I was contemplating writing an article entitled: CAN WE HAVE A CRISIS - PLEASE? But, with the economy growing at over 9 per cent, I couldn't find even a whisper of a cloud in the sky. |
Well, you know what they say "" be careful what you wish for. Because it seems that maybe the crisis I was so flippantly asking for may be here in the form of the current inflation.
The importance of inflation management in India was brought home to me many years ago in a very strange and wonderful way. It was 1986 or 87, I had recently returned from the US and was trying to figure out how things worked here. And, oh yes, I was single at the time.
One evening I went to Casbah, a bar I liked a lot in Bandra. It was a small place, kind of open air "" it probably used to be an Irani joint, which then got a licence for beer and then booze. It had a great feel and I used to go there quite a lot. So, the evening in question, I was there by myself drinking a rum and soda "" I must have been on my second "" when suddenly this pair of African girls walked in.
African! And this was twenty years ago, when you didn't see too many Africans wandering around Bombay. And certainly not as lovely as these "" in fact, one of them was just so extraordinarily beautiful, I almost choked as I swallowed the rest of my drink. They sat down at a table behind me, so I had to move to the opposite bench to keep them in view. I ordered another drink and wondered how I could get to know them.
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They were busy, chattering away to each other, so I got up and walked towards them, still not knowing what I was going to say. And as I got to their table, I said, "Excuse me, but are you girls from Switzerland." They looked up in surprise "" they were as black as could be "" and, seeing my chance, I sat down.
And the first thing one of them said "" and I swear this is true "" was, "Interest rates in India were kept artificially low for too long."
I said, "Huh?"
Turned out, they were economics students and had just come out of an exam and they were of the view that the low interest rates maintained in the early years after independence (to promote industrialisation, I suppose) were very bad for the economy, since artificially low interest rates mean artificially high inflation. And while inflation affects everyone, it affects poor people more. In other words, the policies resulted in keeping our poorest people "" ultimately, our largest strength "" under unnecessary pressure.
I didn't know how to react to all that but we did end up having a wonderful time.
With prices rising faster than they have since November 2004, I've been remembering that unusual financial adventure. For sure, the girls were right "" inflation control in a poor country is crucial. But, it's trickier than usual this time, since much of the inflation is a result of sharp rises in global food and energy prices, each of which has risen more than 50 per cent over the past six months.
Not a whole lot the RBI can do about it, and full marks to them for standing pat on interest rates, despite the possible political fall-out of "doing nothing". Of course, there was a sense of stoicism in the policy statement "" a 5.5 per cent inflation target "with a preference for bringing as close to 5 per cent as soon as possible". Perhaps the RBI knows there's not much it can do but ride out the storm.
What is needed, of course, is faster and more focused deregulation. If we had a deep and liquid money market, interest rates would be at least 150 basis points lower even at these inflation levels.
More importantly, if we had a clear and strong focus on improving yields in agriculture, food prices would be much better contained, perhaps even globally. India has the second-largest arable land acreage in the world. And India has the lowest agricultural yield in the world "" barely 10% of that of the US. Land reform, implementation of superior agricultural technology, accelerated development of food supply chain infrastructure, including futures markets "" these are critical areas for action.
But, our masters continue to fiddle.
Perhaps, this inflation will be the fire that burns down our decrepit Rome. Which, though doubtless painful for many, may be what is necessary for us to move to sustainable 10+% growth.