RBI’S MONETARY POLICY= ECONOMIC POLICY = STIMULATING GROWTH = REDUCE REPO RATE TO 5% (FROM 8.5%)

RBI’S MONETARY POLICY

ECONOMIC POLICY

& GROWTH

This Blog has several times cautioned in the Past against the continuous increase in Interest Rates effected by the RBi in last 2 Years. In last one year, repo rates have climbed from 6.5 to 8.5%. 

No one faults RBI’s intentions to contain Inflation. But then, the instrument of repo and reverse rate increases hasn’t ever worked to contain Inflation in the last two years – due to various factors.

In the last 2 years, it was becoming increasingly clear that Inflation control in India lies mostly in the domain of the Central and State Governments. But, these Governments – were consistently following Pro-Inflation Policies. 

The steep increases in Oil and Gas prices from time to time by the Central Government was sending an all-round spiral effect into the prices of all products in the economy. The increases  in oil and gas prices would have been justified when the Inflation was at much lower levels. Not when it was hitting double digits consistently.

The allocations under MGNREGS and many such central and state schemes was continuously increasing the money supply hugely, without an iota of productivity increase in the economy. Also, it was not reaching the target population fully.

Simultaneously, RBI was adopting the repo and reverse-repo rate increase Policy all the time. This has made Bank credit much costlier for producers and traders. This has very badly affected sectors like auto, home construction and many others. Capital Goods creation has started suffering almost simultaneously. The increase in cost of loans to fertilizer and other farm related companies has also actually added to food Inflation.

This interest rate increase policy has also made Indian goods much costlier than Chinese, American, Japanese and other foreign goods – and has already driven out many Indian Goods from Indian Markets. The proliferation of Chinese Goods in Indian markets has attracted the usually sluggish Government circles as well. But, they are yet to come out with some policy formulations to counter the threat.

On the one side, there were  no serious efforts on the part of the central and state Governments to find the exact reasons for the rising prices in the market and find remedial measures. There should have been detailed studies on the subject and quarterly meetings of the secretaries and ministers of relevant ministries at centre and states. Nothing of the sort has been happening. Even cold storage facilities, we are expecting the likes of Wal-mart to come and construct.

Chandrababu Naidu had constructed Ryot (Agriculturist)Bazaars long ago inn Andhra Pradesh – in which the agriculturists could sell their produce directly in big markets to small and big consumers. This had huge beneficial effect on prices, on remuneration of farmers and on availability of produce. What was lacking was only long term storage facilities. We must not expect Wal-marts and Chinese to be part of our food-supply chain. It is risky. The food-supply chain from farmers to consumers must be totally in Indian Hands.

Long term storage facilities were needed right from 15^th,August, 1945. Why are we waiting for someone else, from somewhere else to create them, own them and do business with us on them? Ask Indians to come in and do that Job. Even if Indian Biggies do it, it still will be safe for us and will be in our control. As some people said, it is not rocket science to do this.

While Population is increasing in Geometric progression, food supply is increasing in arithmetic progression and area  under cultivation seems to be actually coming down! This is an area for serious policy measures.

Food Inflation also needs appropriate and timely export and import measures. These are policy lapses – which can be and should be reversed urgently.

Mining scams are there. But, Government should take over scam-filled mines and run them – till scams are fully investigated and matters stabilize. We can’t allow the lack of supply of most basic raw materials like iron ore and coal to be affected because of scams and localized agitations. The ores are National resources. If companies cannot stick to National Priorities, there is need for Government control and partial take over to save the Nation.

Land acquisition Policy is a disaster in India. I do not understand why this should be. Land needed for production of electricity, coal, Iron ore, steel and road building purposes etc, must be acquired. Whether the factory itself is in private sector or public sector is immaterial. The manufacture of electricity, steel etc and unearthing of coal, iron ore and other ores and the building of good roads  is a PUBLIC PURPOSE. India needs them. Growth of this nation needs them.

What doubt can there be in it? But, the Land owners are also Indians and they must be compensated to a level at which majority of them will be happy to give up their land and can find alternative accommodation and livelihood. The key word here is – they must be made HAPPY to give up their land for this purpose. If the compensation payable is five or six times the land value, please do pay it. What doubt can there be in either of these factors – I am unable to understand. Once 80% of landowners are happy to give up the land – the rest may be subjected to compulsory acquisition at the same price.

The speed with which the UMPPs were allotted to various private sector companies promised a lot but is now promising to be a disaster. The Banks are not willing to give them loans further. But, past is past, even now, what is needed is to bring in a FAST LAND ACQUISITION POLICY, fair to the land owners but making them give up the land. Else, production will fall far short of demand, costs  will gallop and Growth of Nation will be affected very Badly. It would be even prudent to put such a land-owner friendly land acquisition Policy – beyond the purview of Courts.

NREGS and such other schemes must be made more production oriented and much less corrupt. But, for 2012, I would suggest, such schemes must be used to Plant 60 Crore new trees (one for every 2 Indians) on all roadsides, to manure them, to water them and take care of their growth for 2 years. They must be numbered and the types of trees must also be carefully identified in consultation with ecological and Ayurvedic science experts. Also, in 2012, felling of trees must be totally banned – without the specific permission of a central (& state) authority which must oversee the tree growing program. Let 2012 be the YEAR OF THE TREE, in India.

LOK PAL is a necessity – especially to oversee programs like NREGS. There is no need at all for Government to be fighting Anna and opposition on Lok Pal Issue. Just agree graciously. Let a rep of Anna be there in drafting the Bill too. Let Opposition also be there. If I am the Government, I would blindly agree to the draft produced by a team consisting of the rep of Anna Plus the Opposition. The country will love it. All the shortcomings of UPA II will be forgotten – if just these above mentioned, very easy measures are implemented FAST.

Now Back to RBI. The one factor that is adversely affecting Growth is RBI monetary Policy – without an iota of Inflation Control. There are of course many other factors attributable to  Government. But, If prices went up in the past, it was not due to RBI’s Monetary Policy. If they went down, it was not due to RBI”s monetary Policy. But Growth went down – in a significant measure because of the huge increase in Interest rates effected by RBI. 

Now, every day, some measure of this falling growth and falling economic health is becoming visible. It is time RBI reverses its Interest Rate Policy – not just in token, but significantly.

Going back from 8.5% to 6.5%, which was where we were last year – is a good measure. But going down to around 5% will stimulate growth like no other measure can – and it will bring the economy back to health very quickly too. There is no need for caution or ego on this aspect. The increase from 5% to 8.5%  never brought down Inflation but reduced Growth. Likewise, the decrease to 5% will only stimulate growth without affecting Inflation in any way. 

Government, Individual Industry captains and Industry Bodies must also reason with RBI to bring down the repo rates to 5%. People will thank RBI for this one over-due measure.

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