• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy
• Books
• Gallery

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

In early 2004, Dr Rakesh Mohan, the recently retired Deputy Governor of the Reserve Bank of India, asked me to help with the third volume of the Bank’s history. A draft had been prepared by the History Cell of the RBI.

Over the course of the next 18 months, I learnt an important lesson: Central banks are mostly out on a wing and a prayer, at least as far as monetary policy is concerned. They try, perchance to succeed. Oftener than we would like, they fail.

The RBI’s latest effort, released on Tuesday, is no exception. About 95 per cent of it consists of stating the facts. The rest comprises a series of conditional statements: if this, then that; but if that, then this; but which (this or that) we don’t know.

As can be expected from such documents, there is also a certain amount of obfuscation, jargon and euphemism, which has a long lineage.

For example, in the mid-1970s, when inflation was a very bad word, the Government and the RBI preferred not to call inflation inflation. They would talk, instead, about real incomes going up or down! Now we talk of Open Market Operations, de-sequestering, and what not. The jargon has changed but not the intent to befuddle.

One sympathises with the RBI, though. It has to divert attention from the gorilla that walked into its drawing room and is sitting there on the sofa, quietly smoking a cigar. This has made the RBI twitter nervously in dulcet tones about inconsequential things. So the document is full of such civilised chatter.

But chatter has never made gorillas go away. The fact therefore remains: the Government intends to borrow a massive Rs 4.5 lakh crore. The RBI says it can manage this gorilla. Perhaps it can. But for the moment, it is in a sweat.

This is because it knows, better than anyone else, that the consequence is going to be inflation in consumer prices, even if not in the whole-sale price index, which is like those pacifiers given to babies to fool them. Show me an economic agent who acts on the basis of the WPI and I will show you a fool. The reason why we will have massive food price inflation is simple: the Government wants to borrow and spend a lot of money in the rural sector, where the votes are. But this expenditure will lead to a lot of holes being dug, not an increase in grain output.

That’s all there is to it. The rest is superheated economic hot air.

NREGA alone has ensured that those who used to eat one meal now eat one-and-half. That may make moral and political sense but it does not increase grain output. Imagine what will happen when even more money (demand) gets into the system without an increase in supply of grains, and perhaps even a decline because of the bad monsoon.

Unless I am completely wrong, we are slowly segueing into massive food price inflation. The poor will have more money but there won’t be enough food to buy. So prices will rise and they will eat only as much as they eat now, if not less.

The RBI, in desperation perhaps, has tried to be clever. It says money supply grew by 20 per cent during April-June 2009 and that it would like to bring this rate down to 18 per cent for 2009-10 as a whole.

But net RBI credit to Government will increase because of the huge Open Market Operations in the offing. There will also be an inflow of dollars which would add to money supply unless sterilised. Finally, the money multiplier is now over five.

So whichever way we look at it, we are going to have a lot of money chasing very little grains, pulses, edible oil, vegetables, fruits, and so on. If this does not cause inflation, someone had better tell Paul Samuelson.

At the post-policy press conference, my colleague K. R. Srivats, slyly asked the Governor about the mutually contradictory nature of these statements. The Governor replied that the money supply growth level was not a “target” but a “projection”. Nice leg-glance, Sir, well played.

The RBI also thinks that interest rates can be brought down further. But lower rates are not the point in the current context.

It is not industrial production that is central to the inflation in India; it is agricultural production. And lower interest rates won’t make the slightest difference to it.

Net-net: Inflation is coming, aided and abetted by the short-term political goals of the Government.

The RBI, independent agent that it is, should have been forthright about this. After all, when the time comes, not only will it be blamed for the inflation, it will also asked to solve the problem.

More Stories on : RBI & Other Central Banks | Economy | Insight | T.C.A. Srinivasa-Raghavan | Agriculture

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2009, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line