to have moved into a new avatar, that of the Counter-Reformer, ever since he took over the job of his old boss, P.V. Narasimha Rao, in 2004.

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