Suffer inflation till September says Montek
While inflation would fall to acceptable levels by September and manufacturing grow at double digit rate since in 2nd year of 11th five year plan, infrastructure sector would receive Rs.4,20,000 crore of investment as a result of which infrastructure GDP spending ratio would go up to 9% in 11th plan from 5% in 10th plan, says Deputy Chairman, Planning Commission, Dr. Montek Singh Ahluwalia.
Delivering a keynote address at ASSOCHAM organized Interactive Session with India Inc and its Vision 2020’, Dr. Ahluwalia also announced that the slowdown being witnessed by Indian Inc. would certainly end by end of current calendar year as economic uncertainties of 2008 would have resolve themselves by then.
The Deputy Chairman, Planning Commission said that inflation was a serious concern and the short-term measures taken by the UPA government to tame it would start yielding results in next 4 months. “I agree with the Prime Minister that the inflation would take a few more months before its settle down at acceptable levels”, said Dr. Ahluwalia. Infrastructure sector in the 2nd year of 11th five year plan period (2008-09) would receive Rs.4,20,000 crore of investment to ensure that manufacturing sector grows at double digit rate as in the first year of 11th five year plan, i.e. 2007-08, this sector received a substantial investment, said Dr. Ahluwalia.
Referring to the GDP growth, Dr. Ahluwalia said that the GDP for fiscal 2007-08 would be higher than the officially projected levels of 8% plus as agricultural production which increased in the recent months has not been taken into account in the revised GDP projections. “In next few weeks, the latest recorded grain production of wheat when taken into official account, the GDP growth projections would exceed more than 8.5%”, said the Dy. Chairman, Planning Commission.
He exuded confidence that food grains production during the 11th five year plan period would accelerate by 2.5% each year with the available technologies at disposal of farmers and result into higher soil and land fertility and therefore, food grains stock would not suffer.
This would be reflected in the overall GDP growth which in view of the Planning Commission would remain around 9% if not above, said Dr. Ahluwalia. According to him, if India is able to grow at an average GDP rate of 7% for next 20 years consecutively, its economy would be described as developed world and India would fall into the bracket of few such economies which should not be a difficult and ambitious target.
Dr. Ahluwalia said that more than adequate emphasis was being placed on agriculture so that it grows at 4% in the 11th five year plan period. With agriculture growing at 4%, the manufacturing sector would conveniently record double digit growth as contribution of agriculture would be reflected into it, particularly when lot of emphasis is being placed on infrastructure development.
He also said that beyond 11th five year plan period, the government would evolve new mechanism so that health, education, energy and water sectors receive lot of attention. The growth of education sector would be taken into 21% so that employment is generated in a fashion to remove poverty.
On health, energy and water sectors, Dr. Ahluwalia said their growth cannot be left in the hands of market forces as these 3 sectors would require strategic government intervention. Dr. Ahluwalia also said that water has become a real issue as people have started realizing that if adequate treatment is not given to water crisis, India would have to live under the water stressed economy which should be avoided by all means.
3 Responses to “Suffer inflation till September says Montek”
By Syed Zahid Ahamd on Aug 5, 2008 | Reply
RBI is inflating the Indian economy
Syed Zahid Ahmad
The present trend of 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. Interest is a factor for liquidity and credit, but all cares should be taken up while we handle this instrument because if liquidity and credits influences inflation, are also necessary for growth and development. Increased cost of credits not only increases the cost of output, but also creates shortage of supply. This increases the prices levels further up. However the depositor gets higher rate of interest over their deposits and this inflates their purchasing power, thus boosts inflation. FICCI and the corporate sector have already disagreed with RBI recent announcement to increase the rate of interest.
With recent trend of increased capital inflow into 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, financial sector regulators and bankers need to review the policy and practices adopted by RBI as we take interest as a major tool to control liquidity but we hardly evaluate the far reaching consequences of interest in our economic process.
Our net real term GDP growth rate (= GDP growth rate at factor cost – rate of inflation) has considerably declined from 5.2% in 2005-06 to 2.9% by 2006-07 and fell down to1.6% by 2007-08. As the interest increases the cost of credit and output, even the GDP value is inflated through interest. Thus the higher GDP growth rate like 9% just reflects 1.6% real term GDP growth rate if inflation rate is 7.4%. The liquidity theory of J. M. Keynes is failed here to guide RBI optimize these opportunities. The practical approach of RBI to curb the rate of inflation by increasing the rate of interest may not control inflation and might lead towards stagflation as the prices are continue to increase along with purchasing power of the depositors, but the expenditure, investment and net GDP growth rate is falling due to costlier credit and interest based deposit schemes.
By increasing the rate of interest, liquidity might be controlled for shorter period, but with increased cost of credit, the GDP value will increase that leads to inflation. 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.
Wish all the best for Indian economy, the general Indians, RBI and the UPA government.
By Syed Zahid Ahamd on Aug 12, 2008 | Reply
Please be noted that the follwoing contents have been deleted from the original article, so readers be kindly eliminate this section from the above article.
“Our net real term GDP growth rate (= GDP growth rate at factor cost – rate of inflation) has considerably declined from 5.2% in 2005-06 to 2.9% by 2006-07 and fell down to1.6% by 2007-08. As the interest increases the cost of credit and output, even the GDP value is inflated through interest. Thus the higher GDP growth rate like 9% just reflects 1.6% real term GDP growth rate if inflation rate is 7.4%. The liquidity theory of J. M. Keynes is failed here to guide RBI optimize these opportunities.”
By Gaur on Aug 13, 2008 | Reply
Monetary and fiscal policy are normally ajusted to contain inflation. The problem is that while Monetary policy is being very active, we have Chidambram in deep slumber. Even if god hands over the policy and Chidambram is going to implement it, you can expect the same problems.
God save India from Chidambram and Congress.