Cut Interest Rates?
By Dhurjati Mukherjee
Government functionaries, specifically ministers are known to give lectures on various subjects from Hindu Rashtra to welfarism to economic growth and development and a certain section of people think that their observations carry value. But when they try to talk on basic economics and seek to influence institutions such as the Reserve Bank of India,where top experts are there to take decisions, their intentions are far from judicious.
Recently,Union Minister of Commerce and Industry, Piyush Goyal stated that the Reserve Bank of India should cut interest rates in order to boost up the economy and stop using food inflation as the bogey to justify its inaction on interest rates. At an event organised by CNBC TV-18, he stated “growth needs a further impetus”, meaning that cutting interest rates would favour business houses and this would result in growth. Goyal’s comments came just a few days after retail inflation in October surged to a 14-month high of 6.21 percent, largely driven by food prices, which surged to 13.54 percent.
It was indeed surprising to hear from him targeting food inflation as a “flawed theory” for consideration of the interest rate structure. Further, Goyal observed it has nothing to do with managing inflation. He even wanted policymakers and economists to deliberate “whether food inflation should at all be a part of the decision-making for inflation or interest rates”.
The minister’s enthusiasm for cutting interest rates is obviously a manifestation of the demands of business houses, which want to borrow at lower rates. The politician-business nexus in the country is well known and this found manifestation in his observations. However, it would have been better if he had something to say of what the government intended to do to bring down food inflation as such high prices primarily affected the vulnerable and backward sections of society.
Goyal’s comment also rekindled concerns about the independence of the central bank in deciding the country’s monetary policy and whether pressure was being created ahead of the Monetary Policy Committee meeting in December. The same sentiment was expressed in the Economic Survey, which stated the inflation targeting framework should consider targeting inflation, excluding the food aspect. The reason for this observation has, however, not been mentioned in the latest Survey.
It may be mentioned here that at the height of the battle between the Centre and then RBI deputy governor Urjit Patel, former deputy governor, Viral Acharya also articulated his fears about the erosion of RBI’s independence. “Direct intervention and interference by the government in operational mandate of the central bank negates its functional autonomy”, Acharya had stated in a paper presented in October 2018.
The first thing that is important here is whether the government is interested to curb the independence of the RBI. As has been manifest, the government has for quite a long time been seen interfering in institutions of higher education and now it is possibly the turn of the apex bank of the country. This obviously does not augur well for formulating the right strategy for judicious economic growth.
While the minister’s concern for growth is well understood, the question that needs to be asked is whether the strategy for growth that is being pursued by the ruling dispensation would help the overall economy of the country, specially the larger majority of the population. The banks interest lies not in the business houses and loans taken by them but the middle-income sections of society who keep large funds in the banks. RBI governor Shaktikanta Das, who was presentsaid “India’s economic growth remains resilient; inflation is expected to moderate despite periodic humps, and the external sector is robust.”
It is worth recalling that corporate houses are being subsidised in various ways. Whether it is ensuring land for them by evicting common people with nominal compensation in towns and semi-urban areas for starting nursing homes and even schools, apart from industries, there are also rampant incidents of polluting the atmosphere and local water bodies. As the implementation of rules and regulations in the country is quite lax, no action is taken against the offending business groups. This goes on while India makes promises at international conferences like the recently concluded COP29.
The situation calls for introspection. On the one hand, it is being contended that the private sector is not investing sufficiently in modernising and expansion as also in research and development to make their products globally acceptable and achieve economies of scale, on the other, more and more incentives are being contemplated in this sector. While it is well known that some top businessmen, reported to be close to the ruling dispensation in New Delhi, have been accused of non-performance but no action has been taken. There is thus a dichotomy in the thinking and policy formulation of the government.
Does the government believe that making the business groups richer would bring about balanced regional and inclusive development? Obviously not. While the social and economic problems remain unresolved with unemployment and unemployment increasing, the government is not quite serious in tackling these problems. All this has resulted in increasing the disparity between the upper echelons and the low-income groups and experts believe this disparity would widen further in the coming years.
It is worth mentioning that the Confederation of Indian Industry (CII) has recently proposed that the Centre issue ‘consumption vouchers’ to citizens in the lower income group, which can be used to buy specified goods and services. Another more significant suggestion is a 40 percent hike in daily wages under the MGNREGA and 33 percent increase for PM-KISAN beneficiaries.
In its pre-budget recommendations, CII suggested that the unit cost of PM Awas Yogana should also be enhanced along with changes in tax treatment for interest income to support the growth of bank deposits. In fact, the wages in the job scheme are, in some states, below the minimum wages and need to be revised. The kisan dole was proposed to be enhanced to Rs 8000 per annum but this did not mature.
These are more valid suggestions, and coming from a business organisation gains credence more than cutting interest rates, which should be better left to the economists of the RBI to decide. There is thus a need for a change in the policy formulation of the ruling dispensation and making it more wedded to the interests of the real people. — INFA