Inflation
An Opportunity and Challenge for
GROWTH OF BANKING AND ECONOMY
The rising level of Inflation happens due to excessive money supply in the economy and interestingly it also leads to the rise in the Interest rate due to rising demands and consequent cost of products and services including interest cost of bank loans and advances. It also helps in growth of deposits as interest on deposits also move up. However it would be necessary that such excessive growth of money supply should not left unbridled as that would lead to hyper inflation and damage the natural growth of economy of the country. To create proper checks and balances an appropriate strategy has to be developed to prevent such overflow that would lead to consumerism.
To channelize this excessive money supply for productive purpose it is imperative to develop strategies that would give boost to untapped rural economy. In India there is considerable scope to induct capital to develop infrastructure both in rural and urban areas particularly in rural areas for giving boost to farming and small businesses and industries instead of wasting such resources for providing doles and waivers of loans to farmers and artisans. It would be helpful to develop innovative investment opportunities to attract rural and urban rich to invest in such instruments and thus augment rural resources to help adopting modern technology increasing productivity and reducing cost of production and distribution. It would be possible to tap considerable resource if banks are allowed to develop deposit schemes and investment projects with tax shelter. In fact in rural areas lot of latent entrepreneurs could be identified if appropriate strategies could be developed by banks. It would be interesting if banks explore the possibilities of developing business models based on public private partnership as villagers are generally fatalist and averse to risk not because of their own fault but successive rulers and even during independence our politicians and bureaucrats have intentionally made them solely dependent on government so that they remain loyal to vote them back to power and provide opportunity to get their considered legitimate cuts form the doles and grants often they release to give relief to farmers and artisans.
It is not surprising to observe in recent past spurt in prices in India. It should not be a cause of alarm. The rise in prices all over the world is more due to global rise in prices in oil and commodities. It is therefore more a Global phenomenon as could be seen in recent months prices are falling with the fall of oil and commodity prices globally. However the recent inflationary trend perhaps could also be due to the fact that India was also passing through the same phase of ‘Irrational Exuberance ‘as was experienced by the US in 1990s. Joseph Stieglitz (Nobel Prize in Economics) has very vividly and rightly brought this out in his book Roaring 90’s.
Regrouping of an Economic Class
In fact, in our societies dynamic changes are occurring both in social and economic activities. People are getting regrouped and reclassified very rapidly due to almost unbelievable changes the education and earning. No longer can our society be classified in three or four groups’. Rich, Middle, Lower Middle and Poor or to add another class created by our politicians to their voting banks are grouping viz., Below Poverty Line (BPL). Due to sudden high rate of growth of economy and intellectual capital in the country both income and consequent demand for luxury goods and foods as well as properties have been rising almost unbridled. This obviously has created spurt in prices for some time. But thanks to the timely fiscal and monetary measures taken by the government and Reserve Bank of India the inflationary pressure has abated.
IRRATIONAL EXUBERANCE
However it is quite natural thatour middle and lower middle class people, who suddenly got wealth and/or very high salary which they perhaps will not have earned even in their lifetime, felt that this is the opportune moment to show them off by acquiring luxury goods and/or properties so that they could be classified as rich. But rich people generally try to remaining a closed society and prevent any new entry. This intensifies competition and results in ‘irrational exuberance.’ It is strange that such an obvious feature is strangely overlooked by our policy-framers and operators.
There is an urgent need to divert this irrational expenditure to some potent infrastructural expenditure and in building up some cushions to help middle class to venture into new and emerging trade and farming besides educating their children to become more and more confident and self-reliant.
Novae Rich
It is unfortunate to observe that despite such an apparent and visible change very little attention is paid to this factor. In fact, if it is overlooked for long; it might bring a social upsurge of such dimension that it would become difficult to maintain desirable equilibrium in our economy despite having well-oiled economic and social institutions to take care of our economy. It is, therefore, urgent to ponder in what way irrational expenditure arising from a sudden spurt in income of quite a large section of our middle class can be put to use so that social and economic institutions remain sustainable.
Inflation and Growth
The current bout of inflation in India needs to be studied somewhat differently. Some out-of-box thinking is necessary which unfortunately is not presently seriously considered both by the government and the monetary authority in India. It is really pathetic to observe that both the central government and the Reserve Bank of India (RBI) have been busy in fire-fighting exercises. The government of India has banned export of wheat and has also reduced duties on some imports like cements and has quickly brought down the prices of petrol and diesel. Similarly, the RBI has taken steps to bring down money supply by increasing repo rates, etc. But how far these measures will help sustainable control on inflation is anybody’s guess. Even if these measures help abating inflation, these would lead the country to recession which obviously equally have adverse impact on the economy as our economic growth would slow down.
New Strategy
It is not the textbook theory to contain inflation and it can be a sustainable solution as it is not the normal economic condition which has caused the present inflation in the economy. An in depth analysis will reveal that at present the Indian economy is growing at a fairly good rate and is certainly capable of satisfying increasing demand due to higher income and larger spread of such income occurring in our growing elitist society. This is more visible in the manufacturing sector and less in the agricultural sector. This has created an opportunity to divert excess flow of money recently earned and continued to be earned by the emerging richer class from the present lower and middle class, to build institutions and foundations to facilitate the augmentation of agricultural production and agro-based industries In recent years, the agricultural growth in India is virtually stagnating due to lack of venture capital and institutional support both for technological up gradation of farming and marketing, including cover for climate and market risk.
Divert Surplus Fund to Boost Rural Economy
There is overwhelming evidence that there is an urgent need to raise agricultural productivity in India. If one peeps into latest National Sample Surveys (NSS) on employment one can easily observe that real wages are rising in India. In such a situation if the policy-level attempts are made to put a lid on prices of products for one reason or the other it will be suicidal for farmers and artisans. Time has come to realize that sops like subsidies and grants to pop up any activity is no longer effective. In fact, it is the building up of ability both in knowledge and funding that helps the growth wagon to sputter and blossom. It is true our GDP growth is largely due to the growth of the service sector. But, of late, our manufacturing sector is also growing at an almost unimaginable rate. This indicates that if adequate institutional support is created in agriculture there could be no reason that it may also show similar growth rate that can absorb and balance supply and demand. Many economists may argue that lower rates of inflation can be created only by reducing money supply. It is also rightly or wrongly held that inflation control measures will compromise growth. Some economists hold that balancing supply and demand with little price impact can happen only in developed countries. However, many changes are happening throughout the world where contrarian events are happening and disproving conventional thoughts and earlier researches. One may look at our neighboring country China where despite very high rate of GDP growth, inflation rate has been contained to 2%. It is evident, therefore, that no single monetary or fiscal or political measure is effective in dealing with inflation and growth in the present day economy. Each country and on each occasion may require some new measure to deal with the situation. It depends on systematic analysis of causal factors and visualizing stimulants rather than inhibiting factors to control and cripple growth. It is true on certain occasions monetary tightening or the so-called fiscal prudence may become necessary to avoid runaway inflation. But it will be certainly wrong to adopt such measures as a long or even medium-term policy on all occasions.
New Approach to Contain Inflation
No doubt there is a maximum sustainable rate of growth of a country at a point of time but this can be changed from time to time by identifying demand gaps and also by developing ability to absorb such gaps through newly-generated resources. In India perhaps the need of the hour is not to allow the new rich to spend money in acquiring luxury goods in abundance in competition with the traditional rich class and, thereby, creating artificial inflation. Instead, efforts should be made both by the government and monetary authorities to develop institutions for microcredit and persuade this new rich to invest its surplus funds as equity or venture capital in these new institutions. There is certainly not even an iota of doubt that there is considerable amount of gap in demand and supply of money in rural India. In the forthcoming budget deposit mobilization is obviously expected to receive a lot of fobs particularly to reinforce infrastructure development fund. Beside tax exemption, the central government may take this opportunity to tap the new rich class that has emerged recently in India due to a sudden spurt in income and salary.
Some economists hold that balancing supply and demand with little price impact can happen only in developed countries.
Inflation could be an Opportunity as well as a Challenge for corporate executives, particularly in the services industries. This class is hungry to gain status and foot hold in the rich society than just exemption of tax from the state… In view of this it may be worthwhile to visualize some innovations to attract the surplus fund from this group of people. One such way can be to allow them to build foundations to fund not only charity but also to have business enterprise in collaboration with farmers and artisans. The funding can be three or four types depending upon the specific needs of enterprise and prospective earnings to be generated from the enterprise. Additionally, the central government may think of honoring contributors of such funds socially by conferring SEVA medal etc. It is obvious that providing tax exemptions on such savings with commercial banks or even with cooperative banks will serve the dual purpose of ‘incentivizing’ the new rich households to save their additional flow of funds instead of exhibiting irrational exuberance and creating more funds for rural rejuvenation and recreation of rural economy. This will also help effectively controlling inflation. The situation is very much opportune as there has been a rise in the overall savings in the economy, with gross domestic savings accounting for 32.4% of the gross domestic product in 2005-06 as compared to 31.1%.
Opportunity and Challenge for Banks
The opportunity as has been detailed above should be seized with both hands by both the commercial banks and the central government. Tax-friendly bonds should be directly available to commercial banks and later on to cooperative banks also if commercial banks attain a desired level of success in creating rural capital and commodity markets. In no way such fund should be routed through NABARD or SIDBI. In fact, in India considerable experimentation has been made to function. Through intermediation and in most cases it has created road blocks through babudom and consequent corruption. All participating commercial banks should constitute a foundation to become a special purpose vehicle to route the fund to create Micro Finance Institutions (MFI) as per the proposed act of the central government. The funding can be for equity, bonds and venture capital and accordingly be paid to the contributor. Such funding will help building infrastructure in rural areas and help farmers and artisans to avail funds at reasonable cost. This will also keep inflation at low-level as no artificial demand for consumer goods will arise. Commercial banks, however, will have to build up training and research facilities to evolve suitable cadre and model for augmenting and rejuvenating financial institutions in rural areas. Further, these banks have to develop kiosks in selected centers to make available technical and market information to farmers and artisans. Along with this, banks also have to finance dealers in seeds and farm equipments. In other words, banks should build up healthy economic institutions to help farmers and artisans grow without any roadblock. The model suggested is not new but the approach and funding concept are new and appear to be practicable. Only thing that needs to be taken care of is adequate preparatory work both at the policy and field level as it happens whenever any change is thought of and put into practice. Though one may be cautious in bringing about innovation in policy and practice, no one will hesitate to experience the pleasure of success that may arise from such changes.....