Saturday, 21 September 2013

RBI and the Magic Wand


So, the mid-term policy review document is out and our revered Governor has whirled the much anticipated Magic Wand in his maiden policy announcement, though much to the dismay of industry. RBI has once again raised short term Repo rate by 25 basis point in order to rein inflation that has crossed comfort zone of RBI and clocked more than 6% on account of rising food and fuel prices especially the bulb, protein based food items and soaring crude oil prices.
The measure will not bring the respite either to antagonist of inflation or protagonist of growth. Rather it will increase interest rate on cars and home loans. RBI policy is based upon WPI which is far from the actual figures at the retail stores which is based on CPI. CPI is currently muzzling around double digit figures and has no changed despite the measures of RBI to soak money from the market in order to suppress demand.
Various reasons are responsible:
1. The current situation of high inflation of food produce is the product of hoarding by the speculators for better returns. These supply side and structural lapses have made the situation worse with onion in death race with petrol. The government must come down heavily on such unscrupulous hoarders and black marketers and import the food articles so as to bring the prices.
2. The crude oil prices reached new heights due to brewing tension of war in Syria. As the war clouds hovering over Syria have drifted, the crude oil prices will come down. Secondly, decrease of oil import from Iran due to unilateral sanctions by western countries has cost the country dear. India must upheld its commitment under NAM and BRICS and avoid any recognition of these sanctions.
3. There is still a lack of back end infrastructure like cold storage chains which lead to rotting of food crops and horticulture produce. No headway has been made in this regard and most of the proposals are mired in bureaucratic red tape. Government must provide a liquidation of provisions of Foreign multi brand retail and better mobilization of funds in order to set the things right.
4. Reforms of the APMC act are long due. It is a known fact that both consumers and farmers are at the receiving end of middlemen as there is stark difference between the whole sale prices and retail prices as can be seen from the government indicators. The farmers must have the freedom to enter into contract farming direct selling of their produce in the market.
5. WPI consists of 65% of manufacturing products. Given the dismal performance of domestic manufacturing (various factors are responsible from long due labour reforms and tight rules and regulations)and eroding of manufacturing base of the country, these products are imported most of the times. The depreciation of rupee has rendered these manufacturing products costly which consequently increased WPI. Government must promote its NIMZ model in order to strengthen the manufacturing base.

It can be seen that most or all of the reasons are due to inertia and deep slumber on the part of the government and RBI policy has nothing to do with it. The traditional role of RBI is limited to managing the money in the market and not revamping the structural flaws in the economy. The external sector may or may not improve, but the government must first set its books right. That will itself has a cascading effect to bring the country to growth trajectory. 

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