Tuesday, February 7, 2012

GDP GROWTH TO BE LESS THAN 7% = Measures Needed : 1. Reduce Interest Rates by 2-2.5% 2. Budgetary & legislative Measures by Govt


Measures Needed :

1.        RBI needs to reduce Interest Rates by 2-2.5%
2.        Budgetary & legislative Measures by Govt

Now, it is official. Official estimates indicates that GDP Growth will be less than 7%.say, around 6.9% for current Year. If we factor in the Inflation estimates, where will the real GDP be for current Year?

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. The GDP adjusted for changes in money-value is Real GDP.

It is not clear whether the GDP Growth estimated – is adjusted for changes in money value  or not. In other words, is it GDP or real GDP?

In any case, Every country must necessarily ensure that Growth rate is always above Inflation Rate.

But, if we are constricting Growth – while trying to contain Inflation – then also, we need to ensure that Growth Rate is kept above Inflation Rate. This is an ESSENTIAL PRE-REQUISITE for any country’s Health. If this is not ensured, there will be an absolute fall in the standards of living.

In our country – we are battling with falling Growth Rates right now. There is no point in comparing Growth Rates with Developed countries like USA, where there is a saturation limit, beyond which growth will be at lower rates like 4 % or less.

But, then, inflation rates also will be around 2% - so that net or REAL GROWTH RATES  will still be reasonable in such countries.


If Growth Rate is 7% or less but inflation rate is also around that or above that, sterner measures than RBI monetary Policy measures are needed to contain such High Inflation rates. As Government periodically states, an Inflation level of around 4% is tolerable. But, lot of supply side measures are needed for keeping Inflation at or below 4%. By supply side, what is meant is – supply of products and services – which must be enhanced to keep pace with or exceed the Demand for products and services.

RBI can constrict supply of money – through its Bank interest Rate and CRR mechanism. It has nothing to do with supply of Products and services. This falls in the realm of various Central and state Ministries.


Unfortunately, there has been less than adequate positive and quick action on the part of the Ministries at Centre and states -  to control Inflation by enhancing the supply side. RBI also has been pointing out this in their Monetary Policy Documents – directly and indirectly.

But, Inflation comes down in long term in countries like India – where there are no monopoly conditions. Inflation in vegetables, cereals etc can be seasonal. It comes down when harvesting season comes. This has happened. This will go up again when the season goes. Unless, some supply side measures are undertaken by the Government – like, ensuring water supply by digging canals, enhancing water storage facilities and so on. In Most places, we still see, tanks and canals dug hundred years back by some Kings etc – but not by Governments after Independence. In places where there are rivers, we find Dams being erected – to enhance supply to one region and deprive supply to another region. There is clearly no NATIONAL WATER POLICY at work. 

Water lies waste in Dam sites, when it can usefully be used to irrigate irrigable areas in lower regions.

This is just an example. There are so many such factors, which need to be examined and addressed, if we are to be always self sufficient in Food articles.
In respect of manufactured products, the biggest danger today – comes from Cheap imports – from countries like China, which are killing domestic manufacturing Industry. Government must undertake some protectionist measures quickly to promote domestic manufactured products against cheap imports. At the same time, domestic products’ quality must be vastly improved.
In the name of WTO, No Government of any country can afford to allow the swamping of its existing domestic manufacturing Industry by foreign products in the scale it is happening presently.

Well. These measures are for medium/long term and are continuing efforts needed in every country. At the minor level, logistical support like, transportation, storage etc – must be ensured for all products.

But, in the immediate future, how do we propel Growth to a trajectory much above the Inflation Rates?

The easiest measure, is of course, reducing Repo and reverse-repo rates to the level where they were prior to March 2010. At least 2 to 2.5% can be slashed away from these Rates, so that capital assets creators feel comfortable enough – to create productive assets. After all, their Return on capital must be sufficiently more than the Cost of Capital – to encourage them to undertake their ventures. Else, why will anyone create capital assets, whose return is less than the cost of capital? 

Second, Government must become a Big Facilitator for Industry. Supply of Coal, electricity, fuel, gas etc must be made available in plenty – to encourage capital to follow into production.

Today, Reliance Power says, its 2400 MW Power plant is ready – but where is the gas to run it? We do need the electricity. Therefore, we must arrange for the gas -  if necessary by quick imports, or by diversion, from non-essential consumption.
Coal, gas, electricity, fuel must all be reasonably priced – so that final products will be competitive in national and International markets.

The Budget is a Great instrument – to adjust taxes in such a way that Indian exports become attractive, imports of raw materials remain attractive, but imports of final products (which are also available in India) are not that attractive. 

These Policy imperatives are known to all. But, how it translates into Budget – we need to wait and see.

Land acquisition Bill is yet to be introduced and passed. This is essential for Industry to find an acceptable method of acquiring land for their purposes, and for landowners to get satisfying compensation for parting with their land.

I am not impressed with the FDI in Retail. It is not a panacea for any of our problems.  A Wal-Mart is not going to solve any of our problems – but is likely to create unemployment for already employed people and displace Indian products from the retail market with foreign products. Yes. Some people will benefit. But, many will lose. The Gainers are saying, Yes. Losers still don’t know the axe falling on them.

There are so many avenues for FDI – in Defence production, in science and technology, in Pharma, in higher technical education, in different areas of R&D and so on. We can even have FDI in road Building – provided, we pass our Land acquisition Bill first.

In summary – 2 immediate measures to improve our estimated GDP can be identified :

(1)        Reduce Interest Rates (by RBI) by 2 to 2.5%
(2)        Budgetary measures &  L.A.Bill (By Government).

We do hear right voices from Shri Pranab Mukherjee, from Montek Singh Ahluwalia, from Shri Rangarajan and other luminaries.

RBI can reduce Interest Rates – right away. After all – Growth NEED NOT WAIT – anymore.

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