Inflation is a serious illness.

At a panel discussion between present and past governors of the Reserve Bank of India, former governor, YV Reddy said that the target for inflation in India should be 4-5%. In response the current governor, D Subbarao said," I am not saying that we would definitely change the number, but we will certainly revisit our strategy." If India is to really become rich the rate of growth must be higher than the level of inflation. A growth rate of 7% with a Consumer Price Index of 10% is no growth, but is a fall of 3% in the Purchasing Power Parity which makes the country poorer. The target for inflation should be 2-3% as in every developed country. In China inflation went up to 6.5% in July last year and the government acted fast by increasing interest rate to 6.6%. As the rate of inflation fell interest rate was cut twice to 6% but even though inflation in November was down to 1.7% the government is in no hurry to cut interest rates further. The economy is predicted to grow by 7.5% this year, much lower than 10% in previous years, but much higher than India where our most revered ministers are praying for 5.5% growth. The HSBC Purchasing Managers Index for manufacturing in China in November was 50.5%, up from 49.5% in October showing that it is starting to grow again despite relatively high interest rate. So why is our government frantically pressuring the RBI to lower interest rate when inflation is still out of control? Because growth in India is not based on manufacturing and exports but on the rise in property prices. Since half of any property is paid in cash, or black money, this cannot be invested anywhere except in property again resulting in an upward cycle where prices keep rising continually. Those who are not rich and villagers sell off ancestral land or houses at undreamed of prices and suddenly become fabulously rich. They then spend money on buying luxuries such as fancy cars, expensive clothes and extravagant weddings giving a boost the economy. The problem is that this boost is based on the unproductive activity of sale of property and so does not add to the wealth of the country and since it results in an expansion of black money the RBI is unable to control money supply and so, in spite of raising interest rates 13 times in the past 2 years, has been unable to control inflation. The most worrying fact is the irrational rise in share prices with the Sensex above 19,000 when all the gloomy news should be acting as a dampener. The reason is that Foreign Institutional Investors have poured in more than Rs 1 trillion in 2012 into Indian shares. This is because of historic low interest rates in Europe and the US and Quantitative Easing by the Federal Reserve which is pushing money into our market and propping up the rupee. As soon as those economies start to recover this money will disappear overnight and the rupee will collapse. Inflation is like fever. It shows ill health of the economy. Sadly politicians are only interested in growth to win elections.