Why lecture now when they chose to do nothing?

Well known names from the decade of Congress economic disaster have been popping up with advice in recent days. The previous Governor of the Reserve Bank, D Subbarao said that inflation hurts the poor the most and " Cutting interest rates was not necessarily the solution to stimulate investment, there are other constraints." Hear, hear. Strange then that Mr Subbarao was frantically reducing interest rates from 9% in July 2008 to 4.75% in April 2009, when the Congress was running for re-election, even though the average retail inflation was rising from 8.32% in 2008 to 10.83% in 2009. It would rise to 12.11% in 2010 and was 10.92% in 2013 when his term finished, because he started reducing interest rate from April 2012, under pressure from the Congress. He is right when he says that low interest rate alone does not stimulate investment. Companies will not invest in new business unless there is demand for their products and with low consumer confidence demand is likely to be tepid. The interest rate was reduced by 25 basis points to 6.5% yesterday. Some argue that the rate of retail inflation in India is driven mainly by the cost of food, which is dependent on supply, therefore trying to reduce consumer demand by increasing borrowing costs will not bring down the rate of inflation. After all, people must eat to survive. True, but if the cost of other articles of daily use come down then we can better manage the rising cost of food. Rural people spend 54.2% of earnings on food, while urban people spend 36.3%, which means there is considerable benefit to people if other prices are falling. The reason prices of food articles are rising at a slower pace is because prices jumped by 75% in the latter half of 2013. This is known as base effect. The main reason why politicians scream for lower interest rate is because it lowers the cost of borrowing for the government, which is the biggest borrower by far. The estimated borrowing for this financial year is Rs 6 trillion. What is the harm if the government is able to borrow more cheaply? Surely, it would be beneficial if more money is spent on vital infrastructure, such as roads, water and electricity supply, which will increase business, but with elections almost every month it is more likely that the money will be used for handouts to bribe voters, which will increase deficit and reduce growth, as happened with the Congress. Mr Montek Singh Ahluwalia writes that corporate investment is getting squeezed because households are saving less, while combined deficit remains high. He recommends a new Fiscal Responsibility and Budget Management Act to discipline government spending. Pity he did not rein in irresponsible spending by the Congress when he was the Deputy Chairman of the Planning Commission. Pity there is no apology, only pontificating.