INFLATION COTROL - WHAT RBI AND GOVT MUST DO - WHEN WILL BOTH LOOK AT NPAs IN RIGHT PERSPECTIVE?

INFLATION CONTROL

RBI & Government

After Raghuram Rajan took over as RBI Gov, India Inc’s hopes were raised (by India Inc itself) that  he will be a panacea for many ills like Inflation , High Interest Rates and so on. 

But, wholesale Price Index has now climbed to 6.1% in August against 5.79% in previous month. So, if Raghuram reduces interest rates, he will be condemned and laughed at by India Inc itself. The Economic Times Editorial of today says, that keeping high food stocks is treason; Cut food stocks – it advises. This Blog has been saying the same thing for almost 2 years now. 

This Inflation is basically food Inflation – and food Inflation will not respond to High Interest Rates. There is no connection what so ever between the two. Whether Inflation rises or falls, it has nothing to do with the RBI’s monetary Policy, especially in the Indian context.

But yes, it has everything to do with the Ministries of food, agriculture and commerce. If onion prices are rising and yet the Ministries are advocating Exports,  or allowing hoarding of Onions, Inflation in food articles is bound to rise. There seems to be a whole lot of insensitivity to the rise in prices of food articles in the Union and also the state Ministries concerned. 

RBI is helpless, absolutely, utterly, helpless to reduce these soaring prices of food articles through its monetary policy.  But, it is nothing short of treason that the Ministries are doing nothing to control the food article prices. When prices of some articles rise 240%, People are suffering. But, the Ministries and Babus are not seeing that suffering. This  is the tragedy. So, I agree with the Economic Times Editorial in full. Rather, I feel, unknowingly though, Economic Times now agrees with my stand of the last 2 years.

Therefore I advocate 2 things. 

1.  The Ministers and Babus in Food, Agri and Commerce Ministries at Centre and in states must come together and act tough against Hoarders, ensure release of all Inflation prone commodities into the market all over India, even clamp down on prices, and if prices go above a certain level, treat it as act against the country; arbitrarily seize the stocks and sell in the Market at lower prices. Excessive Profiteering in food articles must be prevented at all costs – as this is the primary cause of Human suffering and sorrow. Governments are not there to promote people’s  suffering, at the benefit of hoarders, profiteers, exporters and so on.

2.  RBI must recognize at least now that their Monetary Policy is not the instrument to curb food inflation. Its High Interest Policy had Zero effect on Inflation in last 2 years – because, it is not the medicine for this  Inflation. This inflation remains uncontrolled only because of the inaction of the Ministries concerned. Therefore RBI must bring down the Interest rate structure immediately to promote Growth. Too many sectors are suffering because of the high Interest Rates for last two years or more. Indian Products are becoming uncompetitive in all markets because of this reason. RBI must sternly tell Government that FOOD INFLATION is its baby and advise it to initiate urgent steps to control Inflation -   from their corridors. This Government is angry with CAG, SC, RBI, PAC  and everybody for their criticism of itself – but, it is yet to look at itself. Governments must learn to accept and live with criticism. The lone person who seems to care  – is Mr. Chidambaram. But, food inflation is not in his domain.

3.  There is one more duty for the RBI and the Government. The NPAs of all Banks – especially of Public sector Banks – are rising alarmingly. When will the Government look at what ails all these companies and take steps to redress their problems? If these sectors plunge into their demise because of Government inaction at this point of time, which is already very late, RBI also will have to be blamed for not pointing out to the Government, the enormous problem facing the Economy. The only thing RBI is doing at this point of time – is to ask Banks to play safe in recovery of their loans and in giving further loans. But, that, unfortunately, is not a solution, for the Economy. RBI and Government together are responsible for the Economy – though RBI can do it, in an advisory role and Government can and must actually act.

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

STATISTICALLY

SPEAKING

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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INFLATION vs GROWTH = WHO SHOULD MANAGE WHAT? = THE DEBATE CONTINUES = RBI CAN BAT FOR GROWTH

INFLATION vs GROWTH

Who must manage Inflation?

Who must Manage Growth?

The Debate continues

There is a wide spread debate in India on Inflation and Growth.  In Europe, the discussion is more on bringing up sinking economies. Not merely the Industry, but Sovereign Governments are in deep problems there. In US, it is more a question of sustaining employment and  demand – since supply side is adequate. The Government in USA is robust and strong – though there are some differences between Congress and President right now. China stands on a different footing from all the rest. They have built up capacities in different Industry segments – and are ready to dump their products at ANY PRICE (almost) to capture foreign markets – Indian, US, Europe and so on. The countries where China dumps their products – have huge worries in sustaining their own Industries, employment etc.

Problems are therefore different in different corners of the Globe.

In India – we are seriously discussing Inflation and Growth. The most disturbing aspect of all our discussion is – we are only discussing – but doing almost NOTHING ELSE. If anything, we may be doing the opposite of what we are aiming for.

Inflation Management has become like RAIN MANAGEMENT. Do you manage RAINS? No. we take an umbrella, when rains come. We wait for rains. If they come, we do agriculture. We do water management. If rains are more, we suffer floods. If rains are less or Nil, we suffer draught. But, we do nothing for bringing in rains or stopping the rains, when we had enough of them. That is the RAIN MANAGEMENT we do. Which means, we don’t do RAIN MANAGEMENT. We do self management when rains come – a fight or flight response – not a management response.

It is more or less the same thing – with Inflation Management. Planning Commission, Finance Ministry and all other experts are telling us – that Food Inflation may come down in Dec, January etc, but may go up again from February or March and so on. But, nobody tells us – what they plan to do – to reduce the inflationary trends in food articles.

Manufactured Goods Index, the IIP, may have wild swings from Minus to Plus,  depending upon  CSO’s compiling ability, mostly, and to some extent, the statistics furnished to CSO by those in charge of that.

Everybody has started looking at IIP statistics with some amount of suspicion. Everybody- probably includes CSO as well. No one denies the difficulties in such compilation of statistics from across the whole of the country. But, when are we seriously planning to revamp our statistical methods? When is that going to happen – so that we can take the statistics more seriously – for planning and action purposes?

Not that we are not taking the IIP stats seriously.  For whatever they were worth, we went into deep gloom, when the IIP was Minus, and we have managed to come out of our gloom when the IIP stats turned PLUS. With all suspicions in our minds – we still use it at least for our mood swings.

We have Great software creators like TCS, Infosys etc – who are used increasingly by all other countries for improving their efficiencies – but, our governments are yet to take any such major decisions to improve their efficiencies. The one big decision taken – like Nandan Nilekani’s Adhaar – is now condemned and praised – alternatively, on each day.

But, IIP stats  are useful pointers, anyway. Capital Asset formation indicators are Negative for quite some time. This should be taken seriously. Future production depends on current capital asset formation.

If Capital Asset formation is not managed now – future production and Growth will suffer in a big way.

Why is capital asset formation not happening? There could be several reasons. At least one reason is – that the returns on capital are not commensurate with the Cost of capital – in India today. The Interest Rates in India are TOO HIGH, for encouraging capital formation.

Why are the Interest Rates High?

RBI wants to control the Inflation. Its Intention is laudable. But, it is like the old fable of the Donkey trying to bray and alert its master to the coming of the thief while the Dog is sour with the master and is unwilling to Bark.

The Dog that must tackle the Inflation thief in India at least – is the Government (State and Central) and not the RBI. And, the Governments are doing their best to stoke Inflation, by increasing the prices of all raw materials, oil, Gas etc – and infusing huge money into unproductive purposes. There is almost no Inflation management – planned by any Government.

Are we really looking at those products which are Inflation prone – and trying to manage their supply side? Are we moving against Hoarding? Are we creating capacities for  storage, transportation etc? Are we creating efficient marketing systems? Strangely, we are waiting for Walmart – to take care of these mundane aspects! We are talking - as if, Indians cannot do it and only Walmart can do it! Governments have to do INFLATION MANAGEMENT – especially in countries like India. There is no other way.

RBI can, in my humble opinion, encourage or discourage Growth – but cannot manage Inflation. Why so? There is a huge parallel economy running on corruption and Black money in India, which far exceeds any Bank funds. There is also the problem of counterfeit currency supply, possibly from our great neighbours, as periodically reported in media. There is also the Indian habit of keeping huge currency (and other liquid forms of wealth) outside Banks. Do we not know, for instance, that every land / real estate transaction has two aspects – a registration value, which is much, much lower than the market value at which the transaction takes place? Where does the difference between the two come from? It comes from this parallel economy.

General Inflation is a function of all these funds – but, in the market place, the real inflation happens mainly on account of two factors – demand for Product and supply of product. In real estate, movie Industry and a few others, black money plays a huge part. But, in market place, for onions, tomatoes, soaps, blankets etc – Black money is not in picture. What is in picture is demand for the product and supply of the same.

We must admit, that we must not stifle demand for these essential products. Already, as the prime minister himself has said, people are going hungry in large numbers – and the present demand for these products is actually LOW by decent human standards. We must encourage demand. Therefore, we must manage SUPPLY of these products much better. Supply of products starts from seed supply and fertilizer supply right up to marketing and placing of the products in the hands of ultimate consumers.

This, the Governments, both central and state, must be doing routinely. If they do these, they can manage Inflation, Health, productivity and other national wealth parameters. There will be no need for one third of people to go to Beds hungry.

These are not in the realm or jurisdiction of the RBI. But, classical Keynesian economics dictates that Inflation can be managed by constricting funds supply through Banks! This has many assumptions, many of which are not satisfied in India. This is the problem. RBI has raised Interest Rates, for controlling Inflation, 13 times in a span of one year. While RBI’s analysis is always admirable, the prescription for the malady is NOT. If Inflation went up, it was not DUE TO RBI. If it goes DOWN, it is also not DUE TO RBI. In Indian conditions, RBI cannot be blamed either for Inflation or for Inflation Management.

But, RBI can infuse a lot  into Growth. It can be a Great catalyst for Growth in Indian conditions.

Today, Return on Capital in most manufacturing Industries is not sufficient to go for Bank credit for expansion purposes because, credit from Indian Banks is available at very high Rate above the ROC. For working capital, there is no alternative. But for capital asset creation, many big companies are approaching Chinese banks, US Banks and even European Banks – where credit is available at much cheaper Rate.

Indian Banks cannot lend at those rates because our repo and reverse repo rates are themselves at a high level. Only Mid-sized and small sized Banks will have to approach Indian Banks for funds for capital creation. This again makes their products uncompetitive vis a vis the Chinese products etc. When we look at the Income statements of companies as they are trickling in, we find, the Interest expense has gone up hugely, and in some cases, it is responsible for turning the company’s profits into negligible or even negative numbers. The reduced profits result in reduced tax payments by them – and reduced revenues for the Government.

This in turn will result in deficit financing by Government – and stoke Inflation directly! Come March, we will know the extent of reduction in revenue numbers and the consequent Deficit financing. So, is RBI bringing down inflation or pushing up Inflation?

The Auto and Real estate sectors suffer a double whammy – the buyers have to pay huge Interest rates and so, some at least avoid buying homes / autos. Since the manufacturers and builders have to pay huge interest rates, they reduce manufacturing / building activity – and since they do take loans and manufacture / build, they do charge huge amounts for their final products, because of higher Cost of Capital. Auto companies and Real estate companies are both raising prices of their products right now. So, Inflation does not come down. But demand and production both do come down.

Government and Planning Commission are surprised that PSUs with huge cash balances are not investing in expansion. In their case also, only if the return on capital is more than the interest on their liquid funds parked with Banks, it makes sense for them to invest in expansion. If the rate of return on capital is less – where is the incentive for them to invest in expansion?

Compared to China, our rate of Industrial Growth is nothing to be pleased about. Not that funds are not available. Even the CRR of Banks, which is idle funds, is too high. A little reduction in that will release huge funds, which can expressly be channeled to fund ONLY GROWTH – and not consumption.

For funding expansion by private companies and PSUs, the primary condition that needs to be fulfilled is – we must ensure that rate of Return on capital is higher than Cost of Capital (or Interest rates charged by banks).While ROC is not in RBI’s hands, Cost of Capital is in its Hands. If RBI reduces Interest rates to the levels they were one year ago – RBI will be directly fuelling Growth. If CRR also is reduced with the express condition that the additional funds should go ONLY into production / Growth – and not for consumption, RBI will be aiding Growth in a much bigger way.

Industry and Government must seriously look at these aspects and impress on RBI to BAT FOR GROWTH – leaving Inflation to the Governments to manage.

It is not that Governments have no Role in Growth – their Role in Growth is primary. A huge amount of supportive legislation is overdue. Their taxation Policies can expressly fuel growth. But, in the immediate future, RBI can aid in the Growth process, by reducing Interest rates, by reducing CRR and by releasing additional funds only for Growth.

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INFLATION DECLINES IN 2 SUCCESSIVE WEEKS = FM SAYS CURRENT RATE UNACCEPTABLE = MORE GOVERNMENTAL MEASURES NEEDED = IIP FIGURES =

FOOD INFLATION

DOWN IN

2 SUCCESSIVE WEEKS

(PLUS IIP FIGURES)

Readers can find below the INFLATION STATISTICS  for the latest two weeks hereunder.

In both the weeks, food Inflation has started declining. We can hope that this trend will continue in future too. The Finance Minister has also said that current levels of 9.5% inflation in food articles is unacceptable.

There is a strong need for Governments at centre and states to adopt  more pro-active measures to combat Inflation in general and Food inflation in Particular, as food inflation affects common masses very adversely. The direct effect of this type of food inflation is that – it reduces the purchasing power of the vast majority of common masses, in respect of ALL OTHER COMMODITIES, for which demand slows down. The FMCG segment in India is already facing this impact.

In the medium term, all other segments also will come under some adverse impact, if this level of Food Inflation continues. There is no doubt that this MUST COME DOWN FURTHER significantly.

The usual short term measures are –

(i)                Prevention of Hoarding

(ii)             Prevention of speculation in essential Food commodities

(iii)           Imports of items in shortage

(iv)            Prevention of cartelization in pricing

Long term measures are of course –

(i)                Improving the acreage under all commodities

(ii)             Better Irrigation facilities

(iii)           Better fertilizer inputs

(iv)            Improving yield per acre significantly.

All these are well known measures. But, in recent past, our performance in all these areas has not been Great. The Food and Agricultural Ministries at the Centre and states must act with greater Foresight in this vital area of national development.

Readers can see the statistics and the FM’s statement below :

India's food inflation rate

 declines to 9.52 per cent  

 New Delhi, March 10, 2011 (PTI):

Ø  After a gap of nearly three months, food inflation fell to a single digit at 9.52 per cent for the week ended February 26 on account of a decline in prices of potatoes, pulses and wheat.

Ø  Food inflation stood at 10.39 per cent in the previous week.

Ø  The rate of price rise of food items has fallen to a single-digit figure for the first time since the week ended December 4, 2010, when it was 9.46 per cent.

Ø  The latest figures are expected to give a breather to the government, which has been under increasing pressure to rein in the inflationary pressure caused by high food and crude oil prices.

Ø  For the week under review, prices of wheat declined by 1.07 per cent on an annual basis, while pulses rates fell by 3.91 per cent.

Ø  Prices of potatoes also fell by nearly 9 per cent year-on-year. However, vegetables continued to be expensive and their prices went up by 9.23 per cent on annual basis.

Ø  In particular, onion prices were up by 3.90 per cent year-on-year. Rice also became dearer by 1.16 per cent year-on-year. Egg, meat and fish became 15.38 per cent costlier.

Ø  Meanwhile, fruits prices rose by 18.75 per cent and milk by 8.42 per cent on an annual basis.

Ø  The non-food articles category saw a price rise of 29.85 per cent during the week on an annual basis.

Ø  Fuel and power also became 9.48 per cent more expensive, while petrol became costlier by 23.14 %.

  India's food inflation rate

declines to 10.39 per cent

 New Delhi, March 3, 2011: (PTI)

Ø  India's food inflation rate declined to 10.39 per cent for the week ended February 19 from 11.49 per cent in the previous week due to a fall in the prices of vegetables and onions, among other things, an official statement said here today, quoting provisional data.

Ø  The fall in the food inflation rate will provide some relief to the Government, which has been under attack by the Opposition for the past many months on the issue of high prices of food products.

Ø  There was, however, a slight rise in the inflation rate for fuel and power to 12.56 per cent from 12.14 per cent for the previous week.

Ø  According to the data released today, the prices of vegetables were up 14.29 per cent from a year ago, fruits by 16.34 per cent, milk by 11.07 per cent, eggs, meat and fish by 14.50 per cent, cereals by 2.01 per cent and rice by 2.38 per cent.

Ø  However, the prices of onions were down 3.64 per cent, pulses by 5.02 per cent, potatoes by 12.66 per cent, and wheat by 2.06 per cent.

Ø  Overall, the annual rate of inflation for primary articles, which have a weight of 20.12 per cent in the WPI, with base year 2004-05, stood at 14.85 per cent for the week ended February 19 as compared to 15.77 for the previous week.

WHAT THE FM SAYS :

New Delhi, Mar 11 (PTI) Terming the current level of food inflation of 9.5 per cent as "unacceptable", Finance Minister Pranab Mukherjee today said the government has taken several steps to bring it down further especially through enhancing supply of essential commodities.

"At the beginning of last year, food inflation was 20.2 per cent, and now it is 9.5 per cent. However, this figure is equally unacceptable," Mukherjee said while replying to the discussion on the General Budget 2011-12 in Lok Sabha.

Mukherjee said the high inflationary pressure, specially in food and some non-food articles, existed in other emerging economies also.

"I am not making any plea. This is not an excuse that because there is inflation in other areas there should be inflation in India also. It is not. But the fact of the matter is inflationary pressure is visible all over the world.

IIP STATISTICS

Ø  Industrial growth has slowed down to 3.7 % in January 2011 compared with 16.8 % expansion in the year-ago period, dragged down by poor performance of the manufacturing sector, particularly capital goods.

Ø  This January growth (at 3.7%),  was better than the 2.53 per cent expansion (revised upward from 1.6 per cent) witnessed in the previous month.

Ø  During April-January this fiscal, the growth in industrial output stood at 8.3 % against 9.5% during April-January 2009-10.

Ø  In January, manufacturing growth plummeted to 3.3 % from 17.9 % a year ago. Capital goods sector contracted by 18.6 per cent. The sector posted a robust growth of 57.9 per cent in January 2010.

Ø  Production in the consumer non-durables segment grew by 6.9 % during the month under review. It had contracted by 7 % in the same period a year ago.

Ø  Growth in the mining sector also plummeted to 1.6 % from 15.3 %.

Ø  Electricity generation output rose 10.5 % in January compared with 5.6 % growth in the same month last year.

Ø  On the whole, 14 out of 17 industry groups achieved positive growth in the first month of 2011.

COMMENTS :

The current trend is certainly encouraging in respect of Food Inflation. It is hoped that Government will take effective measures to control Inflation in coming weeks. The downward trend must continue further.

Industrial Growth has been slowing down – partly due to monetary Policy measures adopted by RBI, which instead of controlling Inflation, has been having negative impact on production.

Control of Food Inflation must be attempted by Governments  through short term and long term measures – and not by the RBI through monetary policy. RBI’s policies will have wide-ranging anti-growth impact, even if it impacts on Inflation,  in contrast to  Governmental measures which can tackle Food Inflation through more focused measures.

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