Inflation worries

The editorial ‘‘Will the rate hikes work?'' and the article “The fine art of doing nothing'' ( Business Line , March 21) bring out the lethargy with which the government deals with the worrisome inflationary trend, leaving the matter entirely to the Reserve Bank of India. The central bank, in turn, addresses the issue with successive rate hikes in minor doses.

It is a proven fact that any antidote, in small doses, helps build up resistance; this is, perhaps, what has happened to the Indian economy.

Strangely, the RBI revised the rates seven times this year, in vain. The government still seems reluctant to take serious steps to tackle the supply side constraints.

The Libyan crisis would take oil prices to new heights. China has strategically shifted to countries other than OPEC countries for oil supply. It has also successfully reduced its domestic oil consumption. The interest rate hikes could slow down the activities in the auto and other infrastructure sectors, which contribute toeconomic growth. It is not known why the government still relies on rate hikes, which could arrest growth instead of inflation.

Shortage in the production of food or capital goods requires urgent government intervention. Food shortage can be tackled by aggressive reforms and by concentrating on short-term farm products. But the diversion of investments to other promising countries can fuel the shortage of capital goods. The government should revisit its robust growth theory vis-à-vis the worrying inflation. Efforts should be right on to use alternative financial tools to attack the menace.

C. P. Velayudhan Nair

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Rate increases

The editorial “Will the rate hikes work?” ( Business Line, March 21) along with the news item “Only earning and no spending makes Pranab a rich boy” gives an insight into the dilemma of the government and the central bank. The Centre is sitting on “a mountain of cash” it received from disinvestment, but is going slow on expenditure, fearing that the money spent on development projects may also add inflation. The growth rate and the rate of inflation have a co-relation, if not properly planned, executed and regulated.

For India, the increase in the international price of oil is always a cause for concern, as it country depends heavily on the Gulf region for oil supply. As pointed out in the editorial, countries like China have started looking at African countries too for oil supply. India must look at alternative sources.

V. Prabhakaran Nair

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Impact of rate hikes

The observation that the rate hike will dampen growth sentiments rather than inflation has to be looked at holistically ( Business Line , March 21).

It is true that the policy rate influences the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers.

It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways.

A hike in interest rates makes savings more attractive and borrowing less attractive. Higher interest rates can affect consumers' and firms' cash-flow — a hike in interest rates increases the income from savings and the interest payments due on loans.

The net effect of higher interest rates through this cash-flow channel is to discourage higher spending in aggregate.

Some of these influences can work more quickly than others. In general, there are time lags before changes in interest rates can affect spending and savings decisions, and it takes longer to affect consumer prices.

Some economists feel that the maximum effect on output is estimated to take up to about a year and the maximum impact of a change in interest rates on consumer price up to two years.

So, interest rates are set based on judgments by the RBI about what inflation might be — the outlook over the coming few months; not what it is today.

Manickam Ravindran

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Stamp duty on flats

The Prime Minister's suggestion to scrap stamp duty on flats is good, but difficult to implement. Stamp duty is a lucrative source of revenue to all States and they will oppose any move to scrap the duty.

The burden is rightly on the buyers who, many times, take loans to purchase houses.

The Finance Minister can possibly think of income-tax relief on the stamp duty paid.

Also, tax concessions can be given only to those builders who take full cheque payment for all the flats sold, in a bid to curtail black money in real estate.

The Finance Minister must also think of bold, unconventional measures to contain the scourge of black money.

Harischandra Parshuram

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