Growth be damned

Sameer Kochhar, Editor-in-Chief, INCLUSION & author of best-seller, ModiNomics

Raghuram Rajan, Governor, Reserve Bank of India

Ever since Raghuram Rajan has taken reins at the Reserve Bank of India, media wasted no opportunity to hail him as a hero (an economist with rock star appeal, to be precise) and a vociferous inflation warrior. Indeed, Rajan has hiked rates three times between September 2013 and January 2014 by 25 bps each to take the inflation bull by the horn. The resultant impact, some experts say, was that CPI inflation eased to 7.8 per cent by August this year from 9.5 per cent a year ago.

A closer look, however, will depict different picture -- the overall CPI inflation has eased because of moderation in food inflation from 11.1 per cent to 9.4 per cent during the same period. It's a no-brainer that monetary policy has no impact on food prices and hence the perception that rate hikes have tamed inflation isn't quite true.

There was more applause when he left rates unchanged on Tuesday despite a falling trend in inflation and sluggish growth. Banks merrily started cutting deposit rates but cleverly left lending rates unchanged. This is despite the fact that RBI’s earlier benchmark -- WPI core inflation -- is much lower than RBI'is comfort zone of 4 per cent now and hence warranted rate cuts. But Rajan's decision to lean on the CPI, as recommended by the Urjit Patel committee, to determine monetary policy is locking the country in a high interest rate regime for a long time irrespective of what happens to economic growth and employment. 

What if food inflation stays at a certain level and keeps the overall CPI inflation remains over 6 per cent or 8 per cent? Will RBI hold rates at 8 per cent forever and make the Indian industry and economy uncompetitive perpetually?

The economic growth especially industrial output during the last year has been tottering. High borrowing cost has delayed expansion plans of big corporates and choked SMEs. While easy external commercial borrowing rules have helped big firms to meet their funding needs always even when domestic rates are high, RBI's tight monetary policy has ruined small businesses and led to rise in unemployment. While broader macro numbers show the GDP growth rate remained sluggish at 4.7 per cent last fiscal, marginally higher than the decade's low of 4.5 per cent recorded in 2012-13, the damage that the rate hikes do to SMEs is seldom captured as most of them are in the unorganised sector. No matter how small and insignificant they are, cumulatively SMEs contribute over 7 per cent to GDP, 45 per cent to industrial production and 40 per cent to the country's overall exports. More than anything, the sector is the second largest provider of employment after agriculture providing jobs to over 4 crore people, as per official estimates. The unofficial estimates would be much higher. It is this sector that needs easy lending norms and cheaper borrowing rates to grow and employ more. How can the monetary authorities be so unmindful for this sector when they decide on rates?

If SMEs suffer and close down, will it be possible for India to become the manufacturing hub as envisaged in the Prime Minister Narendra Modi's Make in India campaign? The monetary authority has to take a holistic view and not go by the text book approach when it comes to addressing the problems of the economy. Fire fighting inflation is needed but neglecting growth is going to be bigger sin for an emerging economy like India.

(Sameer Kochhar can be reached at

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