Higher education prepares students to face challenges of life and management education readies students to handle situations in the corporate world. Some corporate challenges arise from rivals, some from customers, employees, financiers, etc, while some also arise from government agencies or regulators, unintentionally though. This article examines how some such man-made risks can be mitigated and how growth can be revived.
In a country where inflation is mostly a non-monetary phenomenon, monetary tightening to fight inflation has proved counter-productive by bringing down growth and jobs without reducing inflation. High interest rates threw a wet blanket on investments and business sentiment remained low through the period of policy paralysis. Business schools must prepare future managers to face such adversities while continuing to expand business.
In India, agricultural supply shocks lead to spikes in food prices, often leading to general inflation. Current inflation started similarly and spread to manufacturing, aggravated by prolonged policy paralysis, high minimum support prices, rising rural incomes, depreciating rupee, hoarding of agri-goods in government go-downs also, and so on. Such supply-side inflation can be combated only by government measures and not monetary tightening. Then why RBI?s monetary reaction to a non-monetary phenomenon?
One, because the US and other developed countries combat inflation mainly by raising rates. But in the US, with near-zero saving rates, excessive money supply has nowhere to go except in consumers? hands, so rising interest rate reduces the credit-based consumption demand moderating inflation. In India, excessive money supply can be routed into productivity enhancement, infrastructure and the like without letting prices rise. Very little of India?s consumption is credit-based. So, rising interest rates have little impact on consumption demand and inflation, but certainly reduce the investment demand and hence production, raising inflation from supply side.
Two, to keep real interest rates positive. But if monetary tightening itself flags off a race between inflation and interest rates, rate hike becomes self-defeating. Three, to crack down hard on the hoarders by making funds costlier and stockpiling difficult for them. Sorry, but hoarders actually hoard more and for longer ensuring adequate price rise to cover the raised nominal interest rates! Another reason given for not lowering policy rates in the previous monetary policy was the likelihood of the US raising rates, which would reduce arbitrage, leading to out-flight of capital. Sorry again, but the US is likely to raise rates only after six months, which is when it will become difficult for RBI to cut rates. All the more reason for cutting rates now!
In fact, SLR reduction in the previous credit policy statement by 50 bps down to 22.5% was surprising in view of the 26% that banks were already parking in government securities for want of borrowers. Liquidity was ample and borrowers rare, so some major banks reduced base rates just ahead of the monetary policy. So, it was unnecessary to release additional R40,000 crore into the system through reduced SLR. It could, in fact, hurt RBI?s inflation target.
In cricket, if a fielder at silly point without helmet tries to catch the ball when the batsman has hit it hard and high, not only the fielder will miss the ball but will hurt himself badly by the swinging bat. He should just leave it and allow some far-off fielder to take the catch. Similarly, if RBI attempts combating inflation without due precaution about falling growth, not only they will miss the inflation target but also hurt their hitherto respected status and put the entire economy into the pains of recession. They should indeed let the government do their bit to combat inflation.
Besides inflation, RBI has other equally important targets such as GDP growth, unemployment reduction, exchange rate and forex reserve management, channelising savings into productive investment, banking and financial supervision, etc. Even if RBI cannot actually bring about major changes in business cycles especially when they arise from repercussion effects of global crises, RBI can do its bit by monitoring other macroeconomic indicators while taking anti-inflationary steps. It must realise when inflation is not in RBI?s control, and retreat to leave it alone. With good monsoon and falling crude prices, inflation has started moderating now, so business must expect policy rates to be reduced sooner than expected and management education must teach students to foresee precisely such events so that they are ready to expand business, for example, as soon as credit becomes cheaper.
There are reports that the finance ministry is creating a high-level committee to decide the monetary policy rather than just one governor. This will depolarise monetary power so important for the nation?s well-being. The new committee must junk single-minded inflation targeting and embrace other RBI objectives. I hope that members of the new committee are raised, educated, worked and hence rooted in India. And management education will do a great service to the nation by preparing students to comprehend this big picture and help firms circumvent regulator-made crises to maintain the industry and thus the economy on a high growth trajectory.
The author is faculty of Economics in Symbiosis Institute of Management Studies, SIU, Pune. shubhada.s@sims.edu
