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The government, RBI and inflation

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  26 July 2015 12:00 AM GMT

WITH EYES WIDE OPEN
D. N. Bezboruah

It may be a good idea for me to plead guilty in advance that I am about to oversimplify the equation that exists between the government's control of the Reserve Bank of India (RBI) and the RBI's ability to put its foot down and exercise the desired degree of control over inflation. Over the years, the RBI has maged to exercise a modicum of control over prices by controlling the interest rates of banks. So far, the Governor of the Reserve Bank of India has had some power to keep prices in check. He also had veto powers to stall fincial policy decisions of the government that could be detrimental to the economy or trigger off inflatiory trends. That veto power as well as the intrinsic strength of the RBI Governor to stick to vital fincial policy decisions has been taken away by the government. The government has proposed to set up a seven-member committee to frame monetary policy, overturning the current system that makes the RBI Governor the sole arbiter. The RBI Governor will be the chairperson of the monetary policy committee, which must meet at least once every two months. It will have two other RBI officials, an executive member of the RBI Board to be nomited by the Board and an employee of the RBI to be nomited by the RBI Governor. The four others will be nomited by the Centre. Even the repo (the rate at which banks borrow short-term funds from the RBI) will be decided through a majority vote. Earlier, the RBI Governor used to do this on his own. The government has also decided to curtail the powers of the RBI Governor in other ways. The Shrikrish committee had suggested that in “exceptiol and unusual circumstances,” the RBI Governor would have the right to supersede any decision taken by the monetary policy committee if he disagreed with the other members. The new code confers no such powers on the RBI Governor. The new draft fincial code says: “The decisions of the monetary policy committee will be binding on the Reserve Bank.” And this is what the revised draft of the Indian Fincial Code released on Thursday has to say about the task of controlling prices: “The objective of monetary policy is to achieve price stability while striking a balance with the objective of the Central government to achieve growth.” This is the first time that the word growth has been pushed into the monetary policy objective even if in a somewhat oblique way. But the very fact that this has happened is a clear indication that the RBI will be pressurized to adopt measures that will help the government to achieve its responsibility of cranking up economic growth even at the cost of creating unbearable inflatiory pressures for the common man. The Fince Ministry has invited comments on the draft till August 8. It can afford to be complacent, because it knows very well that there will be very few comments. We have given ourselves a secular, democratic republic that has very little of participatory democracy. And because successive governments have been very well aware of this, they can afford to take the views of the people for granted when pushing through what is touted as a reform but is far from being one.

Two years ago, the Fincial Sector Legislative Reforms Commission, headed by Justice B. N. Srikrish drew up the origil fincial code. The code did not explicitly refer to growth, even though it did provide a framework for a consultation process between the government and the RBI before the enunciation of a “predomint objective of the Reserve Bank in the discharge of its monetary policy function” (obviously meaning inflation) and “any additiol objectives if relevant”.

Given the present scerio and the changes brought about in the structure and functioning of the monetary policy committee, the leeway that the RBI enjoyed in the matter of being able to control prices within certain limits, no longer exists. This cannot be good news for the common people who have suffered during the last few months due to abnormal increases in the prices of essential commodities. Consumer price inflation went up from 5.01 per cent in May to 5.4 per cent in June. And had the RBI not been able to exert any control over prices, the inflatiory trend would have been much stronger.

Such fears are not imagiry ones. It is no great secret that our political executives are not really concerned about controlling prices of essential commodities (especially food prices) since such initiatives are not as spectacular and eye-catching as the iuguration of a new building or launching of an irrigation project or the opening of a new railway link. No matter how steep rises in food prices affect the common man, serious steps to control prices have never been the concern of our politicians. Such measures are not very visible nor is there any glamour attached to them. But this is not all that there is to it. The far more important factor is that political parties have to sustain huge cadres of party workers, most of whom lack the qualifications for important jobs. Nor can they all be given tickets to contest elections and become lawmakers—if they win. As such, the ruling party must be able to provide means of income to their ordiry members. And considering that the food chain in India has a large number of middlemen between the producer and consumer, political parties generally fill these slots with party members. And that is precisely why a vegetable that is sold by the producer at two rupees a kilo gets sold in urban markets for anything between Rs 40 and Rs 50 a kilo. In other words, political parties in India are making the public pay for the livelihoods of ordiry members of political parties who are incapable of securing jobs and yet think they have a right to make claims on their political parties for ways of earning a livelihood without any real work. And that is why politicians in India are not seriously concerned about abnormal inflatiory trends related to essential commodities. If anything, they realize that food prices have to be kept high if party members are to be provided the means of getting easy money at no cost to the party concerned. They have a neat way of getting the public to pay for the livelihoods of the ordiry members.

If this arrangement is bad enough, things are far worse in a State like Assam. In addition to the long string of middlemen in the food chain, here we have cartels and syndicates for every imagible consumer item that is generally controlled by the elected representatives of the State Assembly as well as lesser politicians. We have a minister for food and civil supplies who has made it quite clear that he has no intentions whatsoever of even trying to control vegetable prices because he knows which side his bread is buttered. He has no intentions of upsetting the apple cart that brings his associates a lucrative income without work.

We can go crazy trying to tackle such issues with conventiol economic cures that will not work because everything that is happening is because all the perverse practices of a corrupt system are in operation. What is happening is possible because a substantial section of consumers are the beneficiaries of this corrupt system and have so supplemented their salaries with sleaze that they can dispense with their pay packets. Consumer resistance measures are unlikely to succeed easily because those with black money will frustrate the initiatives of desperate consumers. The consumers need a strong media support that does not shirk from identifying those behind the syndicates that are playing havoc with food prices. What we have at present is a mention of vegetable prices with no attempt even to tell consumers that if they were to start a strong consumer resistance initiative, the media would be wholeheartedly and constantly with consumers. As for consumers, they need not exactly starve themselves to launch consumer resistance initiatives. All that they need to do is to reduce their vegetable shopping by 50 per cent or even 25 per cent on certain days not notified through the media but circulated through word of mouth. The stench of rotting onions is unbearable and so is the stench of certain other vegetables. If the purchase of vegetables from any given market can be reduced even by 25 per cent on a few chosen days, both the stench and the message will get across to the vendors and through them to the cartels and syndicates in no time. If the media highlights even one consumer resistance programme, it will provide the impetus for many more such programmes. I would not be terribly surprised if things begin to change in a few weeks. The strategy for early 2016 would be to ask election candidates what they propose to do (a) to liquidate the cartels and syndicates; (b) reduce the number of middlemen in the food chain; and (c) to make sustained efforts to control food prices, before promising them votes.

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