Tuesday, October 21, 2008

Wrong diagnosis

RBI needs to solve, not spoil!

Inflation may have failed to knock the spirit of the higher-income group, but the rise in inflation from 7% to above-11% has forced middle-class families to cut their regular budget around by 50%!

The build-up with the drawn-out explication started with the RBI’s nagging suspicion in October 2006 that there ‘could be elements of overheating in the Indian economy’. By December 2006, the RBI raised CRR by 50 basic points to reduce inflationary pressures and by the end of January 2007, it raised the repo rate to 7.5% citing the demand supply mismatch in food as a credible reason.

The benefit of observation makes it evident to all of us (including the RBI and the government) that these measures have done nothing to improve the supply of food. The ever-rising rates and financing costs are killing the Index of Industrial Production (IIP) which slipped to 3.8% during May 2008, as against 10.6% in the same month during the previous year, with manufacturing showing signs of sharp deceleration.

Instead of increasing demand through loan-waivers & National Rural Employment Guarantee Schemes, without addressing supply constraints (which has increased inflationary pressures), the government & RBI should rather adopt a problem-solving approach like subsidising lower-income consumers on food!

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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