Balancing Growth and Inflation in Difficult Times

What the RBI has done to check the rupee fall isn’t a wrong move if it is taken to be a temporary step. Although a lot of criticism has been poured over the Central Bank the steps have greatly highlighted the need to do more on the fiscal side rather than the monetary side. The move on the part of FED and the consequent fall of EM’s currencies was there for all to see. It rather came as rude shock yet on the whole it has been good to the extent that relying on easy money has its pitfalls in the future, if not in the present or immediate future. The economy of the world is slowly trying to grasp the idea as to how to create more jobs and sustainable businesses and that the way through the monetary channel has its own limitations.

There is nothing wrong in saying that the rupee correction is long overdue basically due to lack of fundamentals in the economy. So simply blaming the RBI for its miscalculations isn’t right. But it did give more room for thoughts and obviously the stance that monetary channels have to be pruned with times. We wouldn’t have seen this as a thorough proof without the RBI venturing into it. Now since the time has come to focus on growth and balancing of inflation we can do so within our reasonable means so as to bring about investor’s confidence in our market.

In order to cut the long story short the following questions and answers would throw some light into the whole balancing act that the RBI and other commercial banks would need to bring in growth into the economy.

Question- Where should growth take place as in the case of India?

Answer – Growth in India should take place in the real economy especially in infrastructure, energy, power, manufacturing, exports and services.

Question- But won’t growth affect inflation as a lot of money poured into banks would shoot up the inflation?

Answer- Yes and No both is the right answer for it is the way we deal with the money that assumes importance here and not simply putting money as investment.

Question- How is that to happen?

Answer – When banks give loans they tend to do so over the counter and this is inflationary and that means any liquidity will create the existing level of inflation to shoot up.

Question – Then how will the banks give loans?

Answer – The banks will give loans only in packaged forms with focus on specific purposes only with periodical appraisal of these loans. Weekly audits or fortnight audits would be better. Under no circumstances should the money be allowed to float around in non-productive purposes.

Question – But there is a credit crunch and shouldn’t the RBI do something about it?

Answer – The RBI in its early policy of tightening liquidity has done the right thing then, but now ought to loosen its fingers.

Question – But wouldn’t that be inflationary?

Answer – True, if it is done in the traditional way with the banks given the money directly to give away as loan to one and all. However, if there is regulatory mechanism or some sort of mechanism through which the banks can specify the ‘live’ projects for the loan to the RBI then the loan amount is in packed condition. Then there wouldn’t be any surge in the existing inflation.

Question – Does that mean if any of the packages leak there will be inflation?

Answer – Yes, even if the banks were to fund several specific projects costing one lakh crore rupees then there wouldn’t be any increase in the existing inflation. But even if 1% of that amount goes loose or over the bank counter in several non-specific loans then inflation will shoot up through the stratosphere. This is a certainty.

Question – What about the FDI route?

Answer – FDI investments are non-inflationary as they have specific projects to start off. For example, IKEA may start furniture business and may also do business in some related items. They will surely not run into the fish market and start selling large scale sea fish or start a real estate business overnight. All these FDI projects are disciplinary and hence they tend to inflate the inflation much less than over the counter business.

Question – Money that goes directly into the hands of people are inflationary?

Answer – Yes, money that goes over the counter with little control from the bank side like flashy credit cards, quick loans, easy credit on gold or landed property and any other means. These are surely necessary, but the banks should put some restrain on it. Many of this money go for loose purchase and speculation.

Question – What about CRR cut, Interest rate cuts and others?

Answer – Unfortunately the CRR cut, CLR cuts, Interest rate cuts, capital infusion, printing more rupees and such like are all inflationary. However, these are a must for growth to take place and the only way is to evolve a technique such that the commercial banks can give a list of ‘live’ projects for loan disbursement to the RBI and this should be in packaged form with periodical and better still weekly appraisal by the bank on the firm that has taken it. Under no circumstances should the money get diverted for something else. If that is so, inflation will shoot up dramatically.

Question – That is for large projects and what about a firm that requires 10 crores rupees as loan?

Answer – Whether large or small firms the principle for following the anti inflationary path is the same. Banks should give 10 crores in loan under a package deal and then start to monitor the money on a weekly or fortnightly basis. If all banks do the same then there will be no increase in the existing inflation.

Question – What about real estate loans?

Answer – Real estate loans are usually seen to be porous and may leak to different projects and are very inflationary. The best way to tackle the same is to keep specific projects in a loan packaged form and which the bank should keep rigid track. This is true for those real estate businesses that have huge capital and even the small ones.

Question – Will the rupee stabilize if the above is followed?

Answer – When the economy picks up it is obvious that the Indian long run growth story would again be news. This would mean a lot of flow of both FII and FDI money into the Indian market and thereby lifting the value of the rupee.

Question – So by keeping a tight parameter for loans the economy would pick up?

Answer – Sure, but also the delay in licensing, lack of structural reforms, over taxation and corruption have to be addressed too. As anyone knows ‘Live’ projects cannot be given loan until the bottlenecks are removed. Otherwise, who will bother to invest?