The Reserve Bank of India has taken the difficult decision to raise the repo rate by 40 basis points. The idea is to ‘pull excess liquidity out of the system’, as inflation has become a problem everywhere. Many attribute this to the Covid time financial relief handed out by governments around the world. However, this is not the only reason – there are also the usual ones that emerge from trying to fix the system through supposedly temporary giveaways that acquire a permanent nature. This is particularly the case in India and, no matter which government, it becomes hard to fix.
It must be acknowledged, at the same time, that the present regime in India has worked out some kind of a pattern to boost the economy by increasing efficiencies and using the right incentives and disincentives. In much of this, after many tries by those in charge of the economy, the RBI, the Finance Ministry, top gun economists and Industry are on the same page. The intentions are there but the implementation is not necessarily up to the mark. This is why, the most sensitive of indicators – the Stock Market – has tanked after the announcement on repo rate rise.
Essentially, by keeping this rate low, the intention was to provide cheaper funds for investment and consumption purposes. The price was paid for this by senior citizens, for instance, whose interest on FDs took a big hit. It was a gamble that paid off only partially, as among other factors, the Covid pandemic delivered a serious blow to economies everywhere. There has been a strong recovery after the lockdowns, but it has come with higher inflation. The war in Ukraine has made things worse with the price of raw materials, commodities and manufacturing components becoming costlier and more difficult to procure. It is not necessary, therefore, that a squeeze on money supply will provide remedies on this front.
In many ways, Indian Industry will have to pull itself up by the bootstraps, essentially by increasing efficiency. Financial dexterity, much better management, enhanced labour productivity, investment in automation, smart sales strategies, etc., will need to be adopted. The target should not be to make the consumer pay for the increased costs, but actually bring down prices, even if marginally, to provide that most essential service – value for money. Governments too must curb the freebie funda – after all, promises of free electricity matter little if there is no electricity available! So, clamping down on money supply is only a small step, not the entire solution – much, much more needs to be done.
