People's Democracy

Editorial

RBI�S NEW MONETARY POLICY MEASURES

Faulty Diagnosis of the Causes of Inflation

THE new monetary policy measures announced by the Reserve Bank of India (RBI) are widely being seen as an effort to contain the growing inflation in the country, led by galloping rise in the prices of all essential commodities at a rate of nearly 20 per cent.    The RBI has revised upwards its projection for inflation in this year to 8.5 per cent from its earlier 6.5 per cent. 

Shorn of all technical details involving interest rates and the rates at which banks can borrow or lend, in common terms, the measures announced by the RBI will reduce the amount of money available for lending in the banking system by Rs 36,000 crores.  It is being suggested that since the money supply in the economy will be reduced by this amount, the pressure on inflation will likewise reduce in a corresponding manner.  This is under the presumption that inflation is being caused by more money in the hands of the people.  In other words, people are demanding more while the supply of the products is not matching this demand and, therefore, prices are rising.  This presumption, itself, is fallacious. 

It is universally acknowledged that inflation is being fuelled by high food prices.  Prices have risen partly due to the deficit in foodgrain production due to the damage caused by both drought and the flood.  But the rate of the rise in prices is much higher than can be explained by a deficit in the availability of foodgrains.  Much of the current inflation in essential commodities is due to  the wrong policies followed by this UPA government based on a wrong diagnosis of what is causing such inflation. 

A classic case of wrong policies is the manner in which export of sugar was encouraged through incentives earlier when the government should have built up a sugar buffer stock when all indications of shortfall in sugar production were available with the government.  Now, this very sugar is being imported at much higher prices to meet the domestic demand. It is no wonder that sugar now costs over Rs 50 a kilo in many parts of the country.  Corporates trading through exports and imports, however, have reaped a bonanza at the expense of common people's misery.

Another such instance is the decision to offer release from the buffer stocks of foodgrains to the state governments at the current market prices.  This works out to Rs 17 for a kilo of rice for Kerala.  Earlier, the centre was releasing 1.13 lakh tonnes of rice to Kerala at the APL price of Rs 8.90 a kilo.  This quantity was drastically cut by the centre to just 17,000 tonnes.  Instead of restoring the earlier quantum of release of central food stocks, the UPA government is now offering to give rice at Rs 17 a kilo. Far from containing the rise in the prices of foodgrains, such policies only compound the matter making the situation worse. 

Repeatedly through these columns, we had argued that one of the main reasons for this run away inflation in the prices of essential commodities has been speculative trading in the commodity exchanges in the country.  We had demanded that the central government must immediately ban futures/forward trading in all essential commodities.  This, however, has not been done. Making matters worse, the UPA government has now withdrawn the ban on futures trading in wheat that was imposed by the UPA-1 government under pressure from Left parties.  The net result  of not banning such speculative trading has been that major  trading corporates have reported profits ranging from 150 to 300 per cent this year while food prices are rising at an annual rate of 20 per cent. 

Clearly, therefore, the monetary policy measures announced by the RBI will not be able to contain this inflation primarily because the diagnosis of the causes for this run away inflation is faulty.  If the central government is serious about containing this inflation, then it must immediately ban all speculative trading in essential commodities.  Secondly, it must immediately release central buffer stocks, at APL prices, restoring the previous quantities in allocations to the states, for distribution through the public distribution system (PDS).  Additionally, all essential commodities must be distributed through PDS. Unless these measures are immediately implemented, there is no hope of containing this relentless price rise. 

Therefore, far from containing inflation, the RBI monetary policy measures may well lead to a contraction of the economic stimulus that was put in place to tackle the impact of the global recession on India.  A disturbing trend that is observed during the course of the last year is the sharp rise in the gross non-performing assets of the banks.  These are, in common language, loans that have been taken but are neither being serviced or returned.  Such bad debts of the Indian banks rose by 27 per cent between 2008 and December 2009.  Apart from the gross misuse of bank loans to launder black money, the growth of bad debts also means that the investments made by the borrowers have not given the expected returns.  This is an ominous sign of the economy not picking up at the expected rate, notwithstanding the official rhetoric hailing our economy's �turn around�. 

Under these circumstances, a monetary policy that contracts the availability of borrowable funds to the tune of Rs 36,000 crores may well dampen the rate of recovery of the economy.  Much of this, surely, will be known by the time the union budget will be presented three weeks from now. 

In the meanwhile, however, the vast majority of the Indian people will continue to suffer from the burdens imposed by this relentless rise in the prices of all essential commodities.  Popular public pressure must be mounted on the UPA government to implement the measures suggested above in order to provide relief to the people.  The decision of the Left parties to call for a nationwide march to parliament on this issue on March 12 assumes immense significance.  The strength of this popular mobilisation will determine the extent to which we can pressurise the government to adopt correct policies in the interests of improving the common people's livelihood and quality of life of our country. 

(February 3, 2010)