Reverse Bank of Inflation

When we talk of inflation, a lot of attention is focussed on Reserve Bank’s monetary policy and how it needs to be wise and ahead of the curve.

Few problems in our economy are those of the nature those of the nature that can be solved using basic demand supply analysis of capital and acting in the desired direction. Inflation , as such, which even the Governor acknowledges , still depends a lot on the agricultural economy post-monsoon. To this end, RBI’s policy is merely an analgesic numbing inflationary pains while the real economy recovers .

The statement of Governor and even everyday experience , pins down inflation to its obvious provocateurs –agricultural inefficiency and deregulation of oil prices.
Yes, it is true that agriculture has been the lost chapter in our growth story, but to pin down the problem mainly to agricultural inefficiency is to miss the real reason on how factors that seem distinctly unrelated and even inimical to agriculture are aggravating a demand driven price rise of a very systemic order.

Consider for example that price hike of Rs. 3/litre on petroleum based fuels that was allowed as the first step towards rolling back subsidies given to the energy sector. To accuse all of price rise woes on this single act would be to ignore the problem of development of infrastructure in terms of road, rolling stock and efficient local market mechanisms for essential commodities that has perpetuated the crisis even before oil prices were deregulated.

Oil subsidy is a burden on exchequer that needs to be rolled back in long-term interests of the economy to help develop more efficient alternative markets for energy that are competitive , progressive and dynamic .

Preventing fair pricing of oil is only delaying the modernization and innovation of energy sector by not allowing the consumers to bear the direct cost of their consumption. Subsidization of oil consumption also makes it less lucrative for private companies to enter the market, leaving the sector to state managed public giants whose losses are compensated by the sale of oil bonds.

The move for de-regulation in oil prices is like a teething trouble that adolescent India will have to bear. What surely can be ameliorated is the pathetic state of national road transport network that has seen growth that can only be termed as marginal when juxtaposed with economy’s needs.

Indian Railways’ rolling stock when it comes to capacity building in freight carriage has been sidelined in the favour of populist agendas and dozens of intercity expresses plying between pet constituencies. Major ports have been accumulating losses over the years and an inland waterways development network is stalled by Inter-state water disputes.

It is these pressures of infrastructural under development that are responsible for a long term, steady price rise. Any emerging economy will have huge income disparities and as a result a situation develops where the more affluent , progressive sections multiply their consumption demand over years to move up the socio-economic ladder.

The ones worst hit are people on the wrong side of this disparity who become victims of demand pressures of an affluent society and infrastructural deficiency.
The artificially protected oil prices regime is being defended valiantly by auto sector lobbies. Cheap car loans to serve a demand spike riding on sheltered fuel prices have adversely affected credit allocation by banks to more enduring investments in education and healthcare.

An overview of education loans being forwarded by lending institutions is a testimony to how out of step have our practices been with the much avowed policy declarations of social and economic transformation by 2020.

A simple education loan in India for pursuing higher technical degree in a modest domestic institution costs anywhere between 10.5-13% against this loan is demanded a collateral almost 70-80% (if not in terms of present assets owned by you, the your future ability to earn) of the amount forwarded .In the payment period, this loan turns itself over anything between 2-2.5 times.

Considering the exorbitant amount the lender pays to unburden himself from his liabilities, it seems sensible , if he can , liquidate his collateralized asset and meet his obligations instead of opting for a loan. What is amusing and even ironical at the same time is the fervour with which loans of a more consumerist kind- cars, luxury homes, electrical appliances are being advertised at much lower rates where the economic value of such investments is far lower than that of education and possibly , in a pessimistic sense , nothing but more foam to the consumption bubble.

So, the question is –Will it be fair to hold the Reserve Bank culpable for all those shooting prices? Unfortunately, we live in times where we trust them the least in whom the Constitution vests the most power. The hysteria around RBI’s policy reviews is a subconscious manifestation of our trust deficit in the government .Honestly, we need to give the regulator the credit for its labours in the decade past and it would be unfair to expect it to plaster all the leaking walls. Whether it does well this time round, we can conjecture and remain optimistic But something needs to be done to alleviate the ailments that lie outside RBI’s ambit.

Shailesh