-
Robert Frost (American, 1874-1963)
Word for the day
Technophobia (n)
Abnormal fear of or anxiety
about the effects of advanced technology.
(Source: Dictionary.com)
Malice towards
none
Enforcing the constitutional
pledge of office "Without fear or favor; without affection or ill
will" in letter and spirit will not only get the nation rid of corruption
but will also secure elected legislators against frivolous allegations.
Irony of middle child
Not being an economist, I enjoy the luxury to see the things as
they appear in natural light, without bothering about the General Theory of Employment,
Interest and Money, its myriad variants and even larger number of
criticism.
And as I see the things in natural light, consumer inflation is
primary monetary policy consideration in India, at a time (a) when most of the
developed world is struggling with deflationary pressures; (b) the producer
prices in India are under serious pressure; (c) the credit demand has
completely collapsed; (d) exports are declining; and (e) financial system is
seriously undercapitalized.
I cannot find anything that supports the current lending rates -
not even consumer inflation and stronger INR.
First, inflation. In my view due to the skewed structure of
current inflation its impact is not uniform for different segments of the
society. In particular, the following needs to be considered.
(a) The bottom of the
pyramid (~35% population that is below poverty line) may be more or less
insulated from inflation. This segment mostly consumes cereals, avails
subsidized public transport, education and health, lives in mud houses,
footpath, urban slums, workplace, does not have paid electricity and water
connections, and does not borrow much from organized sector. Lower interest
rate will make their life easier as these increase employment opportunities for
them, and provide greater fiscal leverage to government for increasing social
sector spending.
(b) Mid and small level
famers (~15% of the population) love food inflation as it augments their
income. As they share many traits of the consumption pattern of BPL families,
food and household inflation may not bother them much in routine life. Though
the aspirations are hurt and growth is impacted. Lower interest rates will
serve them materially even if it means higher inflation.
(c) The upper echelons of
the society (~5% of the population) cares least about consumer inflation as
their consumption vs. income ratio is extremely low. On the other hand the
deflationary trend in producers' prices is hurting them badly. Most producers
are struggling with poor pricing power and lack of demand. Lower interest rate
and higher manufactured price inflation will help these producers. Thus
investment and employment will grow.
(d) The upper middle class
(~10% of the population) again is not bothered about food inflation as much as
it is about higher rates. Staples' consumption may not constitute more than 20%
of their household income. Lower rates may however help them grow faster in
their own enterprises, and invest more in real estate, and capital markets.
(e) The non-farming middle
class and lower middle class (~35% of the population) bears the most of the
brunt of consumer inflation. Food, health, education, travel, etc. partake
material part of their household income.
But
the moot point here is "how the higher lending rates are helping this segment?"
....to continue
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