By Ramesh Kanitkar
For many years India was able to pride itself as one of the fastest growing emerging market economies (EMEs) with one of the lowest inflation rates. Distributive justice was, however, sacrificed at the altar of higher growth — one should hasten to add that this approach cut across all political hues.
The economy was on steroids and a small minority extracted more and more ostensibly on the ground that ultimately this approach would give overall higher growth. The elitist malls were full and the nouveau riche flaunted their wealth and conspicuous consumption became the order of the day.
Political economy pressures in this illusory pursuit, and resulted in unbridled fiscal deficits and vested interests prevented strong countervailing monetary policy. As inflation gathered momentum, conservative voices were ignored and there was talk of a “new normal” for inflation.
There was advocacy of the view that the inflation was structural and monetary policy was of little use. As the sectoral inflation became generalised, it was argued that if the industrial countries could resort to created money, we should do likewise.
The generalised inflation was deeply entrenched and the disadvantaged got drowned in inflation. Unfortunately, concepts of distributive justice were given the go by, lest it adversely affect growth.
To the credit of government, it mooted the issue of an inheritance tax, higher income tax for very high incomes, capital gains on stock market gains, but all these measures could not be put through because of strong pressure groups. The inevitable consequence of all this is widespread social discontent, which permeates through vast segments of the population.
It is well known that official price indices, the world over, grossly understate the “true” inflation rate. While the “true” rate of inflation is admittedly difficult to calculate, anecdotal evidence points to a “true” rate of retail inflation of 15 per cent or more. The experience the world over is that high inflation can easily deteriorate into hyper inflation, with all its well known repercussions of destroying the fabric of society.
There is a pressing need for a package of measures to reverse the current inflation rate. It would no doubt be argued that a strong package of measures would totally stifle growth. It is now time to join forces and have a clash of arms. This is no time for namby- pamby policies.
Given a choice between higher growth and higher inflation and lower growth and lower inflation, the fact is that higher inflation devastates the disadvantaged and hence inflation control must be given overriding priority. It is not too late to pull the economy from the brink of the abyss of uncontrolled inflation.
Strong monetary policy measures are called for in the next three months. The history of monetary policy is that strong monetary policy measures were taken precisely when fiscal measures were constrained by political economy considerations — in 1979- 80, 1981- 82, 1990- 91, 1995- 96 and 1997- 98. The measures for December 18, 2013 should include the policy repo rate of 7.75 per cent are ridiculously low, given the current 11.25 per cent inflation rate. The policy repo rate should be above the one- year deposit rate, which should be above the inflation rate. This would require a series of increases in the repo rate.
As a start, on December 18, 2013, the repo rate should be increased by 0.50 per cent and followed up by 0.50 percentage point increases at each subsequent policy review. The cash reserve ratio (CRR) should be raised by 0.50 per cent, from 4.0 per cent to 4.5 per cent. The RBI open market operations (OMO) should not become a brazen device to increase created money. If, in the process, the government securities interest rate goes up, so be it.
The RBI should closely examine the blatant cartelisation of the savings bank deposit interest rate at 4.0 per cent. The RBI cannot take a passive role by saying that with RBI giving up control of the savings bank rate, it has no responsibility. As the regulator, it is incumbent on the RBI to ensure that banks do not rig the savings bank rate.
An amicus curiae, say the All India Bank Depositors’ Association, should consider a public interest litigation or alternatively petition the Competition Commission. The RBI should use moral suasion to dissuade the banks from cartelisation. Banks would do well to note that the Competition Commission has imposed a heavy fine on Coal India Limited.
The Inflation Indexed National Savings Securities Cumulative (INNSS) for retail investors is linked to the Consumer Price Index ( CPI) While the scheme is cumulative, for senior citizens, premature redemption would be allowed, subject to penalty.
The RBI should simultaneously issue a non- cumulative scheme, but only for senior citizens. The twin schemes would then attract very large subscription. INAV