The World Bank agrees with us.

We have been writing time and again that loose monetary policies along with handing out vast amounts of money in various social schemes have resulted in very high inflation, fiscal deficit and Current Account Deficit. While only a few people read this blog now the World Bank seems to agree in its report called Global Economic Prospects. In it the Bank calculates the Output Gap of the economy, which is the difference between actual and potential output. A positive number indicates that the economy is operating higher than its capacity to sustain such a level of production. That is why it is also called the inflationary gap. Livemint, 14 June. The report says that the Output Gap for India was 2.5% in 2007, 2.2% in 2010 and 0.9% in 2012. We have said repeatedly that the damage was done in 2007 when tax on petrol should have been reduced, diesel price should have been raised to that of petrol, gas price should have been normalised, interest rate should have been raised to bring inflation to below 2% , thus controlling property price inflation and the RBI should have bought large amounts of dollars from the market to bring the rupee down from 39 to 45 to the dollar, building up foreign currency reserves to around a trillion dollars. " India's steep growth deceleration mostly closed a large positive output gap that had opened up in the post financial crisis period." Meaning the present slowdown in the economy is because of past excesses. " To the extent the current output gaps are relatively small ( or positive ), efforts to increase growth through monetary and fiscal stimulus risk being ( or may have been ) ineffective and might add to debt or inflationary pressures without any sustained progress in increasing output or reducing unemployment." says the report. Which means that reducing interest rates will be counterproductive, which is what we have been writing regularly. There are 2 reasons why politicians and business fellows keep howling for the RBI to reduce rates - 1. The Congress wants something, anything to stimulate the economy for just a few months to win the elections in 2014 and does not mind if it crashes afterwards and 2. Business fellows want to restructure massive debts by borrowing at lower cost to stave off bankruptcy. " The 2012 output gap in Brazil, India and Turkey is either positive or close to zero ( less than 1% ) suggesting limited scope for growth to accelerate in the short run." Which means it will take a long time to start growing again. Question is, why was Mr Kaushik Basu asking for rate cuts as Chief Economic Adviser to India and is now singing a different tune as Chief Economist at the World Bank. Is it a case of playing the tune according to who is paying?