Posted by: qmaxim | January 29, 2009

The economy and panic button

Now that Indian economy is expected to grow at the slowest pace in last 5 years, the UPA regime is in panic mode with the elections nearing.
It pressed the panic button and pushed the Reserve bank of India (RBI) to repeatedly take measures like increasing liquidity in the system. One more measure is in the offing it appears.
But certain factors are not being considered :
For a large economy like India it takes quite a while to see the effect of such measures.
From robust tax collection of last few years, the Govt. went on spending binge giving handouts to (some deserving) and mostly undeserving people, & not building assets. At the same time, completely ignoring infrastructure development started by the earlier govt. For instance,only small percent of the highway building program has reached financial closure resulting near standstill of this activity in the last couple of years. Consequently, for the measures being taken by RBI there are very few takers., as the economic activity has slowed down significantly in this area. And though liquidity is available banks are not prepared to lend.
When the oil prices were at the sky high levels, the govt. waited too long to increase the prices as a result nearly wiping out the oil distribution companies.
Now the oil prices have moderated the regime is reducing prices recklessly leaving very little money for the oil companies to invest for the future.
The justification for reducing prices given is to put money in people’s pocket so that they can spend more. It appears that people in the finance ministry/ planning commission have no idea as to what they are talking about! They are ignoring the fact that India is not a developed country like U.S(where people tend to spend all the money) but is a developing country where most people save money whenever they can rather than spend it.
Finally, planning commission fellows like Montek is repeatedly interfering in working of RBI which is not their business in the first place thus destroying the independence of RBI.
If this behavior continues economy is heading for deeper trouble.

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