Sunday 18 September 2011

The RBI has gone mad (Sunday Guardian)

here are numerous corners of Indian officialdom that still believe that the country is in the pre-1947 stage, when civilised people ruled India, and few more so than the Reserve Bank of India. Even after Independence, "coconuts" (fruit brown on the outside but white on the inside) such as H.V.R. Iyengar and L.K. Jha ruled, while deputy governors such as P.N. Damry would affect what they believed to be a British accent, pretending that they had nothing to do with the natives on whom they were inflicting policy. Understandably, the RBI looked for guidance and for encomiums to chancelleries in the civilised part of the globe, locations such as New York and London, ignoring the views from Mumbai or Kolkata, not to mention Ranchi or Bhubaneshwar.
Since Sonia Gandhi warned against triumphalism at one of Delhi's numerous conclaves, soon after she took control of the government in 2004, the UPA has worked with impressive success to damp down the country's economic expansion, and to return India to the "Nehru Rate of Growth" of 3% and below annually. In this, it has been assisted by both the former as well as the present governor of the Reserve Bank, Yaga Reddy and Duvvuri Subbarao. Those foreign companies that are nervous about competition from Indian companies — on top of the assault from Chinese entities — can now breathe easy. India Inc has been crippled by the duo's policy of relentless rate hikes, ostensibly to "rein in inflation". That neither Reddy nor Subbarao had the IQ needed to understand that inflation in India is caused by factors other than the interest rate is a tragedy for the country.
That neither Reddy nor Subbarao (right) had the IQ to understand that inflation in India is caused by factors other than the interest rate is a tragedy.
Inflation since the UPA took office in 2004 has been largely caused by uncontrolled government spending, mostly on programmes that are designed to increase the tally of the Congress in the next elections. Thus, instead of a public works programme that would expand rural infrastructure, what has been implemented is a dole that does nothing to ensure that permanent employment opportunities form as a result of the huge financial outlays of the Sonia Gandhi-approved schemes. Across the board, the UPA has let loose a torrent of expenditure, a lot of it flowing back into the pockets of key political and official clusters in the form of kickbacks and retentions. This has been the second-largest engine of inflation in the country. The biggest has been state policy, notably the severe increase in regulations that has come about after the "reformer" Prime Minister was led to his chair by the UPA chairperson. These have opened the door to such criminal activities as speculation in essential commodities by hedge funds, as well as supply blockages caused by regulatory overkill. The combination of huge increases in financial outlays coupled with the creation of new regulatory barriers to investment and output are what is causing inflation, and neither will be affected one whit by the rate hikes inflicted on the economy by the RBI.
Try telling that to Duvvuri Subbarao as he preens in front of the mirror admiring his ill-fitting suit, lost in daydreams that he has suddenly been transformed into a real Brit rather than an ersatz version of that much-admired species. While magazines such as The Economist will pat the RBI on the back for the "courage" it is showing, the same journal subscribes to a policy of super-low interest rates for the UK itself. Only potential challengers to North America and Europe such as China and India ought to boost up interest rates repeatedly, so that their enterprises lose the ability to compete globally. While the Chinese have thus far not been as devoid of commonsense as the Indians, there are enough acolytes of The Economist in Beijing to ensure that the PRC too has put in place an interest rate system that seems certain to choke growth by the time Xi Jinping takes over as Communist Party General Secretary next year.
Poor Subbarao, if he were only to cease glancing at the mirror, would perhaps have enough residual intellect to find out that the global economy is already in a recession, and could tip into a depression. The EU financial system is bankrupt, its only chance of survival is to persuade China, the Arab states, India and other credulous countries to invest in Euro financial assets. Assets that are certain to be marked down at a huge discount within year. In such a situation, the human power resources of India and its other advantages — which somehow enable the economy to survive a government determined to push growth to the 3%-minus level — can enable the economy to escape the oncoming catastrophe, provided the regulatory framework gets lightened and interest costs fall. Neither seems in any danger of taking place. The ridiculous effort of the Petroleum Ministry to implement a system of partial subsidies on LPG (something that would be an administrative nightmare) and the just-announced rate hike show that Subbarao's IQ levels are matched by other key policymakers in the Sonia Gandhi government.
ver the past 18 months, the RBI has raised basis points by an unprecedented 350 points, with more planned. This has had the effect of converting large swathes of the economy into the "sick zone", with consequent effects on the health of the loan portfolios of the very banks that the RBI is supposed to pay beneficial attention to. No other central bank in the world has demonstrated the IQ levels of the Reserve Bank of India. Most have been very cautious about rate hikes, while the "civilised world" has ensured super-low rates while it awaits salvation from barbarians rushing to purchase their financial instruments. Even China (where the grip of the "civilised world" is strong on monetary policymakers) has paused, while Brazil has joined others in cutting rates. What will it take to educate poor Duvvuri Subbarao?

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