RBI — the Lone Ranger syndrome

It appears, in India, central bank independence can only be asserted by vehemently disagreeing with the finance ministry

According to at least five criteria, the management of the Indian economy over the last several years has been awful. The growth rate has collapsed to unimaginably low levels of only 5 per cent. Yes, that is the near-official estimate by the IMF for GDP growth in the calendar year 2012. By the same definition, growth was 10 per cent-plus, and marginally above that of China, in 2010. Second, the fiscal deficit, long after the crisis/ recovery years of 2008-09, is back above 8 per cent of GDP. These levels were last seen in India in the high interest rate regime of the 1990s. Third, the level of inflation, however measured, is uncomfortably high, and higher than what it should be by at least 2 to 3 percentage points. Fourth, real long-term interest rates in India — rates at which medium-sized corporations can borrow, are at 8 per cent-plus, or nominal 16 per cent-plus. Fifth, the value of the rupee is at record low levels, and disturbingly so. After close to a decade of stability around a value of Rs 46 to the dollar, the rupee has hovered at a rate some 20 per cent lower for most of 2012.

We can debate the causes of each of these disturbing facts ad infinitum, as we are more than capable of doing and able to do. But nothing will change the ugly reality. Macro-economic policy has been a complete failure in India. This was, and is, expected. With the dysfunctional politics of the US, and the dysfunctional economics of Europe, it is a wonder that we are growing at all.

But wait. We can't blame the Europeans any more, at least since October 2011. I belong to the camp that the European Central Bank, under the leadership of Mario Draghi, has distinctly changed course, and changed course for the better. And in a week, the dysfunctional politics of the US may appear to have peaked. Whoever wins the presidential election, it is unlikely that the future of politics and cooperation between the two major political parties in the US will be worse than what we have witnessed in the last several years.

... contd.

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