The bottom line of the Reserve Bank’s mid-year policy review is that we have to live with soaring inflation and high interest rates to protect future growth. The price of diesel is expected to be hiked as soon as the government gathers enough political courage — this will spark a fresh round of price hikes and further inflation.
The RBI’s quarter per cent hike in the repo rate (that at which banks borrow from the RBI) almost appeared to have been effected because it had to be seen doing something.
There was obvious pressure from the government. But why is it that it’s only the RBI’s responsibility to tackle inflation? It looks like a losing battle as monetary measures have their limitations and it well knows that steps have to be taken on the fiscal side as well — which is the government’s responsibility. Thursday was the 10th time that the RBI has hiked the repo rate in the past 14 months, in which time the rate has gone up by four per cent while inflation, at 9.1 per cent, burns a hole in the economy. Both the rich and the middle class have to bear the brunt of rising interest rates. The shadow boxing between inflation and growth continues — with growth falling (at least in some areas) and inflation rising. The silver lining in the RBI’s statement is that growth is not as big a concern as inflation. While there has been a slowdown in some areas — interest-sensitive sectors like auto and real estate — the overall picture is still one of broad-based growth.
Unlike the government, the RBI is not overwhelmed by low industrial production growth (6.3 per cent in April) or GDP fourth-quarter growth being down to 7.8 per cent, or investments being postponed or reduced to a trickle. Industry is said to be setting up projects abroad as it’s easier to do business outside India given the government’s indecision and the absence of a policy on the vexed question of land. The RBI is also looking to the rain gods for some help as a good monsoon will bail out the agricultural economy.
But it’s perhaps time for the government to look afresh at ways to tackle supply-side problems. Food and fuel are supply-side problems and largely reflect imported inflation. It’s the same in the case of manufactured goods. There is no use blaming the Pay Commission largesse or that there is more purchasing power in the hands of people due to the National Rural Employment Guarantee Scheme, or on the rise in minimum support price for foodgrains. All these are as necessary as the steps the government takes to subsidise industry and exports. They are also minuscule in comparison to the pay hikes and bonuses that company chairmen and directors routinely award themselves and their executives. We have a Planning Commission which should tackle such issues: it should be questioned on what steps it proposes to take to ensure supply keeps up with demand.
High inflation has been with us for almost two years now, but the government is yet to get a grip on tackling it. Even on the question of fuel, it has not been able to boost non-conventional energy supplies that could cut down dependence on imported fuel. Its lack of decision-making, for whatever reason, has also seen the new oil and gas exploration policy floundering, at great cost. The foreign partners of Indian companies have walked away as the waiting period proved too long for them. If the government cannot give its undivided attention to tackling inflation and its root causes, the people can expect little respite.