Friday, April 13, 2012

STATISTICALLY SPEAKING = RBI must bat for Growth = & Reduce Interest rates & CRR both

RBI must bat for Growth

Statistically speaking - India has been suffering from High Inflation from 2010. Reserve Bank of India started applying its monetary policy measures of raising repo and reverse repo rates – to contain Inflation. But, to my mind, RBI's measures didn’t work.

Inflation defied RBI’s medicine completely and was rising constantly and consistently.

Inflation did not respond till Dec,2012. In Dec,2012, food inflation fell considerably – due to excellent harvest of all agri commodities. It is difficult to say – it responded to RBI’s medicine. Even RBI did not seem to have felt that food inflation came down because of its monetary Policy medicine. Food Inflation fell in response to higher production – and consequent alteration in demand-supply equation. But, it made RBI a little happy. So was everybody happy.

The Babus in the food and agriculture Ministries and the RBI are however a little worried, that food inflation may rise up yet again, when the demand-supply equation changes adversely. 

One must complement RBI – for sincerely trying to act against Inflation. But the relevant ministries of central and state Governments were not seen to be acting with equal zeal for controlling Inflation.

The potential cure for Inflation was actually with them. They only can intervene from the supply side and neutralize the demand – supply imbalance. But, either they did not know it, or were too pre-occupied otherwise, to act on Inflation. 
It is not that RBI medicine was not working at all. It was working. It was working adversely on the credit demand arising at  the commercial Banks – especially for capital asset creation. 

Nobody goes for a loan to create productive capital assets – unless its net productivity (after deducting all expenses) –that is, its return on capital – is higher than the cost of capital or COC (interest rates).

In simpler terms, if ROCE > COC , capital asset creation takes place. Else,not.ROCE must be significantly higher to cover the RISKS involved.

Now, we have a situation where the cost of capital is too high and the return on capital is  not sufficient to induce entrepreneurs to take the HIGH RISKS associated with capital asset formation.

Consequently – Growth of capital asset formation has started coming down drastically. It is getting reflected even in the poorly compiled statistics of IIP Data etc.

India has probably one of the most unbelievable statistics. Especially in respect of Industrial statistics. This disbelief in statistics is not just from me. Many experts have voiced reservations on these statistics. Now, even the Finance Minister has voiced his surprise.

It is possible to bring out more cogent, intellectually and emotionally agreeable statistics in future, which is not bad in itself. Statistics need certain amount of adjustment, to remove errors. 

But, it must now be clear to all of us – that the methods of compilation are FAR, FAR from being satisfactory from reliability angle. India needs much better statistics – if we are to have any sort of accurate planning.

I am sure, RBI has to rely on similar type of statistics – for its monetary Policy too – though, RBI takes a more careful and serious look into them than Government and the Statistician do.

But then, RBI has its limitations. Do we really have reliable Food production statistics? If we have reasonably accurate food production statistics – we can perhaps makes reliable estimates of future production – and based on that, take advance action to either import the expected deficit or permit export of the expected  surplus.

Now – neither of them seem to be happening. One Ministry wants export of cotton and another is against it. One Ministry talks as if it is on the side of the cotton farmers and is against Textile Mills. Another takes the opposite stand.

In respect of Sugar however, the same ministry seems to be on the side of the Mills. Which among the Ministries, is on the side of the Indian Consumer – is anybody’s guess.

The point is – not that others are blaming any of the hon’ble Ministers or Ministries for their stand; but that ,  they are blaming each other. 

The real issue is – of Lies, damned lies and statistics – as one news paper put it. Tell us, Sir, why exports of cotton are justified; and tell us sir, why they are not justified? If two ministries are not differing, we wouldn’t even be asking this question. Anyway, which statistics is the base for your stand?

Coming back to Inflation statistics – when will we have statistics to the comfort of the Finance Ministry and the RBI? 

And, when will we have correct, accurate statistics? 

Till the latter comes, the Finance Ministry and RBI will have to make do with what the central statistician says.

But, certain assumptions seem to be worth making. 

(1) Inflation is not responding to RBI monetary Policy measures.
(2) Inflation is responding to Demand – Supply equation.
(3) Demand – Supply equation has to be tackled by Governments – the respective Ministries of Central and State Governments.
(4) These Ministries must watch – especially supply side and take measures to increase or decrease supply through export / import and other measures (like market operations) in the short term.
(5) In the long term – they must plan for creating conditions of definite surplus – which gives them planning options of various kinds. Planning for abundance is the only type of Planning that can be called Planning.
(5) RBI monetary policy measures - in the absence of Governmental actions – have largely been hurting Growth and Capital asset formation.
(6) Decelerating Growth and lower capital asset formation – will hurt any economy in the short term and long term both.

Well. As a student of economics and a careful watcher of Indian economy – my assumptions are these. RBI and Government can differ. The readers too are free to differ.

There are many measures mentioned in the latest Budget, like creation of storage facilities. FM needs all praise for these. But, the respective Ministries must start implementing these measures quickly.

What should RBI be doing in particular?

Sir, RBI must be revising the CRR and Interest Rates downwards – as Growth and capital asset formation cannot be compromised any more. Even the faulty IIP statistics – have been consistently lowering the Growth figures of many key areas. 

RBI, in my opinion, needs to be, therefore, lowering the Interest Rates reasonably steeply – even if it is not at the speed at which it raised them. 

Nobody has any doubts about RBI’s sincere wish to tackle Inflation. But, in the absence of supportive governmental measures – it is not happening. 

Therefore, the suggestion to RBI is – please BAT FOR GROWTH NOW. There, you will succeed much better.

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