The Reserve Bank of India (RBI) upped the repo and reverse repo rates on July 27 in a bid to rein in inflation while also trying to keep economic growth intact. I had a chat with ‘growth’ and ‘inflation’ and here are excerpts from my conversation:
Me: So which of you is more important?
Growth: Me, without a doubt. In India, I rule.
Me: Why so?
Growth: If the Government gave the right environment for industry to grow, employment will grow. If employment grows, health improves, education improves, lifestyle improves, change happens.
Me: That isn’t so easy. In India, the rich get richer and the poor get poorer.
Growth: India has a unique problem – employment is not just ‘organised’. There is a huge ‘unorganised’ workforce that depends on the ‘organised’ workforce. And the organised workforce doesn’t share enough with the unorganised.
Me: You are sounding socialist now. What are you referring to by ‘sharing’?
Growth: If your company did well and gave you a pay hike, you can pass on that benefit to your driver, the house maid and any kind of domestic help. They can then afford better housing, better education for their children and a better lifestyle. All that, provided you share your growth story with them fairly. If you cringe to give your housemaid a 10% hike every year but are happy to while away precious plenties at the mall and multiplex, that won’t do any good. You can all cry about the fact that the Government does nothing to help the poor, that all your taxes are in vain. But your company too pays more tax for more profits but it also hikes your salaries.
Me: Hmm…
Growth: Your company ‘shares’ because it has to share, because investors are watching, the labour laws are watching.
Me: Will the lower middle class and the poor really benefit from a marginal increase, in terms of lifestyle, housing and education?
Growth: It is not an overnight change. I am not saying a pay hike will drastically alter their lives but they will at least be able to afford schooling and good food for their kids. The children get educated, find jobs in the organised or semi- organised sector and then move up the chain. The point is in most households I know, people won’t think twice before splurging on something they don’t need but they make sure maids get paid only that much.
Inflation: That’s where I come in. If the lower class has more money in their pockets they are going to spend more. That is only going to heat me up.
Me: That’s a point.
Growth: Yes, but increasing interest rates won’t solve that problem. If people are consuming more, the Government must find ways to produce more – improve irrigation, land reforms, give agriculture a push.
Inflation: But that takes care of cost push inflation. What happens in case of demand pull inflation? When there is just too much money chasing the limited resources in the system? The Government simply has to increase interest rates.
Growth: Yes, then the Government needs to hike interest rates to prevent a runaway situation and prevent the economy from overheating. But that is not the case in India today. The growth story is real because the demand is real. There is no overheating.
Me: Wow, that was heavy duty stuff. Thanks, guys, for taking time off to chat with me.
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