"The mechanic that
would perfect his work must first sharpen his tools."
-
Confucius (Chinese, 551-479BCE)
Word for the day
Risibility (n)
The ability or disposition
tolaugh; humorous awareness of the ridiculous andabsurd.
(Source: Dictionary.com)
Malice towards
none
Some politician says I will
make my God bigger and better than the competition's!
And yet someone else was
talking about India as one Nation!!!
Interest rates: let the market decide
Many disagree with my proposition that a marginal rate cut at this
juncture will mostly be perfunctory and may not have any material impact on the
economic activity. Their argument is mostly based on the premise that rate cut
could only stimulate the economic growth by spurring demand, both consumption
as well as investment.
I obviously do not agree with them. I believe that Indian economy
is already growing at its full potential. To grow at higher rate than the
present it would need to change the orbit. This would require escape velocity
that cannot be generated by lower interest rates or easier liquidity alone. In
fact, this experiment has been tried rather unsuccessfully during 2003-2007
creating a bubble that may take 10yrs to deflate.
Mispricing a critical factor of production (i.e., capital) can
only lead to disastrous results. In past six decades of economic planning
experience we have experimented with mispricing of labor, materials, land, and
capital. The consequences are lower productivity in virtually all economic
spheres; systemic as well as commercial inefficiencies; imbalanced and inequitable
growth; socio-economic inequalities, and wasteful consumption.
In recent time the system has been moving towards more efficient
pricing of natural resources, transportation and cooking fuel, public sector
and rural wages, land etc. Not allowing the price of capital to follow the
trend by artificially suppressing interest rates may not be appropriate.
It is clear from the trend of past one decade and government's
vision that in next couple of decades the growth in India will be highly
capital intensive. Even in the traditional labor dominated fields like
agriculture and retail trade, capital will a larger role. The demand for
capital will obviously be more than the supply; hence the price of capital
should remain elevated.
Global supply of capital could help moving the equilibrium to a
lower point. But for that our politicians and their allies would need to take a
"decision" much faster than their Cuban counterparts.
One reader who is a brilliant student of economics has pointed
correctly that the market participants would need to understand that in Indian
conditions high growth could co-exist with higher interest rates if inflation
remains at moderate levels. Higher price of capital will benefit millions of
savers while shrinking margins of few hundred thousand borrowers. It will go a
long way in promoting efficient utilization of capital, eliminating the
inefficient users and businesses; besides reducing income inequalities.
This is critical, because in the evolving paradigm the level of
employment and wage growth is likely to remain low. The capital intensive
industrial and rural growth will not generate enough employment opportunities
to keep the burgeoning worker population fully employed. The supply of
unskilled and semi skilled labor will always exceed the demand.
The interest income therefore will become a critical component of
most household's income. So far it has been critical mostly for the pensioners
and borrowers. Interest rates will assume a distinct political character; that
is if it does not already.
No comments:
Post a Comment