'Nobody is talking about the inequality that is going to come.'
What kind of the impact will the RBI's move have on the economy?
"If we blindly follow what the Western economies do, we might end up having an uneven impact on the people," Dr Ajitava Raychaudhuri, professor of economics at Jadavpur University tells Rediff.com's Shobha Warrier in the first of a two-part interview.
Inflation is high. There is no demand in the market. There is record high unemployment. At a time like this, how will the repo rate hike by the RBI affect the economy?
Rate hike is a worldwide trend that is going on now.
If you look at the United States or Western Europe, you will see that they have injected a lot of money during the covid period.
Then the prices started rising there, which started accelerating due to the war in Ukraine.
In those parts of the world, too much money had started floating in the economy. Employment has also risen back. So, a rate hike is justified there.
But that is not the case in India...
Yes, in countries like India, and South Asian countries, there is either open unemployment or under-employment.
The latest statistics of CMIE (Centre for Monitoring Indian Economy) finds that rural unemployment is more or less the same, but urban unemployment has gone up.
It is a big survey by CMIE, but they do not follow the parameter of what the ILO (International Labour Organization) calls decent jobs.
ILO follows 5-6 criteria for decent jobs like security of the job, minimum comfort in the job, etc.
And 80% of jobs in India do not guarantee what the ILO specifies.
So, if you calculate based on the definition of decent jobs by ILO, most of the so-called employed may not be in the employment category at all.
Then, unemployment rate in India will be much higher than what the CMIE says. Anyway, the government statistics also does not go into that.
If you look at the situation in India, there is still high unemployment, and there is enough scope for the formal sector to expand.
Under such a circumstance, if we blindly follow what the Western economies do, we might end up having an uneven impact on the people.
Uneven impact means?
When you increase the repo rate, the banks are going to increase the interest rate for most of the lending.
For example, if the construction sector or some of the manufacturing sector is hit, there will be some contraction in investment.
And if the construction sector is hit, who are the people who get affected? Those who get affected the most are unskilled workers or semi-skilled workers.
And they are the majority of workers in the Indian economy.
Whichever sector is hit, it is these people who lose the jobs.
This is what I mean by uneven impact by such policies.
You mean, unemployment may go up further?
Not for everybody. It will be disproportionately against unskilled and semi-skilled workers.
With this repo rate hike, you will throw out a number of people from their jobs and their income will reach to a minimum level, or maybe close to the subsistence level.
When you have a situation say of zero income and inflation compared to an income of Rs 100 and inflation, which one will you choose?
So, you feel those who are already affected by the pandemic, and also those who are in the MSME sector, which has already been hit badly in the last few years, will be more affected?
Yes. The sad fact is nobody is talking about the inequality that is going to come. Everybody is talking as if all will be hit equally. No, that is not the case.
The tragedy of this policy is the uneven impact on the people. And nobody is talking about this.
The logic behind hiking the repo rate is that demand outstrips supply. So, they want to decrease the demand.
Why can't you increase the supply in those sectors where you have this problem? That way, it will not impact employment that much, and you can also avoid the uneven impact on the vulnerable section of society.
There is no clarity on the capacity utilisation in different sectors.
Have they found out in which sectors this is happening, and why? Is there no way to increase the supply without affecting employment?
But what is said is that growth is not happening because investment is not happening. And investment is not happening because there is no demand in the market... But what the RBI has done right now contradicts this general situation...
The RBI is doing this citing inflation as the reason.
But inflation is happening only in certain areas like food, the construction sector, some of the services sector, some basic items like textiles and agro-based industries. There is no overall inflation.
When you push money into the economy in some form or the other which you did during the pandemic, people obviously saved it for basic needs.
So, inflation is led by only these sectors catering to people's basic needs, and it is not an overall scenario.
In fact, in some sectors like pharmaceuticals, automobile, electronics, there is a raw material problem because China is on lockdown for the last one month.
It is not that demand is outstripping supply in all sectors. So, it is essential to pinpoint in which sectors it is happening.
You may have food inflation, but there is still no demand in the automobile sector, in the electronics sector etc.
Feature Presentation: Aslam Hunani/Rediff.com