Monday, February 18, 2013

I am with you Mr. Governor

I had written a blog on issues relating to interest rates, inflation and economic growth on September 3, 2012 (http://ajoy-finsight.blogspot.in/2012/09/interest-rate-inflation-and-growth.html), where I discussed the relationship between the three economic variables.  I concluded the same by wondering whether a marginal decrease in interest rates would have any impact on the economic growth.  I was very happy to see a recent article in The Economic Times that the RBI Governor, Dr. Subba Rao's reluctance to decrease the interest rates stems from his concerns towards the poor people who suffer due to high level of inflation.  (The link to this article is given at the bottom).  He believes that the advocates of economic growth through lower interest rates have enough platforms to make their voice heard; whereas the poor people in the country hardly have a platform to voice their concerns.

Yes, you are right Mr. Governor.  All those who are asking RBI to reduce rates belong to higher strata of the society and they have enough platforms like CII, FICCI, and even the print and electronic media to put forward their arguments.  When the inflation is high (especially, the food inflation), the higher strata of the society absorbs it quite easily; the middle ones manage somehow; but people at the lower strata find it extremely difficult to absorb the shock.  Though the inflation, that is the percentage increase in prices, is same for all, the ability to deal with it, is not the same.  Let me take a simple example.  When I came to Tumkur (near Bangalore) 14 years ago, the cost of travelling to Bangalore from Tumkur by bus (Rs.18) was almost same as that of train.  Hence the trains were not crowded much.  But today, it costs Rs.58 to travel to Bangalore by bus, whereas it costs Rs.11 by local train.  And, it is almost impossible to get space to stand in the train (let alone a seat) during the peak hours as it is over crowded.  And if one looks at the crowds that travel, they mostly belong to lower class and lower middle class.  Now, imagine what would happen when the rail fare also starts going up (which might be a reality soon).  Is there anybody to represent the lower class of the society, which suffers the most due to inflation?  Politicians meet them only during the election time!  And the argument that the decrease in rates would propel economic growth, which in turn would eradicate poverty and wipe away the tears of the poor, is a hypothesis yet to be proven.  Even if we were to accept the above argument, it definitely would take a long time.  According to the World Bank statistics of 2010, 32.70% of the population in India live below $1.25 per day; and 68.70% live below $2 per day.  A rough calculation tells me that 68.70% of Indians can not travel to Bangalore from Tumkur and back by bus on a single days as they live on less than what it would cost for the journey!

Let me quote Mahatma Gandhi, "Recall the face of the poorest and the weakest man whom you may have seen, and ask yourself if the steps you contemplate are going to be of any use to him".  Dr. Subba Rao, I am happy that you chose to listen to the above words of the father of the nation.  (Perhaps, many others have not seen 'poorest and weakest people', that they are not able to understand their plight!).  When one looks at the whole issue from the perspective of the poor people, containing inflation becomes a far more important issue than economic growth.  As the Governors himself has said in the past, RBI is not the only agency responsible for managing inflation.  RBI has only limited instruments at its disposal.  It must be a collective effort from the part of government and all others concerned.  I am reminded of some classic cartoons by the legendary cartoonist R K Laxman.

Soaring prices, extortion....we must thank our stars , we are not affected by any of these

One good thing about our political system is that whichever party comes to power, we are left alone to continue our lifestyle

That's good.  This will bring down the deficit.  Now he should do something to bring down the prices.
Link to the ET Article: http://economictimes.indiatimes.com/news/economy/finance/People-suffering-due-to-high-inflation-forces-RBI-governor-D-Subbarao-to-hold-rates/articleshow/18454805.cms.