FOR the umpteenth time, the Reserve Bank has raised its interest rate to almost 8 per cent, hoping that this will slow down inflation, and hopefully give a boost to growth. The bank, of course, does what it is told, and all its attempt so far to curb inflation and boost growth have come to nothing.
Things are pretty tough in India right now. Inflation is now almost close to 10 per cent, while growth is slowing down. In fact, things are equally bad in other countries, with the sole exception of China. In the United States, inflation is under control, but growth is not picking up. And unemployment is virtually frozen at 10 per cent, and it has been at that level for the last two years, despite several attempts by the Federal Reserve, which is equivalent to our Reserve Bank, to reduce it through monetary manipulation.
Actually, what is happening is that the economies are now immune to monetary manipulation, not only in the US but most other countries including India. You may play about with interest rates, but that doesn’t seem to have much effect on the economy. The reasons for stagnation are essentially political, not economic or financial, particularly in India, where politics plays much bigger role than economics.
It all depends on how much faith you have in your government. Do you trust the ministers, including the Prime Minister? To get prices down, you must spend less and save more. But what is the use of restraining spending, if the money you save is not safe in hands of the government, including government-owned banks? Why save at all, if prices double and treble in a couple of years? And since money saved will be stolen by politicians, as has happened recently, what is the point in saving?
The Reserve Bank hopes that higher interest rates will lead to greater savings and less consumption, thus reducing demand. This is supposed to bring down prices and reduce inflation. This is the theory. But these theories do not work when you have no faith in your government. And right now, people’s faith in Dr Manmohan Singh’s government is at its lowest.
There are also other factors at work, including corruption and income inequality. Take corruption first. According to the World Bank, corruption is like a cancer that corrodes growth. In fact, corruption is solely responsible for poor growth in Africa, a continent with tremendous natural resources, but also afflicted with tremendous poverty. In India, things are not so bad, but are getting out of hand.
The fact that several MPs and businessmen are in jail awaiting trial is itself a blot on the government and the way it has been functioning of late.
Take income inequality. According to several recent studies, imbalances in income leads to financial imbalances in the economy, which ultimately affect not only growth but also the economy itself. Everytime, income imbalances have exceeded certain norms, they have upset the economic cart and led to financial disasters. The great depressions before the War as well as one of 1987 when the stock markets crashed and the global economy went into a spin were triggered by large inequalities in incomes which ultimately led to financial disasters and deep worldwide depressions. It is possible that history is about to repeat itself.
Take the situation in India. We have had steady GDP growth for the last twenty-odd years, with growth rates steadily increasing from 5 to nearly 10 per cent a year, year after year, almost without a break. This has led to unheard of personal incomes all round, but also restricted to certain selected organised sectors like government, industries (particularly IT) and, of course, exports. As a result, incomes have soared to height unimaginable only a few years ago.
Incomes in the corporate sector are now in lakhs instead of thousands. Young men just out of college get a salary packet running into 10 to 20 lakh of rupees a year. Their managers earn 50 to 80 lakh a year, with lucrative perks. Top men in large companies take home crores a year and some, as many as Rs 50 crore, excluding bonuses. Who says India is a poor country?
In rich countries like the US, things are even worse. At a time of great financial crisis two years ago, when many banks failed, and the government had to intervene to stabilise the economy, a company like Goldman Sachs, which itself was going through a crisis, paid each one of its 2000 employees 1.7 million dollars as salary and bonus during the year. The partners took home more than 25 million dollars each.
This was at a time when banks were failing, many companies folded, and millions of employees had to be sacked. Very few of them have been able to get jobs since then. While Goldman Sachs and other leading financial companies continue to pay millions to their employees, the number of jobless workers has increased by almost a million since then.
In India, while the corporates continue to make profits by the sackful, farmers continue to commit suicide as they are unable to pay back their loans. And what are these loans? Only a few thousand rupees per farmer, the kind of money corporates spend during a single trip to Delhi and back. Yet neither the Reserve Bank, which means the Government nor the Agriculture Minister, who is supposed to look after the farmers has been able to come up with a solution, partly because they couldn’t care less, but also because there are no solutions for such situations in a capitalistic economy, which is what we are following and which can offer but lip sympathy to the poor and the marginalised.
Things will not improve in India, or in the US and other capitalist countries, unless there is a better balance incomes in the society, for that is what determines demand. The Reserve Bank may fiddle with interest rates but it will have no effect on overall demand unless incomes are more even and disparity is reduced. This does not mean you have to go socialist; it only means you have to spread incomes more evenly, in order to boost demand. A starving farmer makes no demand on the economy. You have to put more income into his hands if you want the economy to flourish, even if you let the millionaire corporates make their piles and purchase more Mercedes and Rolls Royces!