Do you prefer lower inflation or higher growth?
In this issue:
» Stiglitz gives his opinions on rating agencies
» Wealth gap in the US has considerably widened
» Can Indian IT replicate its high growth of the past?
» The flipside of Bihar's healthy economic growth
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So far, bringing inflation under control had been the primary objective of the Reserve Bank of India (RBI) as successive rate hikes in the past have proven. However, inflation has not yet come within the comfort levels of the central bank, but GDP growth has slowed down. India Inc. has felt the pinch on its profits as higher interest rates have taken their toll. So much so that there are increasing talks that the RBI should pause its tightening measures and give breathing space to the Indian economy so that it can grow.
But will that be in the interest of the average Indian? Indians have one of the highest savings rate in the world. And most of these savings are parked in government debt. The latter is predominantly internal (98% of GDP) and denominated in rupees and inflation brings down the value of government debt. Thus, a growth-oriented RBI may not bode well in the Indian context as India's debt is predominantly funded by domestic savers and inflation will hit the saving population the most. When inflation runs higher than the rate of return offered by provident funds, small savings schemes and bank deposits, it is tantamount to a huge tax on savers as seen in the last two years.
Thus, the average Indian is hit hard by inflation on two counts. One is by eating into savings, and the second is by indirectly weakening the balance sheets of institutions holding government debt. Moreover, because India does not have capital account convertibility, the saver cannot take his money out of the country. What this means is that although both the scenarios (notably higher GDP growth and lower inflation) are important for the well being of the Indian economy, when it comes to choosing between the two, inflation control should take precedence. After all, lower rate of savings will automatically make Indians wary of going on a spending spree and for India Inc, which is relying on the Indian consumption story among other things, such a development will only make things more difficult for business.
Should the RBI and the government give first preference to controlling inflation or bolstering GDP growth? Share with us or post your comments on our Facebook page / Google+ page.
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*Human Development Index Data Source: The Economist |
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In addition, the rating agencies often provide consulting services to the rated clients thus cementing the conflict of interest. Ironically, none of this has changed in the last 3 years. In an interview to a business daily, renowned economist and Nobel laureate, Joseph Stiglitz gave some candid opinions on rating agencies. Stiglitz believes that the agencies are profit maximising firms that can make money by giving ratings. What really surprises us is that despite the regulatory whip and media criticisms, none of the rating agencies have attempted any change in their flawed business model. Moreover, most remain highly sought after by new issuers of capital.
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At the same time, increasing labour costs and attrition rates have also brought margins under pressure for most of the IT firms. As a result, the big question now is what next? The industry needs to enter a new phase of growth and that can only be brought about through innovation and higher end services like consulting. These form a miniscule part of the industry's revenues currently. Only if the firms concentrate on increasing this, can they achieve the stellar growth rates that they have in the past. Otherwise, the Indian IT industry will most likely fall into the mature industry growth phase. And that would be much slower than their historic rates.
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04:56 | Today's investing mantra |
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13 Responses to "Do you prefer lower inflation or higher growth?"
Ramanand
Nov 9, 2011Inflation can be tamed by other means than just interest rate hikes. Interest rates are known to be the 'blunt weapon' against inflation. Depending upon the stubbornness of the inflation or the reason for the inflation, interest rate hikes may have little or no impact. Here are 2 distinct ways how the RBI and govt can attack inflation without raising interest rates:
1. Let the rupee appreciate against the dollar. This will make imports cheaper (most importantly oil). Sufferers will be Export/IT cos, but why should they continue to benefit at the cost of common man?
2. Increase incentives for maximizing agricultural output. Increase MSP to farmers, remove big corporates from agriculture supply chain, establish and improve govt granaries and release mechanism, renew the PDS system for proper distribution.
s.athmanathan
Nov 9, 2011It is now clear that inflation cannot be controlled by raising interest rates and thus controlling money supply. RBI probably goes by the book. Indian economy has always been run by a parallel universe of black marketing and unaccounted money that does not show in RBI's books. It is high time RBI realises there is more to understand in framing monetary policies while fiscal policies of the government are working at cross purposes. Probably RBI will stop at nothing before toppling the galloping economy out of its rails.
Akhil Banthiya
Nov 8, 2011I think growth shuold be on a higher priority scale. Ofcoarce high growth would lead to inflation,but the government should try to curb the inflation not by monetary policy measures, instead by increasing the productivity especially in aricultue sector so that the food inflation is under control
A K Shrivastava
Nov 8, 2011Inflation is bigger evil affecting all compared to slower growth rate.
Gopal Kalpathi
Nov 8, 2011I believe that what RBI is doing is right. After all the decade of growth (200 - 2010) has not had its impact on the major population that is rural and has to depend on government dole outs. Such things are not sustainable. As seen by the fact, the inflation is fuelled by the contribution of Food inflation which is clearly hurting both middle class and the poor and it is a no, no for any sort of government to either ignore it or try and falsify it.
The world is witnessing one of the worst financial crisis which are far more widespread than the earlier ones. Inequities are a major cause for unrests and we have witnessed several of them this very year. 'Occupy Wall Street' may not seem to affect us directly, but we all have seen the market turmoil and volatility as never before. As you have rightly pointed out, curbing inflation must be the prime objective as well as a priority for both Government and RBI. I only wish (If wishes were horses....) that the UPA government learns a trick or two from RBI to curb its spending spree and contain fiscal deficit to augment the efforts of RBI.
Aloysius
Nov 8, 2011There is such hype going on regarding the growth rate of India. Let us ask at what cost? We are showing growth rate on increasing the depletion of the natural resources by mining mindlessly and exporting them to other countries. On the other side our power sector is showing a dismal performance along with no respite on the subsidy given to the farmers, many wonder who is benefiting from this as our agriculture production with relation to the population is not matching. This is very much revealed by the food price inflation. With respect to other infrastructural issues, it is a big question mark. So one wonder what is actually pushing our GDP up. Are we really growing or it is just another statistical hype, like valuing the current production under current prices and comparing apples with oranges.
Biraja Shankar Hota
Nov 8, 2011Rural migration has significantly decreased in Bihar not only for remarkable growth story there, but also for anti-Bihari movement in Mumbai in particular and Maharastra in General
R R Bhutra
Nov 8, 2011Yes inflation control is more important then growth.Growth looses its meaning if for same product we have to pay higher price.Growth could be looked with fixed prices as bench mark.
premsunderdas
Nov 12, 2011why is the inflation not coming down? According to me the main reasons arehugely surplus money available with the rual agri class (who are exempt from paying taxes), the higher middle class and traders, corporates and corrupt politicians owning companies who not only evade paying income tax but also vat and service tax which have led to consumtion demand.No state goverment or incometax departments are conducting proper raids to recover concealed incomes. we need a honest society effective tax recovery mechanisms and higher income tax slabs for the vulgar rich sections of society to bring down inflation and create moderate growth.There is no need to give precedance to inflation over growth as many viewers have suggested