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Jamalpur struck the eastern embankment near Hempur village in the Navhatta block of Saharsa district, 75 km below the Bhimnagar barrage. The floods uprooted half a million people and engulfed 96 villages in Saharsa and Supaul districts. People could go back to their villages only after the Holi festival of 1985 when the breach was plugged. Bindeshwari Dubey of the Congress was the chief minister that year. In 1991, there was a breach in the western embankment near Joginia in Nepal that led to a political crisis in Bihar and the minister of water resources had to resign his post. This resignation was never accepted by Lalu Prasad Yadav who was
the chief minister at the time. This was a repeat of the Bahuarawa breach where the river had receded after eroding the embankment. The Kusaha breach took place in the regime of Nitish Kumar and it will take about a year to get the complete story. Thus, virtually no ruling party (including the administration under president’s rule) can claim that it was not involved in such an accident. Yet, the blame game and mud-slinging continues unabated. There is no history of these breaches being plugged before March of the following year. As far as the flood victims are concerned, they bear the brunt of the disaster, irrespective of which party is in
government. It is also a fact that the breaching of the embankments will continue in future in full view of the political parties, the water resources department, police, and the administration. Given the magnitude of the disaster, in all probability the flood victims will be left to fend for themselves. All these debates notwithstanding, the need now is to reach help to the flood victims in all possible ways and provide them support until the next kharif crop season.
[Map 1 has been reproduced from the article ‘Gerrymandering, Poverty and Flooding: A Perennial Story of Flooding’ by J Albert Rorabacher, EPW, February 16, 2008.]
Inflation and Public Policy: Contemporary Dilemmas
There has been much comment by the media and criticism by business that the policy of hiking interest rates to combat inflation will hurt investment and growth. But what has India’s experience been on the relationship between the real interest rate and the inflation rate?
Sugata Marjit (firstname.lastname@example.org) is at the Centre for Studies in Social Sciences, Calcutta.
conomic problems, particularly those which rise to the status of social criticality, draw self-confident comments, policy suggestions, numerical assertions and predictions from various quarters but possibly despair and frustration from institutional authorities and technical experts engaged in a deeper understanding and resolution of the problem. As important events of today are rendered useless tomorrow by the allpowerful media, we are naturally more interested in quick solutions rather than in an understanding of the problem. The business lobby is angry about an increase in interest rate and they claim, in popular national magazines, that a rising interest rate will shave off 2 percentage points from our 9 per cent GDP growth rate. Even the most erudite economists and policymakers such as the chairman of the United States Federal Reserve or the governor of the Reserve Bank of India (RBI) will think 10 times before committing themselves to such a numerical figure. But that does not prevent business journalists or business lobbies from publishing a statement, which may distort the choice of right
set of policies. More recently the government has also come out with a prediction of a lower growth rate, but not as low as suggested in some business quarters. Close on the heels of such assertions, follow demands by a political party to compel the RBI to fix the rupee/$ exchange rate at Rs 39 a dollar. Again an economist will shudder with fear and apprehension if she has to announce a “socially optimal” nominal exchange rate because she is liable to her discipline, years of training and the associated logic. But politicians are not burdened by such baggage. Thus, an instruction to RBI is thought to be a reasonable way-out from inflation. Demands for windfall tax on oil companies are also suggested. But such demands do not need special mention as they are targeted as a “firm specific tax” where the “firm” concerned belongs to the “enemy” of a set of powerful politicians. In this commentary we try to talk about the relationship between the rate of inflation, the real interest rate and the GDP growth rate. We are not going to explain such a relationship, but we intend to focus on statistical associations. This will give us some handle on what to expect of our growth rate if the RBI keeps on raising the nominal interest rate in the face of a sustained rise in prices. This will also indicate, however loosely, the association between inflation and growth, a proxy for a version of the Indian Phillips curve, given the well known pollutants in official
september 6, 2008
EPW Economic & Political Weekly
It is as if the quantity theory of money holds over the long run. but more often than not it chases output supply and causes inflation.0 8. If inflation has a negative impact on output.3 4. Trivandrum 695 011 before 30th September 2008.1 4.8 9. What does it do to the growth rate? What really is the association between the real rate of interest and growth rate of GDP? For all practical purposes. Centre for Development Studies. although stimulated by a sustained rise in oil prices.5 6. A consolidated fellowship of Rs.53 6. If inflation creeps up. As far as my information goes.5 6.5 6.in.74 10.26 13.86 10.99 4. Dollar reserves could not be disposed of at all.06 8.41 5. Even when we were not so affected by rising world prices.8 4. Since we are not as knowledgeable as business journalists or as confident as political critics and since we are fully appreciative of the RBI’s effort to cool a heated economy. partly due to the fact that it would strengthen the rupee and put exporters to further distress. *Source of the data on inflation rate for 2008 is EPW.making at this juncture.and Post-Reform Rate of Growth of GDP and Rate of Inflation based on WPI Years Growth Rate of GDP Inflation Rate Based on WPI Pre-liberalisation 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 Post-liberalisation 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008 7. Those who have submitted their Doctoral dissertations can also apply.6 1. volume: June 28-July 4. The subsequent rise in interest rates is supposed to hurt business groups. Sterilisation as a policy option ran out of steam.1 5. So shortrun problems are difficult to handle and the monetary authority currently has its hands full in this respect.33 4.8 10. growing capital Correlation Table 1 Growth Rate of GDP Pre-Reform Post-Reform All Years (1980-2008) CENTRE FOR DEVELOPMENT STUDIES Thiruvananthapuram Vacancy Announcement Post-Doctoral Fellows: Applications are invited for two positions in the Research Unit on International Migration.’ The scholar selected to work for Punjab migration will be mostly working in Punjab. The scholars. A prelude to our analytical observations must be presented in terms of a discussion on factors determining inflation. the short-run adjustment problem can be quite critical both from economic and political perspectives.60 3. Current Statistics.40 5.46 6. The current inflation rate.61 4.4 5.8 4.2 6.48 4. the long-run relationship between growth in money supply and growth in prices anywhere in the world is almost one to one. the interest rate has to rise. as it was impossible to sterilise so much. such as a rise in the price of oil or price of steel. We can try to suppress these artificially. will be assigned for the research on ‘migration from Punjab to Britain’ which is interdisciplinary in nature and on ‘the impact of migration on children. the price of steel. For example.7 5.ac. etc. The growth in demand for oil and steel all over the world will trouble us as ours has become an open economy and we have to import both. Instead I shall focus on the monetary factors. a part of the inflation dynamics is related to our national policies or policies pursued by the RBI. *Source of the data for the growth rate of GDP is RBI Publications.27 7.35 12. 2008 13 .commentary Table 1: Pre. Prasanth Nagar.82 8. So money supply had to grow.9 7. giving enough ammunition to political opponents.1 7. But whatever it is.46 7.1* 18. Candidates below 32 years of age with Ph. is also fuelled by a growing supply of liquidity as reflected in growth of all kinds of monetary aggregates. but eventually we have to face the music.102 unemployment statistics. we make a humble effort to explore the logic of policy.5 4.42 2. the waiting period for it to return to the preinflation level can be a long one. In this note I am not going to analyse the reason behind the rise in international prices. 20.3 3.3 5.16 3. Please forward detailed resume indicating your preference for one of the above research programmes to the Registrar.95 3. The other part is currently beyond our control. The current episode of inflation is caused both by a rise in international prices over which we do not have full control and by an enormous growth in money supply and liquidity. does not fuel inflation if it does not lead to a continuing wage-price spiral. However. Punjabi/Hindi speaking candidate will be preferred.3 7.38 5. The point I would like to make in the current context is argued out below. For a responsible monetary authority it is important to have sufficient reserves to fend off speculative outflow.46 10. Inflation is a state of sustained price rise.47 4. A one-shot rise in prices. and value of WPI is for the month of June 2008.D in any field of Social Sciences can apply. Survey of Professional Forecasters – Results of Third Round relating to Fourth Quarter ended March 2008. The RBI did try from time to time but the stocks of transactable bonds reached an all time low. this is an explanatory note. Thus. and it is a forecasted value for the year 2008-09. RBI.94* Source: Handbook of Statistics on Indian Economy.14 7. The applications can also be e-mailed to somannair@cds. Rising liquidity may stimulate output demand via Keynesian logic.6 8. in addition to their involvement in Unit’s research programme. Ulloor.7 4.8 6. runaway inflation threatens the real income of fixed income earners.347 -0. The award of fellowship is for a period of one year and is extendable depending upon the scholar’s contribution and requirements of the Centre.3 7.000 (Rupees twenty thousand only) per month will be paid. Economic & Political Weekly EPW september 6.24 9. we have been receiving a huge amount of foreign capital inflows. however caused.7 9.60 7. Inflation rate based on WPI 0. although over the long-run there may not be any real balance effect.352 -0.90 7. hence.41 5.0 3.9 8.
A simple negative correlation will Real lending rate Growth. then the rate like to know.00 20. For application details see: www. if we are getting accusgiven the contemporary concern regard.00 8. where unemployment data are not of a desirable difficult to interpret the data. 2008 EPW Economic & Political Weekly .00 of inflation.00 type of relationship holds 10. hard to rely on.00 It is a serious problem 2. The Keynesian policy of stimulating demand through fiscal and monetary measures presumes that in an excess capacity economy prices should not increase much with increasing aggregate demand. whereas in the which money affects real output in the pre-reform period it is positive (0. Politicians are also very critical given that elections are nearby.00 16. The point is that if the prices rise further in the form of a higher inflation rate. Before one goes about ment. RBI Bulletin and EPWRF’s ‘Current Statistics’. Inflation and Real Interest Rates The connection between inflation and unemployment has been a favourite topic for the macroeconomists. But over workforce remains engaged in unrecorded the past 15 years they are negatively related. 2008 For individuals working in development organisations. replace the rate of unemployment variable higher inflation implies lower growth and by the rate of growth of GDP. decade before and after the reform period On the other hand. the quantity theory 12.edu 14 Real lending rate september 6. The track record of both these authorities has been commendable given the fact that these two major powers did not really suffer from the Asian financial crisis in 1997. activities.commentary flows have led to an excessive accumulation of reserves.00 4.00 where most of the prices Source: Handbook of Statistics on Indian Economy.tomed to a phase of moderately jobless ing snowballing inflation rates.00 -2.102). Mumbai. activists. how they move together. All said and done we still do not know. 4. and officials working in state and central government departments of water and sanitation. the only relevant policy to tackle short run adjustment problems has to be through a rise in the relevant interest rate either through an increase in the cash reserve ratio (CRR) or repo rate or a combination of both.00 ting that over the longer 14. we do have information of 1991-92. What should be the outcome of such policies? Interest groups are already voicing their concerns. Since then debates have never But in the post-reform period it is rather stopped regarding the mechanism by strongly negative (-0. Pune. Again the “unemployment” story is checking their cointegrating properties.00 0. academics. are administered. or we do not have any workhorse of a theory to judge the optimal level of foreign exchange reserves.352).00 tionship such as the Phil0.tiss. October 20-24. of unemployment should not be affected Table 1 (p 13) gives a picture of roughly a much by a decline in the GDP growth rate. and the Gender and Water Alliance (GWA).00 8.00 12.00 12.00 -4. Nonetheless a first hand approx. policy options to RBI are rather limited.347). This does not mean that the policies adopted so far have not been useful.00 to conceptualise a rela0. Society for Promoting Participative Ecosystem Management (SOPPECOM).Figure 1: Pattern of Relation between Rate of Inflation and Real Lending Rate 14. researchers. one would growth in the organised sector. Organised by the Tata Institute of Social Sciences (TISS).00 Rate of inflation lips curve in an economy -4. The famous Phillips curve and the subsequent analyses by the monetarists demonstrated that there is a cost of reducing the rate of unemployment through monetary expansion since the rate of inflation must increase when the rate of unemployment is pushed back from its “natural” Gender. But that is a different exercise.00 money supply and rate 6.00 between the growth of 8. often admit.This is a relationship exactly opposite to imation is possible if one is willing to what is predicted by the Phillips curve. Hyderabad. If this is true then the RBI policies will be increasingly put under scanner. First.00 run. of course in hence possibly a higher rate of unemployterms of its inverse. It is Pattern of relation between Rate of Inflation and Real Lending Rate short run. More significantly.00 4. In the post-Depression era in the west there was increasing concern regarding the effectiveness of such policies when inflation started flaring up. and also decistandard. The same problem has been faced by the Chinese monetary authority and the policy response has been somewhat similar. Growth in money supply and liquidity through an enormous expansion of bank credit have fuelled aggregate demand more than aggregate supply can digest and that is contributing in a significant manner towards inflation. that the real informal manufacturing wage The overall correlation between GDP has increased substantially during the same growth and inflation is negative (-0. period. and where a majority of the pher what causes such correlation. South Asian Consortium for Interdisciplinary Water Resources Studies (SaciWATERs). level. Water and Equity: Training Programme.
47 11.. The focus is not to characterise processes in any one sector alone. and Human Geography. Thus physical capital accumulation does not explain our growth process and physical capital accumulation is not very much influenced by the real interest rate.75 2008 12.5 1984-85 16. including a firm level study conducted at the Centre for Studies in Social Sciences. the actions and reactions of the Indian state in reproducing a totality must analytically be held as of considerable import. though I would believe we could have been more aggressive on this front and the interest rate should have been raised earlier. *Source of the data for lending rate in RBI Bulletin. the conference expects much discussion of inter-regional and inter-national economic connections.com. Rakesh Ranjan.8 4. It will be somewhere around 25 per cent of GDP.8 9.24 4. this is the strategy one Economic & Political Weekly EPW september 6.8 10.09 10.04 6. The next issue is whether real interest rates affect long-term investments.83 9. i e. The registration fee (towards accommodation. On the contrary. and EPW Current Statistics. The issue of whether the rising interest rate will hurt GDP growth seems to have been resolved by the business and media.26 13.83 1998-99 13. The opening keynote will be given by eminent University of Delhi historian Professor K.and for the student scholars the fee is Rs. There are many other factors such as expectations about future demand and infrastructure which are far more important.46 1996-97 15. New Delhi and Simon Chilvers.5 6. Given an ineffective sterilisation process. A conference registration fee of 150 USD applies to delegates employed or sponsored by institutions/ agencies outside of South Asia. All interested scholars should submit their work address.46 7. The aim of this conference is to facilitate discussion and clarification of the quantitative and qualitative aspects of the trajectories discernible in the Indian economic formation.37 6.1 5. Now we come to the most shocking revelation and refutation of popular wisdom. June volume. However.8 6.5 Post-liberalisation 1991-92 17.00 4. which show that real interest rates do not explain private investment.3 3. But one must remember that our high growth phase did coincide substantially with a fairly moderate rate of aggregate investment.75 2006-07 12. the European transition debate. G N Saibaba and other teachers of the University of Delhi.5 6. Survey of Professional Forecasters – Results of Third Round relating to Fourth Quarter ended March email@example.com 7.36 9.3 5.25 1994-95 14. It is mostly a rise in “productivity” of some sort that drives our growth.25 2007-08 12. This conference has been initiated mostly by Indian scholars. have dealt with similar issues. Calcutta. the rate of physical capital accumulation has not been substantial if we take an average of the last 10 years. It is now left to the people working in the academic and policy spheres to appreciate their wisdom. The deadline for abstract submissions is 15th September 2008.97 10. and the Indian ‘mode of production’ debate.27 5.5 1988-89 16. Faculty of Graduate Studies.47 4. Shrimali. Capital & Class.5 1982-83 16.41 5.90 2.9 8. The conference is endorsed by Journal of Peasant Studies. Current Statistics.17 11. Source: Handbook of Statistics on Indian Economy.86 10.0 3.38 5.89 1.9 7. then the next question will be how changes in real interest rates affect such factors.53 6.169 Change of Growth Rate of GDP -0.75 1995-96 15.and Post-Reform Rate of Growth of GDP and Lending Rate Year Lending Inflation Rate Real Lending Growth Rate Based on Rate Based Rate of WPI (AC) on WPI GDP Pre-liberalisation 1980-81 16. The Character and Trajectory of the Indian Economic Formation in an Era of Globalisation 26.5 1983-84 16.44 6.06 8.48 4. Correlation Table 2 Growth Rate of GDP Pre-Reform Post-Reform All Years (1980-2005) Real lending rate based on WPI Change of real lending rate based on WPI -0.42 2. Nagaraj (2008). India Contact: indian. The overall rate of investment.8 4. Call for Conference Papers. some years ago on behalf of the IDBI. *Source of the data for the growth rate of GDP is RBI Publications.1 4.33 4.74 10.formation@gmail. scholar. and value of WPI is for the month of June 2008. Canada. A fundamental question in this context is what really causes GDP growth in India.92 1993-94 16. Marjit and Das (2008).81 7.041 -0. JNU. as well as the linkages that exist with metropolitan capital.7 9.08 2002-03 11. thus eventually raising market interest rates from time to time. Again this correlation might be an outcome of combination of systematic and idiosyncratic shocks. In this regard.27 7.5 1989-90 16.6 1. 100/-.0 8. RBI Bulletin.95 3.D.com Web: arts.41 5.96 1997-98 13.15 7.24 9. York University.82 8. 2008 15 .1 7.60 7.3 4.04 9. etc. Ph.40 5.90 7.74 7.68 8. But it will be really worthwhile if some serious work is initiated in tracking the relationship between inflation and GDP growth.48 8.51 6. scholar. food. the participation of researchers of economic formations in the wider South Asian context is very much anticipated and sought.5 1981-82 16.5 1985-86 16. this conference relates to two preceding theoretical attempts within social science to understand the specificity and dynamics of economic formations: viz.46 10.35 9.5 6.75* 18.258 0.D. On behalf of the conference organising committee: Kumar Sanjay Singh.16 3.99 4. But prima facie there is no evidence that the growth rate will be drastically altered with an increasing real interest rate.3 7.yorku. If one can identify such a set of factors. Simply speaking.6 8.3007 0. etc.88 1992-93 18. *Source of the data on inflation rate for 2008 is EPW.5 4. the aggregate investment/GDP ratio was moderate even two to three years ago notwithstanding the fact that suddenly there has been a huge upsurge. and it is a forecasted value for the year 2008-09. Indeed.86 7. March. There have been many studies.29 2001-02 12.59 9.14 7. Arjumand Ara. The RBI has been adopting a method of raising the CRR and repo rates.352 0. and April 2008.46 2004-05 10.4 5. excessive liquidity growth coupled with rising world prices are plausible factors fuelling the current inflationary trends.92 2003-04 11.61 4.5 1990-91 16.92 2005-06 10.54 1999-2000 12.46 6.5 1987-88 16. etc. and prime lending rate is the average value for the months of February. Rona Wilson. this conference seeks to unravel the changing interrelationships of various sectors of production and circulation. Table 2 demonstrates the absence of a significant correlation between real interest rate and GDP growth rate.7 4.437 not capture many such things.03 12.) for scholars from South Asia outside Delhi is Rs. volume: June 28-July 4.94* -1. thanks to a phenomenal rise in private investment.2 6. Conference of Socialist Economists.28th November 2008 University of Delhi.3 7.M. Several contributions such as by Khasnobis and Bari (2003). Subramanian (2008). 500/..5 1986-87 16.commentary Table 2: Pre.14 8.60 3.1* would naturally recommend.13 8. As hinted earlier. Ph.35 12.60 8.ca/neoliberalism Intellectually.54 2000-01 12. a provisional paper title and a one page abstract to the organising committee at indian.7 5.
the largest drop since such data were first collected in 1947.000 MW of power capacity by 2012. As the rate of inflation goes up.biz) is with Banyan Tree Capital Management. The South Asian Experience with Growth. i e. that is crippling financial markets. If the nominal rate adjusts less than the inflation rate. Stable home prices “will clarify the level of equity in homes. Marjit.4 per cent in the April to June quarter. credit contraction and losses worsen. It depicts a clear negative relationship. At the other end. whatever be the response of RBI policies and private sector strategies. notably in the major ones of China and India. Housing Crisis Since the crisis was triggered by collapsing home prices in the US. 43 (15). this article argues that most economies and financial markets around the world are likely to be flat or down over the next few years. Since it began in mid-2007. the borrowers must gain and that has happened in all the years. the Japanese economy shrank at an annualised rate of 2. together with Japan and the European Union (EU). 2008 EPW Economic & Political Weekly While there are optimists who expect a revival in the economic downturn in the United States. with declines of over T 16 . But it is the fear of the size of the unrecognised losses. Ignatius Chithelen (igch@btcapital. But.8 per cent rate in the April to June quarter. For reasons obvious to many. by packaging individual home loans made in the US. especially housing speculators. eventually real lending rate actually goes down! It is well known that rising inflation. Whenever the rate of inflation increased. dampening economic activity at all levels and around the world. If lending was inflation indexed. The problem is that the mythical story of a rise in interest eating into incentives to invest and hence paralysing growth. which together provide financing for 80 per cent of loans being currently made to home buyers. Oxford University Press. in real terms they have to pay back less than the initially contracted amount. is a boon to borrowers. while that in the EU fell by 0. the real lending rate should remain the same before and after inflation. and its impact.2 per cent. Oxford University Press. including plans in India to add 90. Some economists say the US is currently in a recession. the United States (US) economy has had tepid growth. On the financial side. ADB Volume. ceteris paribus. rotates around economic arguments developed in the pre-historic age of the discipline of Economics. References Basudeb. S and K P Das (2008): ‘Financial Sector Reform for Stimulating Investment and Economic Growth: The Indian Experience’. This credit tightening has spread from the US. it is likely to come to an end only after prices reach a bottom. Oxford University Press. This also calls for a method of corporate accounting which must look into the “real” side of the problem. Nagaraj. The downturn in the developed countries has had an impact on other countries: growth in most emerging economies has slowed considerably. R (2008): ‘India’s Recent Economic Growth’. the Bush administration has taken some measures. thereby ensuring adequate and cheap funding for these institutions.1 Already some $ 500 billion in losses on these securities have been recognised by financial and other institutions around the world. New York. the pessimists counter that there will soon be more financial turmoil as the housing crisis. With the balance heavily tilted towards the bearish case. the real prime lending rate between 1980 and 2008. New Delhi. Equity indexes in the developed countries are in a bear market. says former US Federal Reserve Bank (Fed) chairman Alan Greenspan [Greenspan 2008]. At one end. the worst since the depression of the 1930s. high income Americans find it difficult to qualify for loans to buy a home. the borrowers mainly the business groups always retained some advantage from higher inflation. A (2008): India’s Turn: Understanding the Economic Transformation. a downturn which has had a negative impact on the emerging markets. most of the other 20 per cent is financed by the Federal september 6. several major projects in developing countries have halted due to lack of equity and debt capital. the ultimate collateral support for much of the financial world’s mortgage backed securities”. Subramanian. even solvent. In fact. is unlikely to end soon. President George Bush initially said that his government had no responsibility to bail out home owners. Over $ 6 trillion of such securities were created by Wall Street firms. under pressure from Republican congressmen worried about losing their seats in the upcoming November elections. Global Financial Crisis: A Long Way from Recovery Ignatius Chithelen 20 per cent. much wisdom is dug out of its grave by the captains of modern day finance and technology experts for pressurising the government and creating policy paranoia of some sort. bank credit growth in the US contracted at an annualised 5. New Delhi. Economic & Political Weekly. Guha-Khasnobis and Faisal Bari (2003): ‘Sources of Growth in South Asian Countries’ in Isher Judge Ahluwalia and John Williamson (eds). The losses are far mere severe in emerging stock markets. New Delhi (forthcoming). he global financial crisis.commentary Figure 1 (p 14) plots the rate of inflation against the real lending rate. In July the government said it is explicitly backing the debts of Fannie Mae and Freddie Mac (the largest US housing finance companies).