The futile attempt of Indian Government to control Inflation
- From: Muhammad Javed Iqbal <kaleemjavediqbal@xxxxxxxxx>
- Date: Mon, 4 Aug 2008 18:17:34 -0700 (PDT)
By Anand Kumar
THE Reserve Bank of India’s continuing – but evidently futile – battle
against inflation has started pinching the average middle-class.
A majority of salary earners are caught between a rock and a hard
place – while the country’s central bank keeps jacking up interest
rates, making borrowings dearer, inflation continues to make life
miserable.
Last week saw the RBI raise the repo – the benchmark rate at which it
lends money to banks – by 50 basis points to nine per cent, the
highest in seven years, and the cash reserve ratio (CRR) by 25 basis
points to nine per cent. But a day later, the figures revealed the
ineffectiveness of the central bank’s one-point agenda to tackle the
price-rise, by raising interest rates: inflation, as measured by the
wholesale price index rose to 11.98 per cent – for the week ended July
19 – the highest since the current WPI series was introduced in the
mid-1990s.
Just a year ago, inflation was at a moderate 4.65 per cent, and the
RBI had set a cap of 5.5 per cent for the current fiscal. Now with
inflation soaring to nearly 12 per cent, the RBI appears reconciled to
the inevitable.
“Inflation will continue at the current level for the entire second
quarter and up to the first part of the third quarter,” says Y.V.
Reddy, the governor of the RBI. “From the second half of third quarter
(mid-November), it should start moderating and from the fourth quarter
we are confident that we should be able to bring it down to seven per
cent.”
Indeed, this time around, the RBI chief will have to deliver, as the
top bosses of the United Progressive Alliance (UPA) government will be
closely monitoring developments on the price front. The government has
to call elections by April – May, and it would not tolerate double-
digit inflation when it seeks the popular mandate for another term.
For the past six months, the RBI – which is far from being an
autonomous central bank – has been making loud noises about the need
to curb prices. But all its efforts – by way of jacking up the repo or
increasing the CRR – have gone waste.
Since April, the start of the financial year, the RBI has raised the
repo (by 125 basis points) and the CRR (150 basis points) three times.
But inflation has climbed steeply, despite the RBI’s efforts to tame
it.
*****
THE RBI’s efforts to curb inflation have only succeeded in slowing
down the economy, which was witnessing buoyant growth. The constant
rate hikes have dampened investor sentiment and slowed down investment
inflows.
The Reserve Bank last week was forced to acknowledge that the Indian
economy would for the first time in four years slow down to around
eight per cent, from the previous nine-plus per cent growth rates.
“The economy has underlying conditions to grow at eight per cent,”
remarked Reddy. “The current saving and investment ratio would
normally assure eight per cent growth. I venture to say eight per cent
plus.”
It was only last year that Prime Minister Manmohan Singh and his
senior cabinet colleagues were boldly forecasting double-digit growth
rates, and there were very few doubting India’s ability to match up
China’s frenzied growth.
The government had unveiled plans of attracting investments of up to
$500 billion in the infrastructure sector, which would boost GDP
growth to 10-plus per cent. However, reckless spending by the UPA
government – much of it on pet schemes of the Leftists, who were
providing crucial outside support – on populist programmes, and an
over-cautious central bank have slowed down the economy.
The spurt in global crude oil prices has also had its impact on the
Indian economy. The government, after much dilly-dallying, went in for
a modest 10 per cent hike in the price of petrol a couple of months
ago. While continuing extending unjustifiable subsidies to consumers
of petrol, diesel and liquefied petroleum gas (LPG), the government
steadfastly refused to go in for realistic pricing of petroleum
products – which would encourage consumers to conserve the natural
resource.
But the RBI was directed to unleash its anti-inflationary weapons –
mechanically raising interest rates every quarter and hurting home
buyers, industries and other borrowers. Tragically for the government
and the central bank, this has had virtually no impact on curbing the
inflationary trend.
The monsoon is also likely to play spoilsport this year, with several
important agricultural states – including Maharashtra, Karnataka and
Andhra Pradesh – continuing to suffer from scanty rainfall. Already,
Maharashtra is facing a massive power crisis – as against a peak
demand of over 15,000 MW, the government-owned utilities are able to
generate just a little over 9,000 MW.
The farm sector will continue to grow at an anaemic pace if the rains
fail to bring cheer to farmers. This will affect the off-take of
consumer goods during the peak season – which begins in October –
ultimately hurting economic growth.
*****
BANKS in India have already started raising their lending rates. Last
week, some of the largest public and private banks went in for an
upward revision of their lending rates, just a day after the RBI’s
unexpectedly sharp hike in the repo rate.
ICICI Bank, the largest private sector bank, and HDFC, the largest
housing finance company, jacked up their prime lending rates by 75
basis points. ICICI Bank’s corporate lending rate has shot up to 17.25
per cent and the retail rate to 14.25 per cent. The floating home loan
rates of HDFC have gone up to 11.75 per cent.
Leading public sector lender, Punjab National Bank, raised its rate by
one per cent. State Bank of India, the country’s largest bank, is also
expected to go in for an upward revision in lending rates.
The move has come as a nasty blow for the millions of urban consumers
who have taken loans to buy flats in Mumbai, Delhi, Bangalore,
Hyderabad and other major cities. Similarly, there are hundreds of
thousands of borrowers who have opted for consumer, auto, educational,
home improvement and other loans. Combined with the high cost of food,
it threatens to upset many a middle-class budget.
The hike in housing finance – home loan rates have jumped by 60 per
cent over the past three years – has caused a sharp slowdown in the
real estate market in major cities. According to real estate industry
sources, demand has fallen by almost 50 per cent in several
residential localities of Mumbai and Delhi.
Though prices have still not started falling, they appear to have
reached a peak in most cities, especially the metros. What is worrying
the industry is that it appears to have coincided with a sharp
increase in supplies, which could result in a glut in the market,
leading to further fall in prices.
International developers and investors have been pouring billions of
dollars into the Indian real estate sector over the past two years.
Many of these projects are now nearing completion, and could flood the
market with new apartments and office blocks. This could have a
devastating impact on the real estate market.
Fortunately, bad loans are still rare in the mortgage business, nor do
lenders offer sub-prime mortgages to consumers. Consumer and auto
loans do turn sticky, but most lenders claim that bad loans are
negligible in the industry. They also do not have to resort to drastic
measures like foreclosures, so the impact of a spurt in interest rates
is unlikely to be cataclysmic in India.
M. Javed Iqbal
.
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