Friday, June 24, 2016

777 Outgoing RBI Governor should stay back in India, and study the conditions of Working Class

We absolutely need to get public sector banks back into lending to industry and infrastructure; else credit and growth will suffer as the economy picks up.
I read these obituaries in the paper, I’m still alive. I will be leaving this office in September but I will certainly be coming in and out of the country on numerous occasions. I will be reading and writing and speaking at several occasions



Mr. Raghuram Rajan, the outgoing Governor of the Reserve Bank of India 2016, has humorously observed that he has been reading his obituaries in media, and that he is still alive. He has also highlighted the need for Public Sector Banks getting back into lending to industry and infrastructure. For those who wish to read this news report here is a link: Click to go to Business Standard, if you wish to read it .

This ybrao-a-donkey has designed some questions and answers on this hot topic of Current Affairs, for the benefit of our Readers who may be interested in the economic well-being of India. Here are these:--

Question: Were the Government to give an extension to Mr. Raghuram Rajan, will the situation have changed?



Answer: Nay. Very little is in the hands of Mr. Raghuram Rajan, or any other person who will succeed him as RBI Governor. Indian Economy is a monstracity beyond the control of any Regulator. There is a proverb in Telugu, which is derived from the Indian Epic Mahabharata: "karNuDi cAvuki yEDuguru kArakulu". English: Seven people are responsible for the death of Warrior Karna in the Mahabharata War. This proverb is used, whenever there is a misconception that there is one cause for some result or effect. The proverb highlights that a number of factors will be acting simultaneously in culminating to an outcome. Similarly, there is not one reason for Inflation in India, and the Indian Public Sector Banks being saddled with bad loans. Causes take 1000 pages to explain. Solutions need 1000 pages to present.

Question: Can Mr. Raghuram Rajan control inflation, by keeping the Interest Rates stable?


Answer: Whether stable interest rates help in controlling inflation or not, maintaining stable rates help the prospective borrowers to know, what to expect, and what not to expect, as far as the costs of borrowing are concerned.

Inflation in India is mainly caused by domestic scarcities-- seasonal scarcities, artificial scarcities created by blackmarketeers, logistic scarcities caused by poor transport systems, and restrictions placed by State Governments on free movement of goods across the country.
SEASONAL SCARCITIES


These are not in the hands of RBI. Seasonal scarcities get automatically corrected, unless there are persistent droughts and floods. The Government also meddles with the supplies. Without accurately estimating domestic stocks and needs, it foolishly permits exports, at lower prices. When exports lead to domestic scarcities, the same Government permits imports at higher prices, because whenever India enters markets to buy something, international black-marketeers (Even countries can turn into black marketeers), jack-up the international prices. Thus India loses both in exports and imports.

ARTIFICIAL SCARCITIES

These are not in the hands of RBI. Artificial Scarcities are created by hoarders and blackmarketeers. Even if RBI really wants to control inflation which is created by blackmarketeers, it cannot control all the factors. At the most it can partly control one factor: Curtail loans to sensitive commodities which are subject to black marketing. These were tried by RBI in the past through what are known as "Selective Credit Controls" which have been applied to the sensitive commodities. These Selective Credit Controls, Bankers were expected to implement (RBI only gives directions). Bankers have conflict of interests. As Banks, they always want to maximise their advances levels by leaps and bounds because they have high costs of operations, and they have to do cross subsidisation of priority sector lending. Hence, Banks never really bothered about the Selective Credit Controls stipulated by RBI. In the post-1991-LPG (Liberalisation, Privatisation, Globalisation) Era of Deregulation and Economic Reforms in India, Selective Credit Controls were dumped into dustbin.

Besides, Selective Credit Controls stipulated higher margins for commodities hypothecated as security. E.g.: Suppose for non-sensitive commodities, Banks stipulate a margin of 20%. It means , for every Rs. 100 value goods given as security to Banks, they can lend upto Rs. 80/-. In case of Sensitive Commodities, if RBI stipulates 40% margin, then Banks can only lend Rs. 60/-. Borrowers were interested in hoarding, and waiting till prices rise. Hence, they did not hesitate to hypothecate goods worth Rs. 170 approx. to get a loan of Rs. 100, which is obtained to finance hoarding and blackmarketing. In other words, more goods will have to be hoarded to get a loan of Rs. 100/-. Thus, there was a danger of artificial scarcities going up, when Selective Credit Controls were enforced. Anyway, all that is history, now. Today, RBI does not control credit to sensitive commodities which undergo blackmarketing, hoarding and speculation, by unscrupulous business entities, Corporates and Industrial Houses.

ybrao-a-donkey has, repeatedly stated that we need a 1000 pages to discuss this. Even Retail Malls, Marketing Chains, and Production Houses can create artificial scarcities in the Liberalisation Era. For example, if it will be sufficient for biscuit manufacturers like Britannia and Parle to maintain an average stock of say 200,000 tonnes of wheat and 200,000 tonnes of sugar, they may choose to maintain stocks 400,000 tonnes each. Again, this practice has certain advantages and disadvantages for the Economy. Suppose, Britannia and Parle enter the market to buy wheat and sugar in harvest season, it will boost a sort of price support to the farmers and sugar factories. If biscuit-makers were not there as purchasers, farmers and sugar factories may have to depend only mandi-level traders to get market prices, and the Food Corporation of India to get minimum support price.

Similar situation can prevail in case of cotton and kapas.

PROVISIONAL CONCLUSION



Very little is in the hands of RBI, about controlling inflation. If the RBI Governor believes that he can do a lot or could have done a lot, by resisting the demand from the Finance Minister, Prime Minister, their Economic Advisors, Corporate Pressure Groups etc. etc., then I must say that he is rather unrealistic. I cannot use harsh phrases like "He is living in a fool's paradise". Reason: Living in a fool's paradise, is this donkey's right.

In the same way, if our Rulers believe that there will be tremendous growth, if RBI reduces lending rates substantially, then, we must say that Rulers have been driven into a fool's paradise by the Corporate Pressure Groups like Assocham, CII, FICCI, and the owners of the Industrial Empires. We should not forget one thing. Our rulers whether Congress or BJP or UPA or NDA, or some XYZ Party, they will be constantly indebted to the Industrialists for the funds they collect to maintain their Political Parties, to buy votes, and to remain in the Electoral Battle Field. For this reason only whether Mr. Manmohan Singh and Chidambaram are the Ruling Batch, or the Narendra Modi and Arun Jaitley are the Ruling Batch, they sing the same songs, as directed by the Corporates. Cutting lending rates is one method, through which the Politicians can discharge their indebtedness to the Industrialists.

To continue. सशेष. ఇంకా ఉంది.

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