Sunday, June 17, 2012

Should Subbarao now build warehouses?

He joined at a time when not just Indian but global financial system was at crossroads. The subprime crisis had just reared its ugly head. It threatened to sink even the most resilient financial systems. Since September 2008, Dr Subbarao has donned many hats. As chief of India's central bank, he has had to be a savior, facilitator and negotiator, all at the same time. First he was supposed to de-risk the domestic economy from subprime crisis. Then he was supposed to rein spiraling inflation. After that he was expected to support India's fledgling growth rate. And now it seems he could be expected to do the unthinkable! If the government has its way, the RBI governor may also need to find a solution for rotting grain produce. The same produce for which the government has fixed very high minimum support prices (MSP) to appease farmers. And in the bargain, once again stoked inflationary pressure.

Every time the government goes wrong with its policy measures, it looks for quick fix solutions. More often than not the RBI is expected to use its monetary tools to set things right. Inflation, oil prices, rupee depreciation. The RBI is supposed to have solutions for each of these. Despite Dr Subbarao hardly mincing words with regard to the government's ineptness in handling inflation, his views have found no takers. Other governors with the Reserve Bank of India (RBI) have also cited marginal room for interest rate cuts. Quite understandably since the government's wasteful spending has gone to gargantuan proportions. But once again, all eyes are fixed on the upcoming policy review that could ease liquidity further. That would ease growth pressures, albeit temporarily.

But we will not be surprised if this time a prudent Dr Subbarao should propose building the warehouses too! After all, our government does not seem to realize that the best solution to tackle inflation is ensuring better storage of food grains. On one hand the government is allowing surplus produce to rot in the open during monsoons. There is also a proposal to offer wheat at dirt cheap prices to industries. On the other hand, high MSPs (Minimum Support Prices) are being doled out to appease farmers. All of this if tackled with better warehouses and logistics could solve the inflation problem for good. And that would leave the RBI with more time to look into crucial matters, rather than quarter on quarter inflation control. Well, if the government remains tongue tied and paralyzed, it would eventually be pertinent for the more hands-on regulators to take some radical steps.

No comments:

Post a Comment