There is an all out war between the rulers and the
regulator on failed monetary policy. In Japan, they say “don’t blame the people but blame
the process”.
Going by that, lets us not look at who is right whether “Swamy
or Rajan”. Let’s try and understand the root of the problem.
Though India is a high growth economy on Statistics, we
have hardly made any progress on achieving inclusive growth in the last 10
years despite attracting billions and billions of global money from different routes.
Inclusive growth and Manufacturing revival has been only a political statement
for successive Governments.
Monetary Policy targeting Inflation (WPI or CPI) and
Fiscal Policy targeting more on austerity less on Capital Formation has been
the crux of the problem. Many times we have found rulers and regulators blaming
each other on their approach towards these two issues. It is also interesting
that Inflation measured by GDP deflator does not look so alarming in the last
few years.
Globalization and subsequent crisis has led to policy
makers across developed world introducing Stimulus programs to revive demand in
their economies, but knowingly or unknowingly started exporting Inflation to
different parts of the world.
Global demand was met by domestic supplies as countries
were tempted to become big exporters, resulting in burden of supply shortages
to fall on domestic population.
India got into this trap of exporting food products and
industrial materials thereby increasing the export quotient and leaving
domestic economy on high inflation. We simultaneously were struck on weak
fiscal policies, with rulers not really able to bring necessary reforms needed
for supply side expansion.
Today we are in Stagflation and the developed world is
struck in deflation.
The Global money flow has been directed towards Technology
and Consumption based business and conventional manufacturing sector hardly
attracts capital needed for growth and expansion, since they don’t attract high
valuations.
This is a risky scenario. Manufacturing has not
embraced technology and automation fully across the globe and hence has been
the major source of employment generation.
With lack of capital flow to this
sector, developing economies like India will suffer in the long run with
inadequate wealth creation.
Countries like India having dependence on Manufacturing
as the core sector for growth and employment generation may have to relook at
Inflation as the influencing factor for policy actions.
Policy should be guided by the risk on output and
employment generation rather than WPI or CPI index.
Policy Regulators, instead of putting their conditions
with rulers on inflation management, should link monetary measures with that of
government’s commitments and performance on capital formation for output growth
and Employment generation.
Above data’s, if it were of any reference for policy
decisions, speaks in volume the dire state of the economic condition while the
regulator and rulers are busy looking at Inflation and GDP data to prove their
own points.
Manufacturing in India needs a major boost and lower
interest rate is the minimum requirement on the agenda for revival.
We have
conflicting risk which is building in the near future. Technology is expected
to slowly take over manufacturing through automation, artificial intelligence,
robotics etc., which can become a threat to human jobs.
This can become a big challenge to the young
demographic advantage, we are so proud of.
Expanding the contribution of Manufacturing to GDP over
25% from the levels of 13% within next few years should be the focus point.
Capital formation and lower interest rates are critical for this and both the
monetary and fiscal authorities should have this as the objective to drive
India to sustained and inclusive growth.
Inflation is a lesser evil and it can be tolerated with
higher growth
Standalone GDP of 7.5% does not give the cherish we
want. The real day of happiness will be when growth happens across the value
chain.
Forget
who is right... let’s focus on what is right
T Margabandhu
