Thursday, December 8, 2011

Would anyone have RBI governor Subba Rao’s number???

Because I want to call him and speak with him. I don’t know if he’s read the papers yesterday but the industrial production has actually degrown in October. I want to plead with him for mercy. To save us from his policies…..

I heard a new concept a few days back when a friend of mine told me about how our knowledge and skills tend to have half lives (our jobs are radioactive!). Basically, a doctor has a half life of 5 years; which means that he/she loses half his/her knowledge in five years. In other words, the world of medicine moves ahead so fast that old knowledge becomes outdated in five years. I believe in the world of management as well, the half life would be five years. In politics, it is perhaps less than a couple of years as leaders popular a couple of years back can become extremely unpopular in the present (eg Kapil Sibal who did some good things with the education system a couple of years back and now talks of censoring the internet; PM Manmohan Singh who won a mandate just 2.5 years back and now is derided for his inability to control corruption). In films and sports, the half life is probably less than one film or one game. What about economics? What about Subba Rao’s job? If one were to go by the policies he has made, it would look like Subba Rao is well past the half life of his profession!

For Subba Rao seems to not have understood the problems facing India at all. In his old-school thinking, Subba Rao believes that the only way to handle inflation is by increasing interest rates. He’s done that a dozen times in the last year and a half. Now, if he only understood that the inflation was arising from the agricultural sector (and that too from a subset – fruits and veggies; not cereals), he would have thought a hundred times before increasing interest rates. Interest rate increases have instead helped pull industrial growth rates down – now plummeting to negative levels in November – without as much as making even a minor dent on food prices. There never was any inflation in the manufacturing sector; and yet Subba Rao has aimed his inflation control mechanisms at that sector.

In any case, even going with his flawed logic, he should now look at reducing interest rates. Instead, he’s talking of only smaller measures like reducing CRR. A reduction in CRR will increase liquidity, but with the high interest rates that exist, it will hardly lead to a reduction in rates in the marketplace. Also, a higher than budgeted deficit will make the government borrow more – reducing this higher liquidity that a lower CRR would bring about. What is needed instead is a lower interest rate regime so that industry can borrow more and invest more. At present, higher interest rates, coupled with a weak rupee have made borrowing domestically as well as internationally very difficult. Companies have put projects on hold. This slowdown in investments is bound to affect us in the long run. If the slowdown is marginally negative now, it could be significantly negative in the future – if course correction is not done now.

It’s apparent that the RBI governor hasn’t understood the half life concept. Else, he would have gone back to his economics classes and checked the source of the inflation. He would have found that this inflation was really benign inflation. Inflation is considered bad because it hurts the poor. It’s like a tax which is felt the most by the poor. However, in this case, the inflation is as a result of the poor having more money in their hands. It’s the NREGA scheme that has given them money – in many cases for the first time. He may want to read JP Morgan’s report in this regard. Plus, he may want to see how high growth in Bihar has led to a reduction in labor supply from that state to Maharashtra, TN and Gujarat – the industrial hot spots of India. As a result, labor rates have gone up in all these states. If he had understood this, he would have only attempted to set a new benchmark for inflation – raising it to 8% or so; rather than clamping down so heavily on industrial growth.

He would also have realized that there is only so much that monetary policy can do. He would have egged the Government on to take more fiscal policy initiatives – to give a boost to agriculture. Of course, he wouldn’t have succeeded – as we have recently seen the way in which the pro-framer FDI policy for retail was scuttled by our opportunistic politicians. But if he realized that, he would have wrung his hands in frustration. But at least he would not have gone and increased interest rates. At least, he would not have harmed the one sector of the economy that was doing well.

Subba Rao may also want to read today’s papers – most notably the TOI – which mentions so many industry doyens who are now looking at investing outside India. Surely, the RBI is concerned with growth rates in the country. Surely the Governor understands that if investments are made abroad, the jobs also will be sucked out of the country? All around the world there is a clamour for creating new jobs. And here, he is at least partly responsible for shooing the jobs out of the country. Sir, you have to review your policies.

I would humbly request the RBI Governor to start the process of reduction of interest rates with no more delays. I would also urge the Congress and BJP to find some common ground so that they can pass at least a few crucial reforms bills. Maybe the BJP will appreciate that there is hardly any difference between a 26% FDI limit and a 49% one – at least as far as control of the Board is concerned. The insurance industry needs more funds; please allow it. Unless the two (RBI and government) work together, we will be unable to reverse the downturn that we are seeing now.

The real truth is that Subba Rao has been a poor Governor at the RBI. He has been unable to contain inflation because he has not understood the root cause of corruption. He has not understood the difference between traditional malignant inflation and benign inflation. Pranab Mukherjee must do a performance appraisal and “gently push” Subba Rao in the right direction. He can’t get work done through Parliament or through his own cabinet – at least he can get something out of the RBI…..

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