Really, this UPA government and its scatterbrained, harebrained and brainless approach to serious policy making simply takes one's breath away. Despite brazenly false assurances by many top honchos of the government, the rate of inflation continues to rise and give nightmares to the aam aadmi. So what do our esteemed and revered policy makers do? They (in this case, the RBI – and one has to be a fool to believe the nonsense that the RBI is truly independent of the Finance Ministry) once again raise interest rates and play the charade of doing something worthwhile to tame inflation.
These fantasyland policy makers will fail to answer some basic, commonsense questions about the nature of inflation in India. Will higher interest rates lead to a fall in the prices of onions? Does the persistent and recurring raising of interest rates mean that Indian citizens will see lower prices of petrol in the near future? Or will they lead to falling prices of cooking oil, milk, vegetable and spices? Equally important, will the raising of interest rates lead eventually to a rise in the prices of LCD televisions, mobile phone handsets and laptops?
You and I know that is not possible. So why this nonsensical obsession with interest rates? The policy makers themselves – RBI included – admit that the recent spurt in inflation is caused primarily by the rise in prices of food items and other "essential" commodities. They themselves admit that supply constraints have been playing a large role in the recent spurt in prices. So how will a hike in interest rates solve these problems? How will it positively affect more than 600 million Indians earning less than $2 a day, who have mostly nothing to do with interest rates or the banking system, except taking loans at astronomical rates from local moneylenders? Will the farmers of Nasik immediately start growing more onions? Will the rain gods become more benevolent and stop ruining crops? Will the global oil industry bow down to the diktats of the RBI and redress the imbalance between supply and demand?
You and I may not be economic experts spouting jargon the way some of these lordships do. But surely we know this much: That a hike in interest rates eventually leads to an increase in the cost of capital and discourages investments. Interest rate hikes could possibly control or tame demand led inflation – if at all they do anything. Surely, it doesn't solve anything when supply is the problem. In fact, higher rates will inevitably damage investment and growth.
And who gets hurt most by higher interest rates? People taking loans. So housing goes beyond the reach of the lower middle class family, as do many consumer durables. Worse, large Indian business houses have access to global financial markets for cheap funds. High interest rates hurt the small entrepreneur who has to depend on Indian sources. In effect, we are perpetuating elitism – both at the level of the consumer and the entrepreneur.
These fantasyland policy makers will fail to answer some basic, commonsense questions about the nature of inflation in India. Will higher interest rates lead to a fall in the prices of onions? Does the persistent and recurring raising of interest rates mean that Indian citizens will see lower prices of petrol in the near future? Or will they lead to falling prices of cooking oil, milk, vegetable and spices? Equally important, will the raising of interest rates lead eventually to a rise in the prices of LCD televisions, mobile phone handsets and laptops?
You and I know that is not possible. So why this nonsensical obsession with interest rates? The policy makers themselves – RBI included – admit that the recent spurt in inflation is caused primarily by the rise in prices of food items and other "essential" commodities. They themselves admit that supply constraints have been playing a large role in the recent spurt in prices. So how will a hike in interest rates solve these problems? How will it positively affect more than 600 million Indians earning less than $2 a day, who have mostly nothing to do with interest rates or the banking system, except taking loans at astronomical rates from local moneylenders? Will the farmers of Nasik immediately start growing more onions? Will the rain gods become more benevolent and stop ruining crops? Will the global oil industry bow down to the diktats of the RBI and redress the imbalance between supply and demand?
You and I may not be economic experts spouting jargon the way some of these lordships do. But surely we know this much: That a hike in interest rates eventually leads to an increase in the cost of capital and discourages investments. Interest rate hikes could possibly control or tame demand led inflation – if at all they do anything. Surely, it doesn't solve anything when supply is the problem. In fact, higher rates will inevitably damage investment and growth.
And who gets hurt most by higher interest rates? People taking loans. So housing goes beyond the reach of the lower middle class family, as do many consumer durables. Worse, large Indian business houses have access to global financial markets for cheap funds. High interest rates hurt the small entrepreneur who has to depend on Indian sources. In effect, we are perpetuating elitism – both at the level of the consumer and the entrepreneur.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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