Can RBI Support The PM’s “Animal Spirit”?

In one of my earlier edits, I had very vociferously advocated the need for the RBI to cut the Repo rate by 100 basis points so as to stimulate economic growth. From economists to bankers and from industrialists to analysts, all concerned have voiced a unanimous opinion about the need to cut rates to spur growth. However, the RBI did not oblige even the ex-Finance Minister on this demand. Over the past 20 months, the RBI has raised the Repo rate from six per cent to 8.5 per cent, which makes us a country among the developed/developing nations where the interest rates are the highest in the world. All this was done in the name of controlling inflation, but it has hardly worked. Finally last month, the rates were brought down by 0.5 per cent. In fact, the other side of this whole exercise of trying to control inflation by hiking the interest rates led to a fall in growth rates, bringing down GDP growth from 9.5 per cent to just 5.3 per cent.

In my opinion, the RBI does not seem to be considering the impact of ‘BLACK MONEY’ (read, unaccounted income), which seems to be flowing on a regular basis to more than 300 lakh people in this country, including those from the lower-middle, middle and upper classes. Inflation, in simple terms, means a rise in the prices of goods and commodities, including food grains, pulses, vegetables, fruits, dairy products, petrol, diesel, gas, etc. It is the lower classes, the labour force, small farmers and those in the lower middle class, including teachers not employed with government institutions and honest people (who I assume would be only 10 per cent of our total population) who are the worst affected by this across-the-board price rise. 90 per cent of the government servants (including all those serving the central and state governments as well as municipalities and gram panchayats) and also the vast pool of our politicians and their associates (who, I assume, would in sum total come up to at least 100 lakh people) and other professionals and businessmen including doctors, advocates, architects, contractors and others are hardly affected by inflation. This is because these people meet almost 80 per cent of their monthly expenses out of black money. It is this vast amount of black and unaccounted wealth that is circulating in the economy which is actually fuelling higher inflation.

It is a well-known fact that larger enterprises benefit from corruption in the system, as it helps them to improve their profits. Smaller enterprises, on the other hand, see their costs go up and as a result face lower profitability, as a large chunk of their income goes into servicing these corrupt people.

Out of India’s total population of 120 crore, this segment enjoys these privileges of having black money at their disposal, using it to meet their household expenses and luxuries.

In his book titled ‘India’s Politics’, Bimal Jalan, the ex-Governor of the RBI, observed that “corruption is also an important cause of fiscal drain and ‘HIGHER INFLATION’ in developing societies. There is strong empirical evidence that countries with high levels of corruption tend to have lower collection of tax revenues in relation to their national income”.

Thus, the RBI’s approach that lower interest rates is a cause of inflation is vindicated to a large extent in view of the huge generation of black money in our country. It is said that out of the total money circulated, 35 to 40 per cent is black or unaccounted money. I am of the opinion that higher interest rates are the main cause of lower growth.

After taking over the Finance portfolio, the Prime Minister, Dr Manmohan Singh, has set for himself the task of reviving the “animal spirit” of businessmen, attracting capital flows to prop up the rupee, revisiting aggressive tax enforcement and turning the fortunes of mutual funds and insurance companies around as he attempts to put the economy back on track. He was recently quoted as asking the Finance Ministry to “Reverse the climate of pessimism… revive the animal spirit in the country’s economy”.

The PM has set certain goals for himself, stating that “he will cut red tape, reassure investors and keep the India growth story intact”. The RBI is also a part of the Finance Ministry, and in this scenario, it has to co-operate to help further growth by reducing the Repo rate and CRR by 100 basis points to support the PM’s announcement of reviving the “animal spirit” in the economy to enhance growth. However, a major solution to India’s problems is not with the RBI, it is up to the government to act fast to lift the economy.

In view of the optimism shown by the PM, we found that the stock market is reviving gradually. Fortunately, India is the third-most favoured destination for global companies after China and the US as per UNCTAD’s World Investment Report 2012 announced on 5th July. Our cover story enlightens our readers to keep a close watch on the markets, as the bulls are looking favourably at the market once again.