Today, when Chinese inflation has hit 8.5 per cent and the PBOC has raised the CRR to 16.5 per cent, India is still following. Indian policy makers have not woken up to the fact that this is a disaster for India. They completely ignore the fact that public sector enterprises in China can keep investing despite the credit constraints and keep China’s investment rate high, but Indian firms that function in a market economy cannot do so. The higher cost of capital is pinching industry, and can easily push the economy into another 1996-97 kind of recession when the RBI had repeatedly raised the CRR to sterilise its intervention. Policy makers need only to look back at the consequences of monetary policy in India in the 1990s.

Instead, they continue to look towards the Chinese model.

Another important difference between India and China (as well as other East Asian economies who followed the Chinese path) that policy makers seem to forget is the difference in the political regimes. Perhaps in China the government could ignore the impact of its yuan policy on domestic industry and the mass of the population for a long time, even though it could see that its currency policy had costs. The question that the Congress government needs to ask itself is whether it can blindly follow in the footsteps of a single-party state. The Congress cannot but turn to industry for political funding, and towards the people for votes, when it seeks re-election. Having pushed industry into a slowdown and voters into high inflation, it will be interesting to watch how the Chinese model will save the Congress.

... contd.