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.