The Hindu Business Line : ‘Selective credit control can rein in inflation’

The burning issue now is the rising inflation. A 7.14 per cent rate of inflation is a heavy tax on the average Indian who is already paying the price for globalisation.

In India, the policies of the Government and the Reserve Bank of India complement each other. The fiscal and monetary policies have been moving in tandem without one trying to outreach or derail the other.

The Government has been doing a fairly good job over the years in containing the fiscal deficit through a mix of efficient collection mechanism of taxes and control over expenditure. On the other side, though there have been deficiencies in the regulatory supervision in several countries, invariably the Indian regulator has been having a better control over the monetary affairs of the country all the while.

Now, the Reserve Bank of India is faced with the unenviable task of attacking inflation and at the same time ensuring that the current healthy economic growth does not get stunted.

There are traditionally two ways by which central banks try to rein in inflation. They would either increase the interest rates or stunt the growth of money supply in the economy. As was anticipated, the Reserve Bank has announced a hike in the CRR by 50 basis points, which is expected to suck out about Rs 18,500 crore from the system. Banks can be expected to take a call on hiking interest rates once the Credit Policy review is out later this month.

On the fiscal side, the Government can try to control inflation by increasing taxation or reducing government spending to curtail demand. The result of fiscal control has seen the Finance Minister give the Indian taxpayer a bounty by way of a long overdue revision in the personal tax structure and hence revision of tax rate structure is ruled out. In the Indian set up, cutting down of governmental expenditure is also ruled out, especially with the salary revisions proposed to Government servants in the pay structure suggested by the Sixth Pay Commission.

Back to basics

To overcome the dilemma of inflation vs. growth, the Reserve Bank can revisit some of its earlier methods. The first choice would be to bring back the regime of selective credit control. As the economy grew, the central bank had phased out this system wherein essential commodities such as rice, wheat, edible oils etc were under the ambit of SCC. By bringing back SCC, credit flow to these essential commodities can be effectively controlled. Credit expansion can be kept on course without affecting the real growth sectors.

A system of differential interest rate structure can be introduced wherein interest rates for the agricultural and productive sectors can be kept at low rates in order to encourage production whereas the rates of lending for consumption purposes and sectors such as stock market and real estate can be kept at a moderately higher rate in order to control demand for such spending.

The above proposals would in effect go a long way in channelling money to the sectors that actually require it without them having to pay the huge price in the form of interest, thereby improving production of essential commodities and thus controlling inflation.

(The author is the Chairman of Karur Vysya Bank)

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