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To,
Honorable Prime Minister of India,
Shree Narendra Modi

Sub : RBI have got Detached from reality

Dear Sir,
There are two most powerful persons in India whose decision can affect the lives of
common man in most profound way one is you as a PM and second is Raghuram
Rajan. Unfortunately your every step is analyzed up to depth and Raghuram Rajan
is given a free pass for all his decisions.
Biggest change in policy that India witnessed post 1991 economic reform was in
March 2014 when we shifted to CPI from WPI. Affectively you have been given India
whose currency got changed. A Central Bank whose only mandate is inflation,
when changes its inflation measures dramatically virtually means it changes its
currency and surprisingly there is no debate on such a massive policy shift and its
pros and cons.
As I have a passion for economic studies, and after years of observation of world
economics and central banking, I want to present in this letter how this change in
policy of RBI can become single biggest mistake that India can commit at this stage
of Indias development and present state of World economics.
WPI vs CPI
First looking at diverged indication of WPI and CPI we need to conclude as an Indian,
which inflation measure reflects reality as both cant be true with the gap of 7-10%
as this difference is equivalent to Greece and Germany to the Bond markets.
Its true that WPI is not perfect as it should have housing and services data
embedded into it. But still WPI have been the impeccable predictor of state

of

Indias

economy

which

can

be

seen

in

the

chart

below.

Above long-term chart clearly shows that WPI has clearly predicted some of
the most important events of India such as rise in inflation after dissolution of
Bretten-Woods agreement that finally led to JP movement and emergency,
1989-91 higher inflation that led to liberalization or Asian Financial crisis and
resultant inflation that made Vajpayeejees task so difficult that finally just at
the beginning of change people lost faith in him. And same chart showsbarring emergency, there has never been a time in post independence India
when our inflation have been negative and that too for so long as it is now.
And its implications are visible on ground.
When there was a wave in favor of UPA in 2008 , with inflation totally in
control and Indias growth near to 8 % under UPA1, and on the other hand
your Gujarat Government had a massive crack down on farm theft and even
kishan sangh was against you , results of your work was still not totally visible
on ground; yet as per me in the most important election of India ever,
Gujaratis voted for you in 2008. Just 18 months ago there was not a single
seat that was won for margin less than 125000 in Loksabha elections by BJP.
But in 18 months BJP lost panchayat election or Hardik Patels irrational
demand got resonated among the Gujaratis is worth noting. Its a protest by
most matured electorate in India as they feel something is wrong. As most
other events are predicted through WPI chart so is this. WPI is negative. Its
a vote against RAghuram Rajans understanding of real India. People are in
real distress at lower bottom of the pyramid and for many reasons.

1.) 52 % of Indias population is dependent on Agriculture. And CPI has 46 %

weight age for food on which RBI has no control. Irony of the fact is if
there is a draught, 52 % of the peoples employment will be adversely
affected. Biggest source of farmer suicide is debt and RBI which should
have come to rescue of these rural residents will increase interest rates to
burden these bottom of the pyramid people to see the savers who are
among top bracket gets more interest rate. Politician are questioned on
every account for farmer suicide but no one surprisingly asks anything to
RBI governor how he explains this paradox. With this policy RBI is now the
biggest threat to rural India as when they will be in distressed instead of
decreasing interest rates it will increase rates due to skewed inflation
measure. Using CPI to increase interest rates during draught is akin to
closing Bhakhara Nangal dam doors for floods in Surat.

2.) Raghuram Rajan himself uses a word Quality of deficit every time when
he cuts interest rate, but has never followed what he says. For a country
like India where inflation on large extent depends on currency
movements, most important parameter for RBI governor to watch for is
the kind of deficit. During UPA 2, subsidies were disbursed through
various schemes directly to rural areas which were causing immediate
consumption with no asset or infrastructure building- a perfect recipe for
future inflation. But under your new NDA government precisely opposite
thing is happening. Money is getting diverted to productive assets. Just
through DBT according to one estimate Rs. 15,000 crore have been saved
from leakages but though leakages this is financial tightening which
naturally results in rationally decreased consumption and hence structural
decrease in long term inflation. For left of the center government it is so
easy to give Loan waiver of Rs. 40,000 crore to farmers but for right of the
center government it is so difficult to spend Rs. 40,000 crore for housing
for all. So right of the center governments decisions takes time to reach
to masses as it requires executions unlike subsidy disbursement. This
delay should be compensated by lower interest rates for smaller fiscal
spending and future supply creations. Raghuram addresses this with his
own acronym of Quality of deficit but fails to act on it as should UPA 3
would have been in power his interest rates be even higher? This double
whammy of prohibiting leakages and subsidies, and higher interest rates
is creating huge tightening in financial conditions in rural areas.
3.) Various estimates suggest Indias 30-40% economy is unaccounted which
is unique to India as no other major country faces this issue at this scale.
Add to this the fact that Indias lower bottom of the pyramid are all in
unorganized sectors and are affected most with this black economy. With
various steps taken by governments from center to state and more by
new NDA government there is a massive crack down on black economy.
Every state has increased circle rates of land and market rates have
decreased dramatically in past two years. This has resulted in crack down
on black economy as biggest source of hiding money is shrinking. This
massive reduction of black economy is good for the nation but has
maximum implications on lower bottom of the pyramid in short run and
RBI has taken no note of it. In foreign emulated policies it has lost Indias
ground reality again and is not able to compensate reduction in black
economy with channelized economy.
4.)If 1998 was an Asian Financial Crisis, 2000 was Dot Com Bubble, 2008 was
housing Bubble for India 2012 was a Discom crisis. How west would have
solved Discom crisis? Central bank would have purchased floating bonds
of discoms by quantitative easing and there would not have been any NPA
nor any distress in discom and UDAY would have got fast forwarded by 4
years. Its true India should not follow that extreme path but pragmatism
suggests that when there are Rs. 3,00,000 crore of debt in disarray lower

interest rates are the only panacea. 22 crore people in india dont have
power, another 22 crore people dont have power for more than 2 hours,
and instead of addressing Discom problem we are aggravating it by
keeping interest rates insanely high due to our disconnect from real
economy which is choking credit to every other segment of economy.
1.25 crore people in India are entering workforce every year, meaning we
are adding Australia to our workforce every year. In order to create
employment for these, India needs massive infrastructure investments
and all the initiatives that government is rightly taking. But life blood of
all these initiative is invariably credit which RBI is deliberately inhibiting.
RBI should be given dual mandate of not just right kind of inflation
targeting but also Employment like USAs Federal Reserve as Raghuram
Rajan neither speaks of employment nor do he take it into accounts in his
policies. Indias youth cant wait for long and if RBI s missteps results in
failure of government policies, there can be dozens of Hardiks emerging in
country as people have immense hope in new government and when they
protest they dont need a rational reason but just unemployment to
protest.

Raghuram Rajan says that WPI is international inflation and CPI is domestic
one. This is most ill-informed statement by RBI governor. CPI is not domestic
driven inflation but its domestically spent inflation. Meaning agreeably its
spent in Indian Rupee and hence its spend dont go out of country but to say
its domestic inflation is absolutely wrong. CPI has 46% food items whose
rates are on large scale decided by global commodity prices. Also it has
energy in it again dependent on global commodity prices. So if he thinks CPI
is solely controlled domestically his whole understanding is wrong.
Also
because it is domestically spent inflation and Indias wages are at bottom on
global scale we have far more resilience to tolerate its higher read and is
desirable at times, if other aspects such as stable fiscal and current accounts
are in place.

WPI is derived more from market driven data and CPI is more a survey based
data. Also its worth noting that CPIs major weight age is through rural CPI
which is surveyed by 1100 odd post offices in villages who have no
experience or dedication of doing the survey. In a country as diverse as
India, where less frequent and more professional election poll surveys vary so
much, how can we rely on post office collected data on monthly basis on
which we predicate such a huge policy decisions. This is shear adaptation of
OECD methodology with no consideration of diversity and reality of Indian
conditions. Also CPI dont have credible history as it was initiated in 2011.
Let us for a while assume that CPI is a right measure. But Raghuram Rajan
has other predetermined conditions - repo rate should be CPI+1.5-2%. And

this insanity dont stop here as Indias CPI inflation is averaging around 4.5-5
% from past one year, and by that measure rate should be 6 % but no, he will
takes base affect into consideration and he will predict what will be the
inflation in coming January, though all his past inflaton predictions have been
proved wrong on both sides, and whether he is right or not his assumption
will super cede all data and hence rate will be kept at 6.75% !!!.
Even
though market driven rate transmission system is able to pass just 75-100
bps of his 125 bps so be it because its the fault of market and banks but not
his. Affectively in spite of once in decades event of collapse of commodities
of this unprecedented manner, Indias rates have got decreased by just 75100bps. There is no doubt he is man of integrity but India has always
suffered because of people of integrity but with wrong economic ideology and
he is one among them again.
Former Governor Subbarao did excellent job during financial crisis when he
reduced interest rates from 9% to 4.75% in a matter of 7 months. This made
India go unscathed in a generational financial crisis in 2008-09.
But
Raghuram Rajan takes this the other way. He thinks that inflation and
subsequent financial crisis that India faced was all because of this fall in
interest rates. This again is his incorrect understanding about Indias
economy.
Indias 2013 crisis and all previous crises have just two rootsexternal or governments socialist spending. Crude bounced from $33 to $
120 in a matter of 3 years but government failed to pass these and
subsidized it with a bill of Rs. 50,000 crore per annum? Does he think crude
will again bounce to $120 so quickly and if it does do he think present
government will subsidize it? Does he think government will go for socialist
spending spree to increase its deficit to 6%? Do he think that present
governments massive work for Make in India will go in vain and Indias
current account will again rise to 6% of GDP?. As in 2013 and before, always
Indias inflation is a function of INR which again is a function of Governments
Economic Ideology. For Federal Reserve, ECB and PBOC their demand is
world demand and hence their central bank has a large control on their
inflation. Indias demand in present state has very little influence on world
demand and hence Indias Indias entire inflation problems are related to
government and its policies that affect currency movement. RBI can do crisis
management during higher inflation or during deflation or during INR
volatility but ultimate control always lies with government unlike western
central banks. So RBI is trying to control things that are not caused by it. RBI
has been the most pragmatic organization in worst of Indias financial crisis
until March 2014. This is for the first time RBI is trying to influence the things
that are all because of government and in the process aggravating it. Present
higher CPI is because of higher pulses and why are pulses higher? In 2004
UPA disbanded river integration project and hence the future supply and
resorted to subsidies and unproductive spend. Present government tries to
reverse this but RBI is inviting future inflation by keeping interest rate high

and stopping infrastructure spending in various sectors irrigation included.

Again hence its a question of Quality of Deficit where again he is failing on
his own words.
Let us compare where India stands with respect to other countries and this is
with CPI which again is by no means real indicator of Indias present state.
Count
ry

Inflatio
n

Interest
Rate

Real Interest
Rate

USA
EMZ
Japan
UK
S
Korea

1.80
0.30
0.40

0.25
0
0
0

-1.55
-0.30
-0.40

1.30
4.85(CPI
avg
12mont
hs)

1.50

0.20

6.75

1.90

India

Even if we consider CPI to be relevant for India, above table shows we are
totally at odds with other major economies. And its not just about interest
rates, after turning their interest rates to zero they have resorted to massive
money printing to increase inflation. Also it should be noted Federal Reserve
never looks at CPI, but core CPI which excludes food and energy as they are
volatile and not part of persistent inflation. ECB follows HICP but in all policy
meets they take a note of core HICP which again looks into CPI less food and
energy. And we are following CPI which has 46 % weight age of food only. In
these scenarios with such a massive policy ideology difference between India
and all the other central banks and hence the rate differences, can India
compete on global scale? Wont this be huge hindrance in make in India,
solar mission, smart cities, etc
? Even Pakistan has interest rate of 6 %, 75 bps less than India.

Chart showing Money Printing by Global Central banks after 2008 crisis

GDP deflator vs CPI

GDP deflator is far better indicator of inflation than CPI as it covers broad
range of goods and services unlike CPI. GDP deflator is pointing to zero
inflation in India almost for a year now.
As above chart suggested every major economy in spite of having negative
interest rates is adamant to bring their inflation to 2 %. Implicit target of all
these central bank is just one- higher nominal GDP because- it decreases
their total debt to GDP and increases tax collection, decreases fiscal deficit
and more importantly it keeps ratio of countries GDP to world GDP elevated.
Nominal GDP for a country today is what landmass captured used to be for a
country prior to World War 2 as it is the single most powerful measure that
gives power to a Nation.
Indias GDP deflator at zero and RBI observed inflation at 5 % has
unprecedented long term implications on many fronts including foreign affairs
and Indias global standing. Our government is doing everything to be part of
UNSC or make INR a part of SDR but there is no other figure that is more
important for this than Indias GDP to world GDP. At present this ratio stands
at 2.5 % and if this reaches to 5-8% or above it will become impossible for
anyone to stop us from being part of both. But if this kind of yawning gap
exists between GDP deflator and RBI observed inflation it can cut 20- 50 %
from our nominal GDP in a decade in constant dollar term and can have

massive implications on Indias standing on world stage. Inflation that RBI

observes for policy decisions, should he as close to GDP deflator as possible.

Raghuram is struck in his own statement of CPI+1.5-2 and hence have lost grip on
subjective analysis of the situation. Tied in his own words and in his decade old
ideological war with western central banks he has made India an experimental
ground for his unrealistic policies. There are many One Call wonders in global
financial markets, and he was right in predicting financial crisis but have been
wrong on every call of his on western markets after that and is again wrong on
knowing Indias real problems.
If he would have followed right kind of inflation indicator and would have taken a
cognizance of global economy and massive excess supply of all commodities and
capital, our interest rate could have been as low as 4 %. This would have given
immense opportunity to India in taking maximum advantage of those excess
supplies in every sector to fulfill the needs of Indias poor as there is just one place
where demand is and that is India. This would have solved all the legacy problems
of India such as PSU banks distress, Discom Distress, Infra-corporate distress and
would have provided domestic funding for all important projects like housing for all,
infrastructure, railways, make in India, digital India and could have increased tax
collection in leaps and bounce -true achche din which our government and people
rightfully deserve and are held hostage by one man Raghuram Rajan.
Suggestions for better RBI

MPC is most refreshing news as it eliminates dictatorial policies. But MPC

should be given dual mandate Inflation and Employment. Only inflation is
power with responsibility. If we can survey inflation then surely employment
and its worth having employment data as not just monetary but political
system may get changed in long runs with its figures.
Inflation measure should be as close to GDP deflator as possible and robotic
fixation of inflation should not happen instead it should be subjective on
global and domestic conditions and most importantly Quality of Deficit
India should strive hard to be part of SDR and with higher share, as well as to
be part of SDR equivalent in AIIB and BRIC with higher share, and India
should make opening of swap lines with foreign central bank an integral part
of foreign policy as there is no bigger control on inflation than ultimate stop
option for currency slides in the form of swaps.

Hope my observations if pragmatic can be helpful for nation.

Regards,
Bhavik Joshi
M : 9825506266 Email : corres.bhavik@gmail.com
Bhuj