Tuesday, 28 June 2016

Inflation Control - RBI's primary Responsibility.

Inflation control with in the limit of 3% per annum is the primary responsibility of Reserve Bank of India (RBI) while discharging its responsibility of managing the nation's monetary system.

  • Higher inflation hurts common man & wage earner's living standards very badly.
  • Inflation  effectively transfers wealth from savers to borrowers.
  • Savers lose their hard earned money while borrowers & spenders gain with effective reduction of their liabilities.

Corruption results in unbridled spending by ill-gotten wealth earners evading taxes, boosting prices of essential commodities and breaking rules & procedures with impunity. Uncontrolled corruption results in crony capitalism, nation turning into a banana republic* and consequently a state of anarchy. As long as Corruption remains a low risk and high profit activity it will grow like a demon.

Today in India, every public spending includes elements of corruption of at least 40% and another 20% towards inefficiency & mismanagement and retards nation's growth and development. During last 30+ years, corruption has grown in leaps and bounds and acquired public acceptance. 

While RBI's focus is on inflation control mainly by limiting the cash availability in market, Ministry of Finance (MoF) focuses in making cheap capital easily available for industries & businesses who in turn fill their coffers with taxes and generate jobs and thus works with conflicting goals. Every decision of RBI & MoF has opposing effects, posterity is the best judge and nothing could be done then except issuing soothing press statements. This is reflected by Finance Ministers utterances "I have no magic wand", in the past by P.Chidambaram.

In USA, the Government provides enormous social & financial security for its senior citizens and thus their banking system paying near zero interest on savings & deposits and very low interest on commercial lending can't be emulated in India because here Govt of India provides near zero social & financial security to senior citizens and they are largely dependent on interest income earned on their life time savings. Doing so will result in degrading our culture**.

Ironically, our government talks about limiting the inflation with in 4% because crossing that limit will result in downgrading our economy by international rating agencies will result in capital out flow rather than their national duty. They focus on reducing or withdrawing subsidies being enjoyed by poorer sections rather than controlling expenditure, eliminating corruption & wastage and restricting incentives to capitalists.

*   Banana republic refers to a unstable country whose economy largely depends on exporting a limited resource product.
** Culture of a person / society / government is the way they treat their weaker sections, women, children , old people, handicapped & minorities.

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