Monday, October 28, 2013


Dear Raghuram,

You are hitting the wickets !

Not the Ball.

Yet another Review of RBI Policy Rates is to come today. The popular view is that – since onions and other Vegetables are hitting the roof, so should the Policy Rates.  Everybody seems to have accepted this absolutely incomprehensible illogical logic.

So, it is time, some of those Economists at RBI and those who come on small screen every day, tell us, at what level of RBI Policy Rates, onion prices and other Veggy prices will crash to affordable levels. I feel, the food article prices in India will never come down - whatever be the RBI policy Rates. 

No one is buying food articles with Bank loans. That is the plain fact. Therefore – no one is going to stop buying the food articles – even if RBI policy Rates are at 10 % or even 15%. So, demand will not dry up because of policy Rates. Since these are essential commodities needed for life, or at least for satiating centuries old habits, demand cannot dry up on that count .

Surely, Onion or other food article prices never, ever, in the past responded in any manner, up or down, to RBI Policy Rates. Nor will they ever do so in future.

So, what is the RBI doing, enhancing the rates, every time onion prices go up? More specifically, since, anyway, RBI feels that it should enhance Policy Rates every time the Inflation, mostly food inflation, goes up, it is also time to see what on earth these enhanced Policy Rates are doing, on earth.

Enhanced Policy rates affect Bank Money in 2 ways. They make Bank loans dearer. In some way, they also tend to enhance deposit rates. Thus, Bank savings go up. Bank’s loanable funds go up. But, not the number or amount of loanees. 

Therefore, there are not many takers for bank loans now in India – especially for productive purposes – since their return on capital (loan funds) is not attractive at this high level of interest rates on loans. Therefore, capital formation suffers. Therefore, Growth of the Industrial sector, which is the chief taker of productive loans, suffers. This sector includes cottage industry, SMEs and the large scale sector. This is what is happening all the time in India.

Growth of Industrial / Manufacturing sector is down in the dumps. We all see that.

The RBI and Government statements acknowledge the fact that Growth is suffering; that Businesses are no longer taking loans for expansions or new ventures. That, many sectors, not just individual units, are fast becoming NPAs – as the Public sector Bank results have been clearly indicating result after result. That, Private sector Banks are thriving on consumption loans, not on production loans, and therefore, their NPAs are less. This is not healthy at all, for either the Banking sector or for other sectors starved of Bank loans. 

All these are plain to anyone who reads the quarterly and annual results of the Banking and other sectors. The response to rising NPAs is appalling. The reaction is – don’t lend to failing sectors – which includes Airlines, steel, iron ore, Telecom, road building, house building and so on – all those which go to make a nation a developed nation.

How often are we seeing new businesses coming out with public issues? How many Ads have we seen in recent Past for this purpose. It is close to NIL. This is happening in a developing country, whose steel consumption is LOW, whose Roads are less and are in Bad shape, whose canals are minimal, whose airports serve insignificant number of passengers, whose production of most industrial / manufacturing items is lower than that of Taiwan, S.Korea or  Japan, all of whom put together do not equal one or two Indian states in area.

When are we going to match any of these tiny nations in Industrial Production, if our cost of capital is running high and return on capital is hurtling down? 

In between somewhere, we are missing the fact that employment in India is now-a-days confined primarily to the software sector and many sectors are actually seeing downtrend in employment. And, net rise in employment rates is nowhere close to the rate at which  unemployed / employables number is rising. 

All are employables in some way or the other. The rise in our population - to become world No.1 in that, we are proud, is adding to the numbers of our youth. But, how are we treating our Youth? Where is employment for our youth? Or, for self–employment? News every day, indicate, more and more highly educated youth also taking to stealing and such other crimes.

I am not saying that rising RBI Policy Rates are causing all these. But, the Point is, RBI Policy rates are ineffective, in curbing high/rising food inflation rates, which is the primary component of inflation. But, they are effective in curbing the tendency to take loans for Productive purposes. So, all cottage Industries/SMEs/Big Industries stop growing and new ones stop coming up. Why? Because, the Return on capital is low in many of these sectors. Therefore, the loan Rates (Cost of capital) must be lower than that. But, I feel, they are much higher right now. Therefore, there is a case for lowering the Policy rates – not enhancing them – notwithstanding the rising food Inflation.

Food Inflation will come down – as and when Sharad Pawarji takes more interest in his Ministry and his primary work of enhancing food production, food supply and food prices. I am not alone now in saying this. I have heard numerous media discussions on this. Yet, this waking up is not happening. The food Ministry is still talking of new arrivals of onions, some time in future, when the onion prices will possibly come down a trickle. The madness of Onion exports are to continue in the mean time. Why are people exporting onions to other countries, when they get more price in India itself? It is Government Policy. And, Dr.Manmohanji would never ask his allies to perform. That is out of question. The five year tenure must finish successfully, anyway. It is close to that. 

Who on earth is making the fastest buck in India today? Why? It is the middlemen in the onion market. Who are these Middle men? This is the most serious topic on most news channels. Yet, the only one who is not talking of this, is the Government of India.

It is time to grow onions in much bigger way outside Maharashtra – if their prices are to come to lower and reasonable levels. 

India has Iron ore in Plenty –but buys it from outside. India has plenty of coal in India – but buys it from outside. India has plenty of onions and even exports it – but still, it buys onions from other countries. I strongly suspect if Indian Onions are coming back to India from other countries. It is much like Indian capital coming back to India through other countries. 

Shard Pawar is the acknowledged expert in cricket. He can perhaps tell us why Sachin is not clicking well in his last test. He has analyzed Sachin well. But, not onions or their prices. 

At this level of Onion prices, Why can’t the Government even arbitrarily fix maximum retail prices, at say, Rs.40 or Rs.50? Is it so difficult to clamp down on hoarders and seize the hoarded stocks and release them into the market? Is it very difficult for Government to ask farmers to sell directly to itself or agents appointed by it – at reasonable prices and then release them into market on cost plus basis? Where there is a will, there is a way. Right now, clearly, the will is lacking.

It is difficult to blame RBI, which is going by the Book, the book of Keynesian economics. By the Book, RBI is right. At least, it can justifiably feel so. It is serious in wanting to control prices. Just that, it lacks the ammunition to control food prices.  On ground, things are different. So, it is time to respond to these ground conditions. RBI must bat for Industrial Growth by LOWERING POLICY RATES GRADUALLY BUT SIGNIFICANTLY.  Three years of rising policy rates has not reduced Inflation. And it will not, in future. RBI may be incapable of containing Inflation in India – especially without the Government  Ministry willing to participate in it. But, it can be a catalyst for Growth. By reducing the Policy Rates.

It is not difficult to foresee what Raghuram will do today in his Policy review. His Policy review will be excellent. It will be a treatise on Indian economy – and even world economy. I always read it with pleasure and profit. But, the final prescription for all the ills that RBI describes – is not in its hands - and therefore its prescription is not going to work.

Mean while, Dr.Man Mohan Singh can sternly tell his Food and Agri Ministries and commerce Ministry to go all out for controlling food article prices. This is the only way, Inflation can come down. He will earn the respect of all people if, and only if, he himself lives up to his reputation of being clean and being a knowledgeable administrator.

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