Economy Hapless : RBI Helpless : Govt Complacent

What we have here is a short cover up of views and perceptions of an expert panel including Lord Meghnad Desai, Professor of Economics at the LSE, UK, TN Ninan, chairman of the Business Standard, well known economist Bibek Debroy and from R Seshasayee, executive vice chairman of Ashok Leyland.

As we know Recently the RBI increased the interest rates by 50 basis points which is double of what the market had anticipated. This action was gravely condemned by the panel and was considered excessive and uncalled for. According to Mr. Debroy it is not going to help because the kind of inflation we have has nothing to do with monetary policy instruments. There are other reasons for that. And it will only achieve nothing but a lower rate of growth. Overall it is considered to be a fundamental mistake.

Mr.Ninan ahd two points to make on this matter-
One, No one has focused attention on the fiscal deficit. You have had very low inflation up to 2006 and very moderate inflation up to 2008. You had high inflation over the last 3 years and those were the 3 years, in which fiscal deficit on average has been close to 6% of GDP. In the previous 3 years, the fiscal deficit was only 3.5%. So, you have upped the government’s deficit. You have pumped in more money into the system and you are expecting the RBI to control it. I think the problem lies with the government. Second, we have inflation coming from high global oil prices and high international commodity prices. Domestic commodity prices are no higher than international prices. So, there is nothing that monetary policy can do to correct this.

So, that means the government, rather than the RBI has failed to understand the real causes of inflation. It’s also come up with the wrong remedies for tackling it and if international food and oil prices stay high, the pressure on inflation will continue regardless of what the RBI has done.

According to Mr.Desai, what is important is that inflation is a government failure. It is a failure of supply side policies and it has been persistent for all the two years that UPA II has been in power. The budget completely failed to address a question of inflation. The deficit is very large and 36% of revenue is paid in interest on government debt. It's really a very serious problem and the complacency on part of the Ministry of Finance is shocking.