“Interest rates are high… Sometimes it is necessary to take
carefully calibrated risks to stimulate investment”, said the new Finance
Minister, P. Chidambaram, perhaps to send a positive signal to the uneasy investors
and businessmen.
He also said that appropriate action would be taken to
address fiscal deficit, inflation and controversial tax laws. Obviously, India Inc
is jubilant of the remarks despite there being no specifics, for it is backed
by the Finance Minister’s past records.
These remarks indeed appear to be more as the objectives of the Finance
Minister. For, the reality is different: the country appears to be heading for
a severe drought, which obviously calls for lot of spending under creation of rural
employment opportunities and their expansion. Farmers are also to be helped to
replant their fields. Provision of drinking water in the countryside will
demand huge budgetary support. All this welfare spending obviously results in
fiscal expansion.
That aside, the next general elections are hardly 20-months
away. It means, again an expansionary
fiscal policy pursuit. Further, he didn’t say anything about decontrolling the
price of diesel, kerosene and gas. Nor did he say anything about any proposal to cut subsidiaries
under fertilizers. All this cumulatively makes one wonder if there is any scope
for cutting down the fiscal deficit in today’s context.
It is against this background that the statement of the Finance
Minister to cut interest rates is causing anxiety. Some economists are indeed wondering
if what the Finance Minister meant is to make the RBI deliberately cut the
interest rates with scant regard to the ground realities.
Their anxiety is not ill founded, for the global economy is
no way encouraging. Indeed it is on the brink of another recession: The WGP forecast
of the World Bank for the year 2012 is 2.6% and 3.2% for 2013. A greater chunk
of this is expected to be contributed by developing countries and the transition
economies. The US, which is saddled with persistent unemployment of 8.6% coupled
with low wage growth, is obviously suffering from no rise in aggregate demand.
Therefore, its growth rate is projected hardly at 1.5%. The Euro zone, which is
being haunted by the sovereign debts crisis, is forecasted to record, at best, a
positive growth of 0.7%. Problems are thus multiple and inter-connected which
means the World Economy has still not come out of the quagmire.
Against this backdrop, the Central Banks of developed countries
are continuing with their policies of monetary flooding with a hope to
stimulate growth. But this appears to be all set to worsen the global economy
further. Unfortunately, there is a mad clamoring for such monetary policies in
India too from the business quarters, for they consider low interest rates as the
panacea for stimulating growth.
But what these lobbyists must bear in mind is that India is
not what Europe is or for that matter the US is. For, we are suffering from a
high growth and high inflation phenomenon, while the developed countries are
facing low growth and low inflation. Hence,
aping their monetary policies may prove disastrous for us.
These lobbyists of quantitative easing must remember that our
fiscal deficit is already at 5.9% for the fiscal 2012. The current account
deficit stood at 4.2%. Inflation is almost persistent at 6.5%. The core sector
numbers have already slipped to 3.6% in June 2012. Exports declined by 5.45%. Rupee
is depreciating. Monsoon rains are not encouraging. In such a gloomy scenario, cutting
down interest rates can prove to be disastrous for the common man.
So what we need today is not mere anodyne statements from the
government, but concrete action—action that ignites “animal spirits” to bring
down inflation by addressing the supply-side constraints, to reduce fiscal
deficit by eliminating subsidies that are unwittingly benefiting even the rich,
and to wither away the consequences of the impending drought by launching requisite
welfare measures, even at the cost of fiscal deficit, while letting the RBI do
what it deems fit under the monetary policy.
Indeed such letting the RBI to be independent makes it more
accountable to the nation!
grk
0 comments:
Post a Comment