Jun 20, 2012

Behind the economic sob story: RBI Governor calls the bluff.

It is heartening to see Reserve Bank of India governor D Subbarao calling government and industry's bluff on rupee depreciation as well as inflation. By doing so, he has categorically exposed the faulty assumptions behind which the Prime Minister, Manmohan Singh, the chief economic adviser, Dr Kaushik Basu, and several chieftains of the Indian industry have been hiding their own failures. Prime Minister and the chief economic adviser have repeatedly blamed policy paralysis (under Coalition compulsions) to be the reason for the slowing of the economy, while the PM goes to shift the blame even to the Eurozone crisis.

"Europe alone cannot be blamed for the rupee's woes and inflation isn't merely due to supply-side constraints but has a structural element to it. I don't think this blame game can go on," Dr Subbarao on Tuesday addressing the Indian Merchants Chamber in Mumbai (RBI guv calls govt's bluff on Re, inflation http://bit.ly/NPZjG8). This is a significant statement coming from the RBI chief who should know what he is talking about. What upsets me more is that even the business journalists, who I thought were knowledgeable enough, refrained from coming out with the truth. None of the Business TV channels (and of course the business papers) had the courage to call a spade a spade. Except for an editorial or two, the business media only echoed what the industry wanted.

Prime Minister Manmohan Singh used the G-20 platform to reiterate what he has been saying earlier. "Our growth rate in 2011-12 declined to 6.5 % from the level of 8.4% in the previous year. This may look like a reasonable figure, given growth rates being experienced in the rest of the world, but or public is impatient for a return to high growth and faster jobs creation," he said at the Los Cabos in Mexico. Interestingly, RBI governor D Subbarao demolishes this argument. The Times of India says Subbarao struck out at those who argued that India at 6.8% was faster than the West. "We must remember that we are a low-income country with a per capita income of less than $1500. India is a supply constrained economy and should grow faster to bridge the income gap."

Well, the PM will need another smokescreen to hide.

Moving away from the growth rate obsession, I would also like to draw your attention to a misleading headline that I find are splashed across the media. 'Global investment seem less bullish on India after a series of policy flip flops by the government sapped confidence', reads the introduction to a news report (see Times of India, June 20, 2012: FDI inflows dip 8% this year). It is misleading because it very cleverly blames policy paralysis for the decline in FDI during the period Jan-April 2012. The RBI data shows that FDI had actually increased, compared to last year, in Jan and Feb, and thereby declined in Mar-April. Overall, against the inflow of $8.5 billion in 2011, it is $7.8 billion this year. But what remains hidden is that the decline in Mar-April is because of the Eurozone crisis when the entire world is witnessing an investment  decline. It is not because of any policy flip flop within the country. 

Nevertheless, what is not being mentioned is that between Jan-March 2012, India Inc had invested $ 8 billion overseas. This massive outgo is not because of policy mismatch within the country but the favourable conditions created by RBI allowing these companies to invest abroad. They have gone to greener pastures overseas. Therefore what is the use of crying over falling FDI when our own companies are investing heavily abroad? Mischievous reporting, isn't it?

I am glad RBI governor has made clear his views on inflation. He talked of the 'structural elements' that result in a higher inflation. This is what I have been stressing for several years now.  At a time when there is no drop in agricultural output, including nutritious commodities like milk and eggs, I see no reason why the prices should be on an upswing. Huge cartelisation in the wholesale markets, followed by rampant exploitation by the retail traders, in the absence of any checks and control, has actually led to the present crisis. No economist wants to point out to this structural anomaly because any effort to bring the wayward trade under control would go against the tenants of the market economy, which they swear by. Also, they are paid to support the proposal of allowing FDI in retail, and so they go on singing the chorus. This is rather unfortunate. But that's how the realities are.

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