The National Council of Applied Economic Research says that India is in an economic crisis. TOI, 17 June.
" The Indian economy is in a crisis. While growth rate has been declining....the issue ( of high CAD ) gets amplified against the backdrop of slowing economy, high fiscal deficit and persistent inflation," it said. Couple of days back the Reserve Bank kept the repo rate unchanged at 7.25% and the Cash Reserve Ratio also at 4%. Defending its decision the RBI said," It is only a durable receding of inflation that will open up space for monetary policy to continue to address risks to growth." The RBI has been talking tough about high inflation for months but keeps wilting under political pressure and reducing rates. Which is neither here nor there. If it was really serious about tackling inflation it would raise interest rate to 12% as Mr Narasimha Rao did in 1994-95 and hold it there till inflation came down. That would immediately bring down property prices, effectively slashing the amount of black money in the economy, drastically reduce the import of gold as people put their savings in fixed income instruments in banks, thus cutting down the Current Account Deficit and helping to stabilise the rupee. Banks would have lots of money to lend, consumption would rocket as people spent more encouraged by falling prices, and industrial production would jump, leading to higher employment. Companies keep whining about interest rates but interest costs on debt are only 5% of net sales while raw materials constitute 40% of net sales. With falling commodity prices profit margins are rising. Livemint, 18 June. If, on the other hand, the RBI wanted to stimulate growth it would have lowered rates much faster, reduced the CRR to increase liquidity in banks and allowed the rupee to depreciate to stimulate exports, which is what the US has been doing and Japan has started under what is known as Abenomics. But it does neither. Its behavior is like a little boy who sticks out his tongue in a show of defiance and then quietly eats his spinach as his mother has ordered. Consequently, inflation remains uncontrolled, the rupee is drifting downwards without direction and the economy remains stuck in doldrums. A 1% fall in the value of the rupee will add about 15-20 basis points to the Wholesale Price Index. Trade deficit in May was $20.1 billion as against $17.8 billion in April. Imports rose 7% in May to $44.65 billion while exports fell by 1.1% to $24.51 billion. Gold and silver imports were up by 89.7% to $8.9 billion. This cannot last. But the response of politicians is to deny any crisis and promise 100% growth in the distant future. We, the people are helpless pawns.
" The Indian economy is in a crisis. While growth rate has been declining....the issue ( of high CAD ) gets amplified against the backdrop of slowing economy, high fiscal deficit and persistent inflation," it said. Couple of days back the Reserve Bank kept the repo rate unchanged at 7.25% and the Cash Reserve Ratio also at 4%. Defending its decision the RBI said," It is only a durable receding of inflation that will open up space for monetary policy to continue to address risks to growth." The RBI has been talking tough about high inflation for months but keeps wilting under political pressure and reducing rates. Which is neither here nor there. If it was really serious about tackling inflation it would raise interest rate to 12% as Mr Narasimha Rao did in 1994-95 and hold it there till inflation came down. That would immediately bring down property prices, effectively slashing the amount of black money in the economy, drastically reduce the import of gold as people put their savings in fixed income instruments in banks, thus cutting down the Current Account Deficit and helping to stabilise the rupee. Banks would have lots of money to lend, consumption would rocket as people spent more encouraged by falling prices, and industrial production would jump, leading to higher employment. Companies keep whining about interest rates but interest costs on debt are only 5% of net sales while raw materials constitute 40% of net sales. With falling commodity prices profit margins are rising. Livemint, 18 June. If, on the other hand, the RBI wanted to stimulate growth it would have lowered rates much faster, reduced the CRR to increase liquidity in banks and allowed the rupee to depreciate to stimulate exports, which is what the US has been doing and Japan has started under what is known as Abenomics. But it does neither. Its behavior is like a little boy who sticks out his tongue in a show of defiance and then quietly eats his spinach as his mother has ordered. Consequently, inflation remains uncontrolled, the rupee is drifting downwards without direction and the economy remains stuck in doldrums. A 1% fall in the value of the rupee will add about 15-20 basis points to the Wholesale Price Index. Trade deficit in May was $20.1 billion as against $17.8 billion in April. Imports rose 7% in May to $44.65 billion while exports fell by 1.1% to $24.51 billion. Gold and silver imports were up by 89.7% to $8.9 billion. This cannot last. But the response of politicians is to deny any crisis and promise 100% growth in the distant future. We, the people are helpless pawns.
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