Mukesh Jagota and Anant Vijay Kala have written an article named “Aggressive Rate Increase Would Hurt Growth” published on 4th of August 2010 in Wall Street Journal India. As the title of the article suggests that it’s about rates increasing in a more hyper way that could hurt the economy.
As per Finance Minister of India, Pranab Mukherjee, the increase in interest rates with such an aggressive way would ultimately lead to hurt the economy’s recovery which would lead to no further investment in the country, no growth and as obvious there would be ultimately no job creation.
Since March 2010 lending and borrowing rates have increased in India fourth time in August. The latest lending rate increase was by 0.25 points in percentage and for borrowing 0.50 points in percentage which was more than expected. So in total since March the total lending rate got hiked up to a total of 1 percentage points and for borrowing to a total of 1.25 points in percentage.
However, the government has been supportive and has cut down the taxes along with increase in spending for the country. Not even this but Reserve Bank of India has also became supportive which has cut down its policy rates in order to be more encouraging for the country in times of worldwide financial disaster. Moreover, the inflation rates for food have also displayed some flexibility keeping in view the track record of previous three months.
For example the inflation rate for eatables was around 9.67% on 17th July, 2010 which got down from an inflation rate of 12.47% the week previous to that. The main reason for decrease in the rate was due to the price fall on vegetables, pulses, rice and cereals (Jagota and Kala).
However, if India’s wholesale price indexed-based inflation rate is taken into consideration then it has displayed an increase from May where it was about 10.16% which got up to 10.55% in June (Jagota and Kala).
For having more flexibility in the food inflation rates, the government is relying on the monsoon rains in order to get more farm output but unluckily this year the monsoon rains have been two percent below if compared to the average of long-term (Jagota and Kala).
In order to control the overall inflation rate system, the central bank of India has tried cleaning the excess cash from the overall banking system by making adjustments cash reserve ratio, policy rates and continuously monitoring the levels of liquidity in the financial system. Liquidity has also been compressed lately because of the outflow of around 1.35 trillion rupees fee payouts for license by telecommunication companies and also for advance payments of taxations.
This whole situation led to a result that banks which were keeping excess money with the Reserve Bank of India for a very long time now turned out to be the frequent borrows from the central bank in order to meet even the very short term needs of these banks faced by them on a daily or monthly basis (Jagota and Kala).
As per the words of Indian Finance Minister, the high growth faced during the previous five years, the rise in local incomes and increase in prices of commodities globally including higher prices paid to farmers as a support for the effort the put in production are all ultimately leading towards increase in inflation.
According to the finance minister if the provinces put some effort in the improvisation of public distribution system and do not compromise on the rules related to commodity-limits on agricultural stocks then inflation can further be curbed and more investments can be a result (Jagota and Kala).
Jagota, Mukesh and Anant Vijay Kala. “About aggressive rate increase.” 4 August 2010. Wall Street Journal India. 05 September 2010