It is now clear that D Subbarao, Pranab Mukherjee and the rest of us aren't really part of the same economy. Monetary policy will remain fixated on inflation; fiscal policy will be captured by political tug-of-wars; and beyond them, we will continue to reel under high prices and soaring but
impotent interest rates. That high interest rates have not been able to control the inflation rate is a fact Mint Street, home to Reserve Bank of India (RBI), has been consistently dismissing.
Chief economic adviser Kaushik Basu's Economic Survey clearly mentions that the high prices we're facing are being driven by rising global commodity prices, high and sustained fuel prices, structural shifts in food consumption to high-protein diets. Controlling inflation, it says, "was rendered difficult due to supply-side factors contributing to food inflation, low interest rates and repeated liquidity injections by industrial nations battling recessionary tendencies, and rise in international commodity prices." Inflation, it says, has little to do with domestic issues.
The only impact high interest rates have had so far is to push Indian industry and households to a financial precipice. Economic growth - the one bright spark in the Indian economy - has slowed down to 6.1% in the last quarter. It is almost as if the black hole of high interest rates is sucking out all the growth, swallowing jobs, aspirations and the feel-good factors of India. This is likely to change as the RBI policy concludes that "future actions will be towards lowering the rates".
But even if the interest rate cycle turns, sweetening the sour economic mood of capital will take some doing. If you examine the factory output numbers, for instance, the high interest rates have delivered a contraction of 1.5% in capital goods. This means, factories of the future are unlikely to come up in a hurry. As a result, job creation - a political capital that the UPA alliance profited from in the previous elections - will turn static, or even contract.
In 'India and the Global Economy', one of the two new chapters Basu has introduced this year, he states that the global economy will remain fragile and, "concerted efforts will be needed through G20 and other forums to restore stability and renewed growth, including addressing the sovereign debt crisis, financial regulation, growth and job creation efforts, and energy security." Add oil prices in case of a recovery and either way, inflation will remain unchecked.
We are missing an opportunity. The decline of the West is unlikely to reverse in a hurry, as the chaos is being driven structural changes - ageing populations, high prices of goods and services under pressure from China and India, and the rise of BRICS. With inflation rate not budging - and unlikely to fall in a hurry - lower interest rates could get the economy running, as it plays catch-up with the West. Of course, this has to be supplemented with a renewed thrust on manufacturing, for which we need a contemporary rewrite of existing factory and labour laws and bring some sanity in the way land is acquired such that farmers become partners in industrial and economic growth.
Else, we'll join the West's decay.