Why moan about higher interest rates on home, business and consumer durable loans if policies engendering those higher rates can bring down prices of dal and chawal? The RBI governor’s thesis on political economy is fascinating in that it is so similar to current political thinking. It is also off the mark, for the same reasons the current political thinking is. Let’s first agree that no one is in favour of runaway price increases in basic commodities in a country where food accounts for a large share of a lot of people’s personal budgets. The question then is why are dal-chawal prices increasing and is a high-interest economy the best way to deal with this. These columns have repeatedly pointed out problems with the economic side of this thesis: the rise in primary article prices have been supply side, locally and globally; theoretically and on the ground the impact of high interest rates on supply crunched primary article prices is ill-established; real economic reforms, for example, reducing the costs of getting commodities from farmgates to retail outlets, can be more potent in this kind of inflation; that there’s a contradiction between the RBI’s exchange rate policy and its anti-inflation policy. To this it is time to add, after the RBI has effected huge rate hikes, the argument that high interest costs are passed on and for industries like steel, cement, etc these passed-on costs contribute to inflation by keeping input costs high. Therefore, high interest rates are not attacking dal-chawal prices but killing middle-class aspirational planning. It’s hard to defend this kind of economics especially when India is going through a great transformation. High growth was changing economic profiles of people who have had few opportunities before. Killing EMIs on home loans are not just some abstract economic data, they represent the busting of a social reconfigurement. The politics that refuses to recognise this, first, falls victim to all the scare stories about inflation — recall the recession engineered in 1996-97 and that kept growth down for almost four years — and, second, has a problem admitting that aspirational classes are also voters who need listening to. Politicians glibly invoke social justice to say high growth is not important. The RBI says it too, but puts it so crudely. But RBI governors can get another term without going to the people. Politicians looking to the RBI to bring down inflation don’t have that luxury.
