Kill the rich and bury the poor
The Congress (I) led UPA government is planning to bring in social equality. The obvious person who can dream up solutions for such endeavors is none other than the nations accountant and tax man Palaniappan Chidambaram. P Chidambaram who holds a fancy post like Finance Minister is a very charming man who gets away with charms and blessings of the party bosses; Very less on his ability. This man who admitted that he did not know that his wife had bought shares worth lakhs is set to bring out accountability from rest of the nation. The latest venture by the socialist Chindambaram is to force companies to lower profits to keep product prices down and aid the government in its fight against inflation.
This comes at a time when there is barely margins in products that companies sell. If this is not enough, the companies are struggling to hire employees who hop company to company to get better renumeration to keep their families afloat, which is in turn is due to unpresidented price rise due to mismanagement of the Indian economy by P Chidambaram.
The poor are in much worse state. P Chidambaram price control measures range from blaming world economy to issuing warnings to Indian industries for unknown issues to blaming state governments to blaming RBI and blaming opposition.
All this shadow boxing to gain a plus point with the poor vote bank is actually not helping. While the prices keep rising and the poor not able to make their ends meet. Even the middle class is finding it difficult to pay for their daily needs.
The economy was performing well with deregulation since 1991 PV Narasimha Rao government till the current UPA government took over. The worse was appointing P Chidambaram is a responsible position like Finance ministers post. P Chidambaram rode high on the benefits of his predecessors sound policies. Now since the economy did not have a sound finance minister in past few years, the effects are telling.
P Chidambaram is now trying to revive old Congress era sentiments where industrialist and profits were a bad word and were used to keep themselves in power. Its still time to realise that social equality comes with inclusive growth and not inclusive destruction. Its not expected of P Chidambaram, but, this advice is for anyone else who will come to the Finance Ministers seat in future.
4 Responses to “Kill the rich and bury the poor”
By Inclusive growth in India and Muslims on May 2, 2008 | Reply
Muslims clogging Inclusive Growth of India
Muslims and Indian Civil Society:
The Economic development of the nation needs strategic utilization of natural, physical, human, financial and social resources. Unless we establish socio-economic justice through resource allocation among religious communities, it is meaningless to talk about civil society development and inclusive growth. Abandoned Indian Muslims (as 15% Indian population) definitely need more focused plans and strategies for inclusive growth of India.
Our Strength - Unity in Diversity:
The Sachar Committee Report revealed the facts that Muslims are not far better than Scheduled Castes and Scheduled Tribes of India and thus needs special attention in our national plans and policies framed for inclusive growth. We need to believe that the strength of India is ‘Unity in Diversity’. The religious communities may have diversity in believes and approaches, but are united for the nation. Indian Muslims are instinct part of the nation with diversified approach in believes and approach to practice.
Interest Free Banking for Inclusive Growth of India:
The Sachar Committee did not consider the constraint of ‘Interest’; the most important reason for financial exclusion of Indian Muslims, rather advocated financial inclusion of Indian Muslims through participation in Scheduled banks. Since majority of Indian Muslims are poor and orthodox, their financial exclusion is mainly due to prohibition of interest in Islam. We must not forget that Indian Muslims shares 18.35% Indian population living below poverty line. So unless Indian Muslims is allowed transacting interest free banking, their financial inclusion is not possible. Without financial inclusion of Indian Muslims, their economic development is not possible. And without economic development of Indian Muslims, it is not possible for India to achieve the much desired real inclusive growth of the nation.
Sachar Committee Report – Half work done!
The Sachar Committee Report reflects that Muslims are under financial loss over Rs. 23,766 crores per annum in terms of credit through Scheduled Commercial Banks; as their share in outstanding loans under PSA is just 4.7% compared to 12% share in PSA accounts. A community with more than 31% population living below poverty line and 39.4% as self employed workers, such credit loss pushes it towards more backwardness; ultimately making inclusive growth more difficult. The Sachar Committee not only denied the requirement of Interest free banking for Muslims; but also failed to suggest any suitable measure to make our financial system more interactive and attractive for Muslims.
Recommendations of Sachar Committee - Imperfect measures
After Sachar Committee Report, the government took some initiatives to follow the suggestions made by the committee, but none of the initiatives is ensuring financial inclusion of Indian Muslims. The Sachar Committee has reported that participation of Muslims in Micro Finance is very low and share of Muslims in credit through SIDBI and NABARD are also very low. Instead of analyzing the causes of financial exclusion of Muslims, the committee just advocated to increase number of Scheduled Banks in Muslim areas, promotion of Micro Finance and deployment of more funds to NMDFC, SIDBI and NABARD. This approach is irrational because the measures suggested by the Committee are against the orthodox approach and financial requirements of Indian Muslims.
Approach of RBI toward Indian Muslims:
RBI is not paying due attention on financial exclusion of Indian Muslims. It should have studied the impact of ‘Interest’ on Indian Muslim’s financial inclusion and suggested some measures to comply with religious and financial need of Indian Muslims. But RBI (might be with intention to avoid any additional procedural changes) has already declined the feasibility of interest free banking in India. RBI should have considered why Muslims are just 0.78% in its working force. Similarly it was not discussed about reasons that why Muslim’s share in credit through SIDBI is just 0.48% and through NABARD is under 4%.
Dr. C. Rangarajan Committee Report ignored Muslims:
Under such extreme financial exclusions, it was supposed that the high level committee for financial inclusion would focus on Muslims. It was not a surprise to see that there was no Muslim member in that committee, but unfortunately the committee did not pen a single word about financial exclusion of Indian Muslims. Generally it is not expected that such committees would make community wise study; but since the report worth mentioned specific plans for 100% financial inclusions of SCs and STs, it was duly expected to have some comments on Indian Muslims which is not far better than SCs and STs of India.
While the Terms of Reference assigned to the Committee on Financial Inclusion contained the task ‘to identify the barriers confronted by vulnerable groups in accessing credit and financial services, including supply, demand and institutional constraints’ The report submitted by Dr. C. Rangarajan Committee did not carry any personal intervention report with vulnerable group. Moreover it did not study the financial exclusion in urban areas. Thus the report did not serve the designated purpose. So it is not justify for the government implementing the suggestions of the report with no study of minority community and with any case of committee’s interference with vulnerable group. If this would be the approach of our high level committees, how financial inclusion mission could be a success?
Dr. Raghuram Rajan Committee Report - Missing Inclusive Growth potentials:
The Planning Commission of India set another high level committee to prepare a report on financial sector reforms. This committee is also 0% representation of Muslims. The committee prepared a draft report after interference with more than 82 persons. Unfortunately there was no Muslim among those 82 persons. Neither the committee considered the issue of financial exclusion of Indian Muslims, nor suggested any proposal to ensure financial inclusion of Muslims. How could we set financial sector reform, unless we consider factors responsible for financial exclusion of minorities? With such abandoned financial exclusion of Indian Muslims by committees after committees, we may not be able to develop a civil society nor succeed to achieve the desired real inclusive growth.
Government Schemes for Minorities:
In Muslim concentrated areas, the physical infrastructure is always found lacking behind the actual requirements; and the community based institutions constrained by regulations and closed after no support from government schemes. Moreover the schemes announced by government to empower Minorities are also not inclined with Muslim NGOs which could have utilized and help to develop the social resources of Muslims. Such practices of dethroning Muslim social and institutional resources will certainly snag development of civil society and inclusive growth process.
Policy initiatives are required for real inclusive growth:
In the interest of the nation it is wise to take due initiatives instigate Indian Muslims into mainstream section to help India realize the desired inclusive growth.
1. There should be a parliamentary committee to study abandoned financial exclusion of Indian Muslims and recommend measures to ensure financial inclusions of Muslims.
2. At least one Muslim should be incorporated as member of any committee constituted for study and analysis of national level issue, because it is not justify ignoring minority community while doing strategic study for the nation as a whole.
3. If any committee has no Muslim member, the committee must have physical interaction with Muslim NGOs or institutions to ensure inclusion of the Muslims in that study, recommendations and schemes framed after that.
4. Minority related schemes should ensure participation of Muslim NGOs so that Muslim social resources could grow in civil society manner otherwise the process of isolation may threat wastage of Muslim social resources or it may go against national interest.
5. RBI must consider ways and means to include Muslims as working staff and find means to attract Muslims involvement in monetary and financial service businesses. It may need to incorporate products suitable to shariah compliant.
6. There should be at least 12% working staff in special financial institutions like NMDFC, SIDBI and NABARD. Moreover such institutions should introduce interest free credit schemes for Muslims because interest is most important hurdle in financial inclusion of Indian Muslims.
7. Interest Free credit schemes is not only required by Indian Muslims but also by our vulnerable section associated to agriculture, rural, small and micro industries where due to financial sickness entrepreneurs are unable to take financial risk, thus need risk free credit scheme. It is possible that credit on profit loss sharing basis may be provided to these groups through inducing shariah bound investors to interact with these groups.
8. To allow inflow of capital on profit loss sharing basis for our vulnerable enterprises associated with unorganized sector, it is necessary that such investments should be exempted from all taxes and free from undue formalities.
9. If we succeed to mobilize capital on profit loss sharing basis (for unorganized sector) from Islamic countries, it may along with capital investment, generate resources for allied industries and also boost export potentials.
10. The introduction of Islamic Banking for unorganized sector may help our economy in dual manner. At one end it will boost capital investment in unorganized sector without cutting resources of organized sector; on the other end it will generate new sources of employment and income opportunities to shift load of labour from organized sector to unorganized sector.
Our policy makers and administrative forces need to study the prospects and feasibility of interest free banking and finance for unorganized sector to avoid possible need to loan waiving schemes in future. It depends on our own wisdom whether we take challenges as opportunities or threats. The issue of Interest free or Islamic Banking must be addressed before we frame our financial sector reform and it must be tackled with thorough and sincere study by our financial experts.
Hope the leader will use their wisdom to study and analyze the issue of Indian Muslim financial resources and adopt suitable policies. This sincere attention and due efforts in this regard will surely ameliorate India develop a true civil society and achieve the much desired real inclusive growth.
Syed Zahid Ahmad
Mobile - (091) 9869814113
E Mail - aicmeu@yahoo.com
By Syed Zahid Ahmad on Aug 18, 2008 | Reply
Comments on CFSR Draft Report
With due regard to all CFSR members, I would like to say that the draft report is very comprehensive and it was not so easy to comment over it. The committee has indeed made sincere and focussed attempt to do justice with the assignment given by the planning commission. In the light of the available sources of information, it really made some very genuine proposals. I hope the committee will certainly revisit the pointed areas and find it worth while writing the final report.
A. Micro Economic Framework
1. Money itself is a medium of exchange, facilitating economic transactions and denotes a price value of real output. Money itself is not a product. Whereas banking and financial services are real services promoting economic transactions and should have prices. There are two ways to recover the cost of financial services; either by fixing a rate of interest as price of finance; or by receiving proportionate share in outcome of financial services (i.e. profit). Interest payable on debt finance is a part of capital cost and increases cost of outputs, resulting increase in prices (inflation). Whereas equity finance is not considered as cost factor, and the aim is to share the profit, without increasing the price level, rather promoting profit sharing and bridging economic disparities. Using ‘interest’ as a tool to control inflation works to control liquidity and financial transactions, but does not provide anti inflationary monetary base, whereas equity based deposits and finances restrict inflation and promote equitable distribution of income and wealth, thus providing stability and inclusive growth. So, to control inflation and to stabilize financial market we need to promote equity based financial transactions.
2. It is required that the proposed Financial Development Council (FDC) and Financial Sector Oversight Agency (FSOA) should have close coordination with the Planning Commission so that it should work according to long term plan and not undertake any politically motivated agenda on priority or approve anything harmful for financial health of the nation.
3. Considering current recession in USA market, and China’s own requirement of capital inflow, we have to look for Capital Market from Oil Producing Countries for long term sustainable capital inflow for India. But to enable FDI from Oil Producing countries, we may have to open doors for Islamic Banking and Finance in India. Strategic promotion of Islamic Banking by Indian Regulators may open options to have our investments in petroleum resources; reciprocally FDI in our agricultural and unorganized sector.
B. Developing Banking and Finance for the unorganized Sector
4. We need to consider the nature of financial holdings required for our unorganized sector where the majority are poor and do not have the capacity to undertake financial risks nor have collaterals to provide. Debt finance through Banks and formal financial institutions do not suit the poor and vulnerable in unorganized sector; thus they should have access to equity finance instead of debt finance so that financial risks do not result in extra pressure on them.
5. The Business Correspondent model should be enhanced to enable BCs to provide information about equity deposits and finance, along with consultancy to develop small businesses. Business Correspondents without consultancy services may just offer debt finance and increase indebtedness of the poor in the unorganized sector, whereas if consultancy services are provided along with equity finance, it may help the poor and vulnerable to proficiently use the finance.
6. We need to develop ‘Market for Unorganized Sector Small Equity Finance and Investments (MUSSEFI)’ where small banks and financial institutions could deal with small mutual funds or venture capital funds focussed on the unorganised sector. This would help equity market to grow out of the present situation in which over 90% Indians do not have any share in equity market. MUSSEFI would work as an OTC market for equity and debt instruments. There would have to be some market makers which could be found from a number of Islamic Financial Institutions dealing in equity financing.
7. There should be a specified category of deposits which can be used for equity finance. Such practices will help us grow investment in the unorganised sector. Such deposits could also be counted towards the equity of Cooperative Credit Societies, relieving them of capital constraints while ensuring they remain capital adequate.
8. In the unorganized sector only 12% retailers have access to formal credit system. Similarly 73% of farmer households have no access to formal credit system. More acutely 40% workers of unorganized sector have no entrepreneurial assets to provide collaterals for credits. We need to ensure that these enterprises should get cheaper and easy credits from formal sources; utilize those credits to compete with organized sector and be part of inclusive growth.
9. If Government diverts the allotted subsidies for the welfare of farmers, MSME and BPL towards equity finance or risk funds for the unorganized sector, it would help in reducing the deficit of the Government while also benefiting the poor and vulnerable sections through equity finance for the development of enterprises.
10. There should be a Public Corporation to promote industrial and retail infrastructure for the unorganized sector workers so that they could compete with the organized sector manufacturers and retailers. Industrial estates and retail markets could be developed and provided on lease finance to the unorganized sector workers; it would help them get organized.
C. Ensuring Financial Inclusion for Inclusive Growth
11. To ensure financial inclusion, strongly recommend the following proposal of Dr. C. Rangarajan Committee on Financial Inclusion -
“A National Mission on Financial Inclusion (NaMFI) comprising representatives from all stakeholders may be constituted to aim at achieving universal financial inclusion within a specific time frame. The Mission should be responsible for suggesting the overall policy changes required for achieving the desired level of financial inclusion, and for supporting a range of stakeholders – in the domain of public, private and NGO sectors - in undertaking promotional initiatives.”
12. The Justice Sachar Committee Report hints that there is annual loss over Rs. 22,000 crores to Indian Muslims due to the gap between the credit deposit ratios by them. Around 29% of the savings of Muslims are diverted as credit to others. The credit share to Muslims through SIDBI is reported to have just 0.48%. There should be a regulation to ensure fair and justified credit disbursement by Banks and financial institutions.
13. We should arrange a national level study to identify factors responsible for financial exclusion because till date we have no comprehensive study on financial exclusion so that the real barriers for financial inclusion could be broken down.
D. Islamic Banking - An alternative financial system
14. We have to recognize the fact that ‘Interest’ which is an important ingredient of our financial system, has been strictly prohibited in Islam. This is having a dampening effect on Indian Muslims’ participation in the financial system, which is evident from the Sachar Committee Report. Like ‘Financial Services Authority’ of U.K. regulating Islamic Bank of Britain, Indian regulators should also authorize the establishment and regulation for Islamic Banking and Finance in India
15. To promote public-private-partnership (PPP), we should have a national authority to design equity products and market it in national and international market. If it makes Shariah compliant equities, it could comfortably be marketed in Islamic nations. To make it feasible we need to develop a National Board for Islamic Finance, which should comprise of Government officials, financial consultants, bankers and also Islamic economists so that Shariah compliant certificate could be issued by the board at the national level and products could be sold in the national and international markets.
16. There is a sense of deprivation among Indian Muslims that many national and international banks have windows of Islamic banking abroad, but Indian Muslims are still deprived to take advantage of Islamic Banking in India. Since, we need to open Islamic Banking in oil producing Islamic nations, it would be better to first allow Islamic banking in India and open its foreign branches in abroad. Islamic Banking should not be seen as a concession to the Muslim community, instead it should be seen as a progressive step in the financial sector, which will have a vast impact on resource mobilization and financial inclusion.
E. Improvising the Information System for Financial Sector
17. National level unique ID number must be issued to every citizen irrespective of number and nature of accounts in different banks or institutions. All transactions should be traceable through that unique ID number and no significant cash and capital account transaction should be permitted without that unique ID number. That ID should be denoted at national level and not on sector or segment level so that it could be recorded that a particular ID number is involved in how many sectors, segments, enterprises or unit based transactions.
18. We should take land reform as the next most important item on the agenda because without computerization of land records, we cannot assure success of financial sector reforms. It is important to computerize all capital assets including land with specific unique asset ID number. Only then we should go to make efforts for financial sector reform otherwise chaos will always be there and vulnerable group will be excluded in the absence of relevant data and verification system.
19. We need to develop capital accounting system for individuals and firms in banks to record capital assets (lands, equity, tools, vehicles, machineries, equipments, security & certificates etc.) This would help us evaluate assets of all individuals, firms and thereafter at the national level. If managed properly, such capital accounts may also work as collaterals against equity finance. The provision to maintain cash and capital account system in banks for individuals and firms will help banks maintain required liquidity and utilize maximum financial resources through lending and equity finance.
F. Increasing Circumference of Public financial resources-
20. There should be incentive provision for regular and honest tax payers. The tax payment history of individuals and firms should be available for access by creditors and it should be considered for providing equity finance to individuals and firms. Persons and companies paying regular taxes should have advantage in availing equity finance for their honestly and regular payment of taxes. Whereas the tax savers and cheaters should have disadvantages in equity finance. This would popularize tax payment and increase Government revenues.
21. The tax revenue department should assist National Mission for Financial Inclusion by providing trading and stock keeping software free of charges to unorganized sector enterprises and allowing banks to maintain it with help of Business Consultancies, so that all transactions in unorganized sector could be well recorded and monitored by special Banks for the unorganized sector. It would help collecting taxes from unorganized sector as well. If tax revenue department successfully help National Mission for Financial Inclusion to attain 100% financial inclusion in unorganized sector, it may result additional 10% GDP growth through tax collection from unorganized sector itself.
22. The Department of Economic Affairs need to frame programmes for economic development of the unorganized sector enterprises. Software related to Sales Taxes and Excise duties may be provide through Business Correspondents, to maintain accounts of the unorganized sector enterprises. This would help the unorganized sector enterprises maintain their accounts; in turn tax revenues may increase and against tax payments, enterprises should have advantages to get tax credits.
G. Liberalizing Regulatory Norms for Financial Sector Growth
23. There should be greater liberalization related to bank licensing, branches, deposits and credit so that the financial sector could grow with comfort and facilitate economic transactions.
24. Priority Sector Lending was introduced at a time when we had limited resources and we needed to ensure that scarcity of resources did not affect the priority sectors. After liberalization, we no longer have such scarcity of financial resources. There is no longer any need for stimulating financial flows into priority areas. Thus we do not find any reason to continue PSA system or to advance it with PSLC scheme because it has no economic rationality in liberalized economy; rather it often creates NPAs. Farmers’ loan waiving over Rs. 71,000 crore is in fact a side effect of PSA scheme.
25. All Banks and NBFCs or other financial institutions should have equal rights and the regulations should ensure level playing grounds. Government should not have any share in Banks because it does not positively affect the efficiency or growth of Banks. All banks should have freedom to choose their own board members or to extend branches or network with other financial institutions without any regulatory restrictions. RBI should allow banks to work according to market forces and decide their rate of interest or percentage share in equity capital. The economic rationality and liquidity should be allowed to govern the financial market.
26. It is not evident that SLR really helps achieving stability or growth of financial sector; on the contrary, it is evident that it enables deficit finance by government and causes inflation. Thus the condition of SLR should be omitted because it may restrict growth of banks in the unorganized sector. The condition of minimum capital should be liberalized for new banks for the unorganized sector otherwise it may restrict smaller but innovative entries into financial market. Like small community banks in USA, we may need to promote Community Based Multidimensional Local Area Small Banks and Financial Institutions for our unorganized sector to make financial inclusion a success with cost efficiency.
27. The ‘Hawala Agencies’ and ‘Angaria’ are in fact catering to real financial needs and so it is better that the regulations for registration, licensing, networking and transaction should be liberalized with minimum tax slab so as to induce illegal financial players to undertake only legal financial transactions. It would reduce money laundering business and increase tax revenue of the Government.
I wish the final report of CFSR would contain proposals to develop banking and finance services among poor and vulnerable associated to unorganized sector and also open door for Islamic Banking and Finance. Wish CFSR would review the economic conditions of the unorganized sector and propose equity finance along with Micro Finance for Inclusive growth. Wishing that the proposals would be taken up for be implemented at it earliest and enable Indian financial sector grow at a much higher rate.
Syed Zahid Ahmed
By Syed Zahid Ahmad on Aug 18, 2008 | Reply
RBI is inflating the Indian Economy
The recession in US and prevailed uncertainty in petroleum nations had provided an opportunity for India to pull capital resources from US and Gulf countries, but the practical approach of RBI has converted the opportunities into challenges as the liquidity and inflation is certainly not under control of the RBI who is attempting to freeze the liquidity by increasing the interest rate and cost of credits. FICCI and the corporate sector have already criticized RBI recent announcement to increase the rate of interest.
With trend of increased capital inflow to India, the aggregate deposits by Scheduled Commercial Banks (SCBs) has increased from 80.7% in 2005-06 (Rs. 21,09,049 crores) to 102% (Rs. 31,96,939 crores) of GDP at factor cost by 2007-08. With increased deposits, the bank credits has also increased from Rs. 15,07,077 crores in 2005-06 to Rs. 23,61,914 crores by 2007-08 reflecting 75.6% of GDP at factor cost in 2007-08 as credit against 57.7% in 2005-06. This indeed is a situation; where our economists and financial sector regulators need to review the policy and practices adopted by RBI as we hardly evaluate the multi level impact of interest in our economic process.
The theory of J. M. Keynes is failed to guide us optimizing the growth opportunities with abundance of FDI. The practical approach of RBI to curb the rate of inflation by increasing the rate of Repo Rate and CRR for last 24 months (since July 2006) is not controlling inflation instead leading towards stagflation as the prices are continue to increase, but the expenditure, investment and net GDP growth rate is falling.
By increasing the Repo rate and CRR, liquidity might be freeze for shorter period, but it will increase cost of credit and output which inflates the GDP value. Since July 2006 RBI is increasing the Repo Rate and CRR, but inflation is also increasing. Interestingly the interest income to SCBs was Rs. 1,85,384.9 crores in 2005-06 which increased to Rs. 2,37,271.14 crores by 2006-07. It means by 2006-07 total interest income to SCBs was 7.1% of GDP at factor cost. It simply means that the interest income to SCBs has inflated the value of GDP at factor cost by 7.1%.
With increase in rate of interest, the aggregate deposits might increase and SCBs may need to pays more interest over increased deposits. Total Interest expended by SCBs over deposits was Rs. 89,742 crores in 2005-06 which increased to Rs. 1,20,261.08 crores by 2006-07 showing a net annual increase of 34%. This growth is inflationary as it increases the buying capacity of the depositors. By 2006-07, the interest expended over deposits was around 4.20% of GDP at factor cost.
If we add the interest income of SCBs to interest expended over deposits, it stands for around 12.5% of GDP at factor cost and 8.6% of GDP at market prices in 2006-07. Considering the impact of interest on inflation, we may need to add interest income of SCBs through investments / commercial credits with interest expended by SCBs over deposits. This amounts to approximately 9% of GDP at factor cost and 5% of GDP at market prices in the year 2006-07 while annual rate of inflation was 6.7%. It reflects that basically inflation is a result of interest charged on credits expanded by SCBs and interest expended over deposits. The interest charged by SCBs increases the cost of GDP and the price levels, while the interest paid by SCBs over deposits increases the purchasing power of the depositors. Both ways the interest is increasing the price level and causing inflation. Since RBI regulates the banking business in India, by increasing rate of interest it is increasing the inflation and decreasing the real term growth rates.
Further to note that RBI is increasing the rate of interest for over one year to control the inflation which ultimately increasing the cost of GDP showing higher GDP value and increasing inflation instead of controlling it. Our total final consumption expenditure as % of GDP at market prices is already declining from 67.8% in 2005-06 to 65.5% by 2007-08. This decline along with inflation cannot be controlled by increase in interest rate. This economic tendency may leads to stagflation which is more dangerous for economic stability and growth. RBI should review its policies and practices to monitor liquidity, credit and inflation, if we have to combat inflation and attain desirable growth rate.
Often it is argued that inflation devaluates the money and interest over deposits compensates it’s money value, but this argument is missing to note the cruel problem of inflation which arises due to interest and could worse of with more interest over deposits. Islamic economic ethics suggests mechanisms for stable and anti inflationary monetary system which should be adopted by RBI to make our monetary system more stable and anti inflationary. Hope the RBI will consider these ethics as measure to combat inflation and stagflation. Islamic Banking principles and practices will not only increase the equity deposits and finances but also promote capitalization and investments. It will help increase employment and business opportunities which are must for inclusive and foster growth of India at a time when world is eying upon Indian economy for making more investments. Otherwise consistent approach of RBI to control inflation through interest rate may let the UPA government face cruel failures in capitalizing the investment and growth opportunities with worst off inflation and stagflation.
By Syed Zahid Ahmad on Aug 18, 2008 | Reply
Indian Economy and Financial Sector Regulators
Syed Zahid Ahmad
What we expect from financial professionals who just care about financial performances and do not care much about socio economic impacts of any policy? Indian economy is blooming financially but loosing economic growth prospects due to tight credit policy, inflation and fiscal uncertainties.
Top from our Prime Minister to RBI Governor all who are involved in managing the economic crisis are financial experts. They have been taught to control liquidity through interest. While during time of Keynes, the foreign capital inflow was not matter of concern. Indian money market liquidity problem has been due to unplanned policies for foreign funds and by increasing rate of interest RBI is in fact inflating the economy further more.
Since July 2006 we have been seeing that with every increase in CRR and Repo rate, the rate of inflation has increased. Does 24 months period is not enough for RBI to experiment the monetary suppressing? It is affecting the output negatively and with every increase in credit cost, the output prices are bound to increase. But this could have better understood by any economist, not by persons of finance background who have not learnt anything except interest tool handling.
Time has gone worldwide to control the economy through interest rate. Now investors think beyond interest rate and seek higher profitability. RBI should develop policies in coordination with SEBI so that stock market could become active source for capital formation. Investment in equities will not only help economy grow, but control inflation as well. Liquidity should not be dealt by RBI alone because it could be well transformed into capital if SEBI plays active role. It is only possible through better homework by our economists, financial regulators and politicians as well. Otherwise, columnists will keep on writing, politicians will keep on speaking and economy will keep on loosing.