Tuesday, December 30, 2014

Make in India, but without credit?

Prime Minister Narendra Modi's key Make in India project got some fresh momentum this week with a national workshop being held to bring stakeholders together. Towards the end, the PM assured stakeholders that laws and rules would be suitably amended to encourage manufacturing, which is the only hope for India's young to find jobs, the defining issue on the basis of which the BJP won its historic Lok Sabha majority in May. Scared to make politically difficult decisions and under pressure from coalition partners, the Congress has systematically held down manufacturing growth while allowing services to flourish, resulting in a strong GDP growth but with little employment - 'jobless growth' in popular parlance.

However, a major issue, as highlighted repeatedly by Finance Minister Arun Jaitley, is the high interest rates in India that the RBI continues to set with very little evidence of either its need or effectiveness. India's interest rates are one of the highest among Asia's top economies. Ostensibly, this has been because of the record high inflation under the UPA Governments. However, as of now, inflation is much lower and even below the RBI's own target rate. Moreover, the reason for the low inflation is the global collapse of commodity prices, crude in particular, and not because of the RBI's high interest rates.

One important structural fact that the RBI simply refuses to accept is that it has very little control over inflation, which is mainly due to supply-side problems in the Indian economy. India is currently coming out of a recession and demand has been very subdued in the last few years. The high interest rates that have prevailed over that period have actually contributed to the recession and the slack in demand but have failed to make a dent on inflation. This fact alone should make the RBI realize that in the game of growth versus inflation, it can either stoke or damage growth but barely control inflation, such is the Indian economy. Therefore, it would be much better for it to aid the government's quest to create jobs by lowering interest rates. 

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