Reserve Bank Kills India Growth Story
In 1997, the then Prime Minister of China Zhu Rongji took note of the crisis in several Asian economies and launched a full scope reform of State-Owned Enterprises (SOEs) in China. Several of the worst performers were shut down, and others merged together or told to confine themselves to their core competences. Zhu’s slogan was “Grasp the big and ignore the small”. As a consequence, several smaller state enterprises were shut down. However, industrial reforms ensured that the slack caused by this was more than made up by private units, which were given much greater freedom than previously. Certainly the 1997-99 SOE reform was a very painful process, and it is estimated that about 40 million lost their livelihoods directly or indirectly as a consequence of the measures adopted by Zhu. However, several of these got new jobs in the next few years, as the Chinese industrial economy, both public and private, began to expand throughout the first decade of the 21st century. Today, several SOEs in China have emerged as some of the largest companies in the world.
The growth of Chinese companies has become a nightmare for companies in Europe, who are unable to compete on terms of price. Several markets that at one time were the exclusive preserve of European companies have now switched to Chinese imports. Even more troubling, during 2003-05, several Indian companies began to emerge as global competitors. Indeed, they were even able to buy out several companies in Europe, including huge enterprises such as Arcelor Steel, Jaguar-Land Rover and Corus. All of a sudden, there was fear in company boardrooms across Europe at this new competitor from Asia. Would even more of their global markets get lost because of the Indian private sector? It was exactly at this time of gathering trouble for European businesses that the RBI, the Reserve Bank of India (the central bank of the country), began to put in place policies that were certain to negatively affect the Indian growth story. Then RBI Governor Yaga Reddy began raising bank interest rates on loans drastically, besides other steps designed to sharply reduce loans to industry and commerce. From the close of 2005 onwards, Reddy was determined to starve the private sector in India of money from commercial banks, and to see that they paid very high interest rates on the loans taken by them. In the process, he reversed the policy of low interest rates that had helped ensure a high growth rate (and moderate inflation) during the previous five years. Although the RBI is supposed to be an independent organisation, the government takes care to appoint only career civil servants as Governors, thereby ensuring that they will follow the habit of a lifetime and listen to commands (passed off as “informal requests”) from the Union Finance Ministry.
Despite increasing protests from industrial groups in India, who began losing out in international markets because of the high bank interest rates and the drying-up of credit, the RBI continued its suicidal policy. Clearly, the approach of the central bank met with approval from the Chairperson of the United Progressive Alliance government, Sonia Gandhi, despite the fact that it gave an unfair advantage to European (and Chinese) companies competing in the Indian market. It is noteworthy that Sonia Gandhi is very popular in both China and the EU, being the subject of frequent and flattering media reports in both locations. While Manmohan Singh is the Prime Minister, the reality is that the ministers in his team report to Sonia Gandhi. In a way, he can be compared to President Ahmedinejad of Iran, whose ministers report to Supreme Leader Ali Khamenei rather than to him. Being an expert economist, Manmohan Singh understood the harm that the policy of restrictive credit and high interest rates was doing to the Indian economy, yet he was forced to remain a silent bystander while Finance Minister P Chidambaram (who is much closer to Sonia Gandhi and her family than is Manmohan Singh) orchestrated the RBI policies which began to apply the brakes on economic growth in India.
Naturally, Yaga Reddy became a hero in Europe, including in the UK, because of the benefits that his policy was showering on industry in that continent. By the time he retired in 2008, the once-feared Indian private sector had diminished into a shadow of its previous self, wounded by the policies of its own government. The Finance Ministry and the RBI were fully aware that rising inflation (which they gave as the reason for higher and higher interest rates) was not at all lowered by higher interest rates. Instead, the higher rates fuelled more inflation, by adding to the costs of doing business. This increase was passed on to the consumer, thereby raising prices still more. The increase was promptly used by the RBI to justify still higher interest rates and sharper cutbacks in bank lending, a cycle of disaster that began picking up steam just when the international financial crisis hit in 2008.
Although the RBI has claimed credit for the relatively better health of Indian banks as compared to those in the US or the EU, the reality is that the lack of problems with Home Lending by Indian banks is because there is a sizeable “black money”( i.e. undeclared) component in the value shown of houses that are mortgaged to the banks for a loan. This underestimation of the money value of houses in India provides a cushion for the banks in case of a fall in house prices, a factor that is not present in economies where 100 per cent of the value of a dwelling is declared to a bank. That India weathered the 2008 crisis better than several other major economies is a tribute to the resilience of the Indian people and to its entrepreneurial community, not to the policies of a government that has been working overtime since 2005 to slow the Indian economy down.
In order to ensure the continuation of Finance Ministry control over the RBI, another career civil servant was made Goverrnor of the RBI in 2008, after Reddy finally retired. Duvvuri Subbarao was a former Finance Secretary, used to taking orders from the Union Finance Minister. He has continued, with still greater viciousness, the policy of higher and higher interest rates and reduction in the flow of credit. To the delight of those VVIPs who want to ensure that Europe and China do not need to feel the pain of competition from India, Subbarao has increased interest rates by as much as thirteen times so far, all in the name of fighting inflation. He has ignored the fact that prices have risen, not fallen, each time he has raised interest rates. After all, he has to fulfil the wishes of those who seek to derail the India growth story. He has to obey those who want to see that Indian industry never emerges as a serios competitor to European and Chinese companies, a job he is carrying out so well that his term in office has been extended from 2011 to 2013. By that time, Reserve Bank of India Governor Subbarao would have succeeded in finishing off several thousand enterprises in India, which are being closed down each week because of the unbearable burden of high interest rates.
India that was roaring upwards in 2003-2005 is now going downhill, writhing in agony. The Indian growth story has been replaced by steep falls in manufacturing and even in services. The only thing growing exponentially is government expenditure. The RBI is merrily printing currency notes to finance the wasteful expenditure of a government that spends more in a single year than others ever did in five. Another “achievement” of Subbarao has been the steady fall in the value of the Indian rupee, which has gone down by 20 per cent in just a year, another factor causing higher rates of inflation. Of course, Subbarao’s political masters do not bother about the falling rupee, because he knows that VVIPs are happy that their Swiss bank deposits get more in rupee terms each time the currency in India gets reduced in value. If the fence begins to eat the crops, what hope is left? When the RBI itself becomes an engine of economic stagnation, India’s once-bright future seems to be darkening.
By MD Nalapat