Monetary policy play important role to stimulate the economy and is used for higher economic growth and controlling inflation. Dr. Raghu Ram Rajan , the Governor of Reserve Bank of India (RBI) in latest monetary policy reviewed monetary measures on September 30 2015 repo rate (6.75 percent) reverse repo rate ( 5.75 percent), bank rate ( 7.75 per cent) cash reserve ratio at 4.00 per cent SLR ( 21.50 percent) and marginal standing facility ( 7.75 percent). The provisions in the latest monetary policy of the RBI are necessary but not sufficient to create faith in the fundamentals of the Indian economy. The banks have not transferred the benefits to the consumers on the plea that the cost of loans have not reduced. Some of the banks like SBI have ensured reduction in the base rate but interest rates on loans have not been reduced. The reduction in base rate affects all rates including deposits affecting adversely. There are well identified bottlenecks in the implementation. Without bringing agricultural economy back on the rails, the financial year 2015-16 will certainly end with high inflation rate. The RBI estimated growth rate to be 7.6 percent in January 2016. We need to understand limitations in increasing productivity. The moral persuasion of the RBI as big brother needs to be strengthened more than the instruments of the monetary policy. The gap between the WPI based inflation (-4.54,September 2015) and CPI based inflation ( 4.41, September 2015) is to be understood in right perspectives.
A basic test of a good or bad economic policy is to check if it clearly spells out how its different components are expected to achieve the goals and targets of growth and stability. The measures of the RBI are necessary but not sufficient to achieve its own objectives and targets. To make it sufficient, there is strong case for its coordination with fiscal policy and other physical controls in the economy. We have to understand, analyses and interpret the constraints, weaknesses and limitations of the Indian economy and its policies for implementation. There are professional and non professional money lenders in large number, indigenous banks, non banking financial institutions playing important role but not controlled by the RBI.
To remain close to the trend growth rates, we need to create conducive climate of investment which calls for promotion propensity to save. This requires reducing propensity to consume which should be confined to needs. Wantlessness is the kind of non- violence in economics deserves to be adopted in our mentality for sustainable development ensuring inter- generation equity. Our domestic saving rate is still lower to China. The inflation in general and food in particular is significantly high with no impact of the measures taken by the RBI & GOI in recent times.
In my considered opinion, the challenge for the RBI is to unearth hidden bad loans which leads to increase nonperforming assets in a bank. To dig out bad loans as suppressing them benefit none, we need restructuring for infusing capital in the banks increasing credit to the productive sectors which are underutilized with subdued investment.
It is interesting to observe that there is lower off take of loans in spite of the higher number of loanees.
It is sad to observe that in my beloved India car loans are cheaper than education loans. It is pertinent to mention while plundering of the education is carried out by the private sector, the public sector is highly subsidized.
To get rid of some if not many problems of the Indian Economy, we need to understand that Physiocracy is the absence of hypocrisy and deserve the attention of the policy makers. Let us revisit physiocrats for solving the problems of the poor and unemployed. Physiocracy (from the Greek for “Government of Nature”) is an economic theory .
The reduction ( if not removal) of socio-economic tensions and disparities calls for reforms in the national financial architecture and a self reliant model with improved financial literacy among all the stake holders including consumers as householders, producers of all kinds as there is a positive correlation between financial literacy and economic growth of an economy.
To build sustainable financial economy without black and bad money in India, we need close working relationship between RBI, the ministry of finance, the 29 State governments and 7 UTs, international agencies and the academicians.
To promote credit culture, there is a strong case for risk mitigation products like insurance which ensure better bank loan recovery. This calls for no write-offs by the government. There is need devising more financial products like insurance to face the natural calamities which leads poor to fail for repaying loans,
To make financial inclusion sustainable, there is a strong case for a change in public policy perception that loans to the poor have to be at very low rate of interest which is bad economics. It is well known that the poor currently access informal markets at rates ranging from 36 percent (for collateralized loans) to 120 percent for non-collateralized loans..
For making financial inclusion as catalyst of economic growth, we should see its commercial viability also.
To materialize Make in India with Bake in India, there was a strong case for reducing the CRR to 3 percent. However, Indians need to be alert for not relying too much on the monetary policy. The cheap credit to the Industrial sector is alright but they need to be honest for its proper, productive and practical uses leading to utilize hands, heads and hearts of the Indian youth. The increased availability of liquidity is the need of the hour. Let us learn to monitor development efforts along with good governance as SMART & SIMPLE administration at all levels including Monetary Policy Committee (MPC) responsible for future monetary policies in India.* Based on Endowment Lecture delivered recently in honour of Late Prof. Venkatagiri Gowda organized by Indian Institute of World Culture (IIWC), Bangalore and presided over by Justice M. N. Venkatachaliah Former Chief Justice of India by the writer who is Professor of Economics & Former Dean, Faculty of Social Sciences, Kurukshetra University, Kurukshetra
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