Inflation Vs Rate cuts: A trade off

 

(This article was written by me for my BETA round 2nd interaction)


Since the great economic recession which happened in 2008, subsequent Indian governments and RBI have constantly faced one big dilemma and that dilemma has been on how to successfully trade-off or negotiate between inflation and rate cuts. India, a hugely populated nation along with its prospering middle class, has a natural demand for goods and services in the market which almost invariably outreaches our supply. It’s because of this excessive natural demand that India has not been real to unravel its true growth potential. Every time, Indian government and RBI try to provide slight incentives for the industry by increasing liquidity in the market in the form of rate cuts, it results in high consumer inflation figures. And, this has not happened just once or twice, it has continuously happened over the last 7 years which somehow has resulted in not enough space for the govt. to push forward with growth agenda. 

Today, India is seen across as a country that has a dual distinction of having both the largest youth workforce and the highest no.of people living below poverty line. So, for India, it becomes very much imperative to control its inflation in order to safeguard the interest of the poor people living in our country. Even, a slight increase in inflation can adversely affect the life of more than 40 Crore people. Also, on the other hand, we have a weak manufacturing industry which despite utilising the benefit of cost intensive labour in our country is not able to deliver consistently on the promises of providing cheap quality products. Creation of SEZ’s (Special economic zones), making easy accessibility of credit to micro, small enterprises haven’t helped in pushing forward the manufacturing sector either. Therefore, this strong demand and weak domestic manufacturing industrial growth have paved the way for big foreign companies to enter into the market. This has increased our dependency on foreign companies and their products. And also, these foreign companies are able to successfully eliminate the domestic competition by removing the smaller players from the market because of their huge size which give them cost advantage. 

Also, the purpose of giving rate cuts has been to give an incentive to the industry by providing easy accessibility to the credit. But, this hasn’t happened as most of the liquidity which generated in the market by decreasing rate cuts have been passed on to the customers in the form of retail loans and not in the form of industrial loans. Industry is still struggling with liquidity crunch despite several reduction in rate cuts in the last few months in the form of SLR, Repo rate, reverse repo rate, CRR. And last week only, RBI governor raised concerns regarding rising inflation again, which doesn’t come across as a good news for the industry. This is a duality and conundrum which India needs to manage cautiously to be able to register strong growth otherwise we would get stuck in this vicious cycle. 

Why we should be wary of the recent verdict given in Delhi Assembly Elections ?

Delhiites, despite being busy in valentine's week, have given a resounding and overwhelming verdict to Mr. Kejriwal and his political party AAP, by giving them 67 seats out of 70 in the recently concluded Delhi Assembly election. Amassing 54% of the vote share is something unheard of in this highly diverse and segregated democracy where religious sentiments still continue to play a greater role in deciding the fate of elections.  

The judgement seems to be loud and clear that Delhiites want a govt. who won't just rule but would act as their representatives, where the voice of the common man is heard, where their problems are being addressed, where inequality would remain dead and buried, where there will be no space and time for communal differences and violence. These seem to be some of the core issues based on which Delhi has given its verdict.

But, are these the only reasons for this kind of massive verdict in favour of AAP. I guess no. Looking at the complete picture, we can easily deduce the important role that freebies have played in this election. The outrageous, irrational, and over the board promises made by Mr. Kejriwal have played a greater role in this election than estimated by the so called pundits. Promises of constructing a school every 3.67 days and a college every 5.45 days over the period of next 5 years look beyond the scope of reality in the current context. Promises of drastically reducing the electricity and water prices have definitely gone down well with the electorates but the question still stands whether Mr. Kejriwal would be able to achieve this considering that Delhi as a UT is always dependent on other neighboring states for both resources. 

The problems just don’t end here. AAP, as a party in power, needs to understand that even the governments are required to maintain balance sheets. What we have heard till now is the expenditure part only. They will be requiring huge sums of money to uphold their claims and promises. I am still not sure where these revenues will come from. We still haven’t seen a plan in AAP’s political rulebook which can be effectively used for generating some revenues and I am not sure whether Mr. Kejriwal would ever be concerned about it or he will just try to happily pass on the burden for his freebies on central govt. When 60% of our villages are deprived of electricity connections even, forget about getting electricity, we surely can’t afford to give cheap electricity to the well-off section of the society. 

I hope Mr. Kejriwal is smart enough to understand that India at this stage really can't survive on freebies. Prudence and austerity have to be the sisters of governance in this time of ruckus and uncertainty. If he really wants to make an image for himself and his party at the national level, he needs to come out of that freebie zone to understand the realities of ground. At least, we are getting a picture of the structure that central govt. wants to implement in this country. Whether “Make in India” or not, at least we have a plan on paper from Mr. Modi. I guess letting economics run over politics is something which will decide whether Mr. Kejriwal would ever become an important player at the centre or not.