RBI has done enough..Now govt’s turn to fight inflation

IT is a double whammy for the middle class. On the one hand, home and auto loans have become dearer due to the RBI’s rate hike (the 11th in 15 months), on the other, high prices, including those of food, are stretching household budgets. The plight of the poor is worse. Since they usually do not have access to bank loans, they borrow from private lenders at hefty interest rates. Unlike the salaried class, their incomes are not inflation-linked. The brunt of costlier corporate loans is also borne by ordinary people. While big companies can weather a financial storm, it is the small and medium firms employing large numbers of people that often buckle under pressure. As their projects are abandoned or delayed for want of affordable capital, growth takes a hit and employment opportunities shrink.

Though what the RBI did on Tuesday came as a shock to the financial markets, which expected a moderate hike of 25 basis points, it is what Governor D. Subbarao said which attracted analysts’ attention more. He asked the government to do what it had been avoiding all these months: contain fiscal deficit (the gap between government income and expenditure) and ensure adequate supplies of items whose prices are rising. What economists call “supply-side bottlenecks” have remained unaddressed for years.
Due to low agricultural productivity, heavy dependence on the monsoon, the absence of cold storages and other infrastructural handicaps, the supply of food items remains erratic and often falls short of demand. The farm sector, which supports a large majority, needs better attention. Bringing in domestic and foreign investment in the supply chain can cut massive food waste. There are factors beyond government control like global oil prices and trouble in the Arab world and the US/European debt problems, which affect the global economic recovery as well as Indian exports. But there are things the government can do like thinking beyond scandals and political survival and focussing on governance and in-house hurdles to faster economic growth.