The RBI on Tuesday hiked repo rate by 25 basis points. The 13th hike since March 2010 will put further pressure on economic growth. The 12 previous hikes has not had any impact on controlling the inflation, and neither will this. The new repo and reverse rates are 8.5% and 7.5% - This is way too high, and very alarming. We are almost back to the state of financial anarchy of the late 1980s. The Government spending is uncontrollable, the fiscal and revenue deficits are increasing, and the black money in circulation is on the high. One of the reasons why the repeated rate hikes have not had an impact on the inflation.
Food inflation rose sharply to cross double digit levels at 10.6% for the week ended Oct 8 as against 9.32 per cent in the previous week. The headline inflation based on the wholesale price index was recorded at 9.72 per cent in September, according to the latest official data - And one has to understand that the period is just post harvest, when the inflationary pressure should be at the lowest, due to increase in supply.
Inflation has remained almost near double digit since January 2010, despite an aggressive monetary tightening by the central bank and the claims of a series of fiscal measures by the government - That is precisely my point. The 12 previous hikes has not had any impact whatsoever, then why hike again. The saddest part is, while the RBI (Government) is tightening the monetary policy on one hand, the moment inflation starts coming down, they do everything to ensure it stays high. Just see the recent interview with the Economic Advisor to PM, Rangarajan, who said that Government is waiting for the inflation to come down, so that they can increase the Diesel price. This is absurd. I can understand why the Government wants to increase the Diesel price, as it wants to cut down on subsidies. But this Government has done precious little to reduce wasteful expenditure. Money has been thrown down the drain on unproductive social sector programs, just because it is suggested by Sonia Gandhi and her non constitutional National Advisory Council comprising of unelected representatives, all of whom have an agenda of their own. The Revenue deficit is spiralling because of the undeserving sops given to industries, who have used them to cover their weaknesses rather than increasing productivity. Between the irresponsible socialist 'do-gooders' and the 'crony capitalists', the treasury has been bled dry, leading to the current fiscal mess. And add to this the supply side constraints. Food inflation is high because we have a non functional Agriculture Minister, who want to relinquish his post more than a year back!!! While the world has grown leaps and bounds in high tech farming, Indian farming is, by comparison, at primitive level. The so called Green Revolution of late 1960s is almost half a century old. We have hardly seen any new sustained effort to improve our farm productivity. The Government just sits back, hopes for a good monsoon, and then do nothing. The rural marketing system is a disgrace, and agriculture sector is totally neglected as it is not glamorous, along with Education and Health Care. But these are the three areas that make a difference to the majority of the population. But hey! who cares?
However, the rate hike has shown its negative impact on the economic growth. Industrial production has slowed down considerably in the past few months. It was registered at a sluggish 4.1 per cent in August rising a bit from the 3.8 per cent seen in July -- its lowest in almost two years. GDP growth slowed to 7.7 per cent in April-June period, the weakest in six quarters.With rising cost of inputs and high interest rates, industrial output is likely to remain subdued in the coming months. According to a recent survey by the Confederation of Indian Industry, business confidence, especially among smaller firms, has declined in recent months - This is no surprise, as the rate hike is meant to affect the industrial growth rate. Our much pampered industrialists are busy investing overseas, after taking all the benefits from this country.
The economy is being sustained by Services and black money. As a country we have been spending more than what we can afford for the past 5 years. This is not sustainable. It will be at least another 6-8 years, and that too after a concerted effort on the policy makers part to enforce fiscal discipline and to have a clear cut long term strategy in place (which is not even being discussed about) for Indians to feel comfortable.
As of now, I dont see a light at the end of the tunnel. The way ahead is dark, and littered with thorns. The alarm bells are ringing loud and clear. But the Government and the policy makers are playing deaf.
