Economy
REXIT – An Alternate View
Discipline is not a natural trait amongst Indians. We do not like to be constrained by boundaries. We want to retain the freedom, for instance, to tell the Reserve Bank of India (RBI) Governor to reduce interest rates, even if we cannot distinguish cash reserve ratio (CRR) from euro currency. Heavens forbid if he chooses to ignore such a command.
 
One of the major criticisms against Dr Raghuram Rajan, the incumbent Governor of RBI has been his stubborn refusal to lower interest rates. While interest rates today are lower by 150 basis points (bps) compared to the time he took over, business and industry had always clamoured for lower interest rates. What Dr Rajan has done is to take away the personal element by introducing a data based, structured framework for determining interest rates. In a sense, fixing interest rates has become predictable and stable. As he has always maintained, business wants predictability more than low interest rates. 
 
RBI has been given a target to achieve, by the government – 4% inflation plus or minus 2% (range of 2% to 6%). How does one expect a reduction in interest rates, if inflation is currently touching 6%? As long as inflation is high, RBI needs to fight it ruthlessly. 
 
Some of us may remember Paul Volcker, the former chairman of US Fed, increasing the federal funds rate to as high as 20% in the late 70s and early 80s, in order to kill the monster of inflation forever. Growth in the US plummeted and even turned negative during that period. Since then, however, the US has never faced inflationary pressures. A short-term pain was essential for long-term gain.
 
Volcker was also called terrible names due to the impact of his anti- inflationary measures on growth rate. Today, he is a revered figure. Human beings are too concerned with the immediate future, without being concerned about the long-term negative impact of their actions or wishes. 
 
There are two other factors that are keeping interest rates high in India. The extent of non-performing assets (NPAs) in public sector banks (PSBs) implies that these lenders can no longer carry out their basic function of financing. Constituting 70% of the banking sector, this places a significant constraint on the overall lending ability of the Indian banking industry. Resolution of NPAs is critical to get the banking sector moving again and reducing interest rates. Dr Rajan has initiated the process to clean up banking balance sheets once and for all so that banks can commence their business without the overhang of bad debts.
 
Interest rates on government’s savings schemes are stubbornly high. About 8% plus tax-free returns are available on provident fund (PF) and other schemes of the government of India. Some of them have tax saving features too. That places a limit on reduction of interest rates by the RBI.
 
Supporters of the current government, miffed with the RBI, would do well to remember that fighting inflation is good politics, besides being good economics. Historically, hardly any government has lost elections due to lower growth rate; plenty of them have had to vacate office due to spiralling prices. 
 
There are many reasons why Dr Rajan is exceptional. I will speak about one of the least mentioned. His voice has been a consistently sane voice in an otherwise loud cacophony of meaningless clatter. Growth in the world over in the last few decades has been debt-induced. The crisis in 2008 was based on too much debt. Dr Rajan has been warning us, unsuccessfully it seems, against this debt-induced growth.
This has been his consistent stand over the years. 
 
He has also advocated coordinated efforts on the part of central bankers. Actions of one central bank have an impact on other economies also. We were witness in 2013 to the turmoil in emerging market economies, as a consequence of a slightly hawkish statement by Janet Yellen, ironically at the time Dr Rajan took charge as Governor of the RBI. Conflicting monetary policies of different central banks will render them ineffective. He has been exhorting central banks to take a global view and not be exclusively fixated only on their own countries. Not surprisingly, earlier this year, he was adjudged the best Central Banker in the world by the Financial Times group.
 
Not many people display the courage to consistently speak against popular beliefs of the time. To have the grasp of economic issues like Dr Rajan and the integrity to be true to those beliefs is a rare quality. Sadly, such qualities are not appreciated in this country. Despite the fact RBI as an institution will survive Rajan’s exit (Rexit), I am not sure it is a good idea to lose him. 
 
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)
 

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COMMENTS

J SUDHARSHAN

11 months ago

Hats off to Mr. Raghuram Rajan. Its great to read such an thought nice article thanks Sunil and ML

Ramesh Poapt

11 months ago

very well said, sunil/ML!

MG Warrier

11 months ago

Excellent analysis. People need to come out and speak out like this. The media is full of 'professionals' with constituency interests. Moneylife is doing a great service by allowing people with different views to express their views.

R Varadarajan

11 months ago

A well presented article. Well ! Discipline is the most disliked word among politicians in the country. Unfortunately, Dr Rajan failed to realise this.

Kumar Swamy

11 months ago

WPI is negative, small and medium industries are hurting because of high interest rates, their revenues are declining. Retirees want higher returns on their retirement funds, bank FDs, irrespective of inflation. So how can you balance all
these if one is adamant of sticking to a particular point of view. RBI governor needs to be more flexible, particularly given we are living in very interesting times - near-zero to negative interest rates in western countries and Japan.

vijay b joshi

11 months ago

Congratulations! for bringing transparency to a common man.
Congratulations! for bringing transparency to a common man.
How can we start a mass protest by millions of Indians to stop Rexit?

Gupta

11 months ago

Very well written. So true and alas, so sad!
The first line of this article is the fundamental problem of India, irrespective of what problem you discuss.

Vitamin A, high-fibre diet keeps food allergies at bay
Consuming high-fibre diet consisting of a bowl of bran and some dried apricots in the morning and intake of Vitamin A can help reduce food allergies, finds a new study.
 
The findings showed that mice allergic to peanuts were protected against the allergy when fed on a high-fibre diet.
 
Food products rich in fibre reshapes the gut and colon microbiota and helps to fight against food allergies, said the study, led by Jian Tan, professor at the Monash University in Australia.
 
The immune system works with the good bacteria in the gut to help protect against life threatening allergic responses, the researchers said.
 
The microbiota in the gut was found to assist the immune system in resisting allergies through the breaking down of fibre into short-chain fatty acids.
 
These short-chain fatty acids boosted a particular subset of the immune system called dendritic cells, which control whether an allergic response against a food allergen happens or not.
 
Increased levels of short-chain fatty acids switched these cells to stop the allergic response.
 
Further, deficiency in vitamin A levels could promote food allergies, especially in infants and children, the researchers noted.
 
The study opens a potential route for drug therapy for allergies by delivering short-chain fatty acids as a treatment, said the paper published in the journal Cell Reports.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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Do you know blueberries can improve vision and memory?
While awareness about the benefits of blueberries in warding off cancer and lowering the risk of heart disease is widespread, very few people are aware of its advantages of reverting ageing, improving vision and memory, new research has found.
 
The researchers wanted to determine how much consumers know about blueberry health benefits and see if there is a knowledge gap with blueberry health benefits among demographic groups.
 
They surveyed more than 2,000 people in 31 US states to see what they know about the health benefits of blueberries.
 
The researchers found that most people were aware of the benefits of blueberries in cancer prevention and lowering the risk of heart disease but they are less aware of the advantages of reverting aging, improving vision and memory.
 
"People being more familiar with blueberries as deterrents for cancer and heart disease may be related to the high general awareness of these two diseases," said lead researcher Shuyang Qu, doctoral student in agricultural education and communication at University of Florida Institute of Food and Agricultural Sciences, in a statement.
 
"The fact that cancer and heart diseases are the leading causes of death in America may have led to more personal research related to preventing the diseases, leading to the respondents being exposed to these findings more than other benefits," Qu noted.
 
The study also found that low-income populations tend to know less about blueberry health benefits.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
 

 

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