Let me start the first post of this blog by sharing my take on what is the most pressing problem of current Indian Business and their employees. We are just not growing; the GDP growth of Indian economy for the past 3 years have hovered around 4-5%. While Chidambaram and his cronies might shift the entire blame on global economic slowdown, the fact is that they are trying to bell the cat from the wrong end.
It is widely known fact that monetary policies of a country are technically independent(and managed by RBI) but actually influenced a great deal by the Finance Minister and his economic ideologies. One of the broad acceptance by economists across the board is that current recession is due to lack of demand. This lack of demand is due to very low disposable income across different strata of the society. However, UPA- II government's entire focus has been on welfare schemes at the lower end of the society such as MNREGA. So the lower starta of rural India's income has been boosted, they spend majority of this income on food and other essentials. This has resulted in increased demand for food products only leading to high food inflation. As the business sentiment is at all time low, no new capacity addition is being made so the basket size remains same, thereby resulting in increased demand for only food and hence high food inflation. and who gets hurt by this high food inflation the lower strata of society. So we are back to square one.
To curb this inflation, RBI in the last few years have consistently increase or retained high interest rates primarily to curb the liquidity which is perceived to cause even higher levels of inflation. What they have either overlooked or not understood is that the primary borrower of money is government and they have to pay higher debt servicing amount at high interest rates. Further, these high interest levels suck the liquidity from the system.Now since the government needs to borrow its fiscal deficit shortfall hence it tries to minimize its fiscal deficit.
Now consider a scenario where we are under a very low interest regime say at 2-3% and government spends a lot of money in infrastructure and other projects leading to high fiscal deficit. What would it lead to?? Increased spending by government will lead to increased income for Indian Citizens. So it will spur demand generation. Additionally as the interest rates are low, hence it will lead to increased investment in capacity building thereby increasing the supply. So while increased liquidity may lead to increased inflation but increased supply of commodities will keep it in check. Our fiscal deficit may increase but aren't government's supposed to welfare bodies and inherently inefficient. This relatively simple change in ideology by current finance and monetary team of India is necessitated to kick start the economy.
So all I am saying is that leave this western ideology of low fiscal deficit and dont be afraid of IMF,World Bank and Rating Agencies triad and think innovative. If a complete new comer in Macroeconomics can think of methods to kick start Indian economy then economics decision makers can certainly can. Go ahead...just do it.
It is widely known fact that monetary policies of a country are technically independent(and managed by RBI) but actually influenced a great deal by the Finance Minister and his economic ideologies. One of the broad acceptance by economists across the board is that current recession is due to lack of demand. This lack of demand is due to very low disposable income across different strata of the society. However, UPA- II government's entire focus has been on welfare schemes at the lower end of the society such as MNREGA. So the lower starta of rural India's income has been boosted, they spend majority of this income on food and other essentials. This has resulted in increased demand for food products only leading to high food inflation. As the business sentiment is at all time low, no new capacity addition is being made so the basket size remains same, thereby resulting in increased demand for only food and hence high food inflation. and who gets hurt by this high food inflation the lower strata of society. So we are back to square one.
To curb this inflation, RBI in the last few years have consistently increase or retained high interest rates primarily to curb the liquidity which is perceived to cause even higher levels of inflation. What they have either overlooked or not understood is that the primary borrower of money is government and they have to pay higher debt servicing amount at high interest rates. Further, these high interest levels suck the liquidity from the system.Now since the government needs to borrow its fiscal deficit shortfall hence it tries to minimize its fiscal deficit.
Now consider a scenario where we are under a very low interest regime say at 2-3% and government spends a lot of money in infrastructure and other projects leading to high fiscal deficit. What would it lead to?? Increased spending by government will lead to increased income for Indian Citizens. So it will spur demand generation. Additionally as the interest rates are low, hence it will lead to increased investment in capacity building thereby increasing the supply. So while increased liquidity may lead to increased inflation but increased supply of commodities will keep it in check. Our fiscal deficit may increase but aren't government's supposed to welfare bodies and inherently inefficient. This relatively simple change in ideology by current finance and monetary team of India is necessitated to kick start the economy.
So all I am saying is that leave this western ideology of low fiscal deficit and dont be afraid of IMF,World Bank and Rating Agencies triad and think innovative. If a complete new comer in Macroeconomics can think of methods to kick start Indian economy then economics decision makers can certainly can. Go ahead...just do it.
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