The fall in demand for gold is the best lesson for the finance minister to stop directing banks on how to conduct their business
By Mohan Sule
In the end, the government did nothing to discourage its consumption. Nor was there any patriotic fervor behind users’ waning interest. Rather high prices contributed to the fall in demand for gold by 20% in India in the June 2012 quarter over a year ago. Continuation of this trend could have a beneficial impact on the country’s current account deficit, easing the pressure on the rupee and, thus, interest rates. The reversal demonstrates how market forces are the best levelers rather than artificial efforts to suppress prices or discourage usage. Taken together with the low tariffs in the telecom services space, it should embolden the government to free prices of natural gas, power, coal, and fuel. This could be the signal for the market to break out rather than cosmetic tinkering with the minimum retail subscription for IPOs, which was recently raised by Sebi to attract serious investors and ensure allotment. This is despite increasing the cap for this category of investors to Rs 2 lakh from Rs one lakh producing no noticeable surge in participation by the small investors. Small investors’ disinterest stems from issuers pricing their offerings richly, leaving little scope for post listing appreciation. Inability to get allotment is due to the large portion (65%) allocated to institutional investors. Prohibiting big-ticket investors from withdrawing their bids would make them choosy and increase the selling expenses of issuers, and prompt them to opt for private placement, preferential allotment or tap the cheap overseas markets.
The flattening of gold consumption should also be a lesson for the finance minister from interfering with companies’ administrative affairs. P Chidambaram has suggested that banks reduce their interest rates on loans for consumer durables and automobiles. According to his reckoning, the resultant demand-push would accelerate GDP growth. As the largest shareholder of PSU banks, the government does have a right to opine on operational matters of state enterprises. So are funds with exposure to listed entities entitled to oppose any move that would hurt minority shareholders’ interest. The brawl between the largest institutional investor in Coal India and the Centre over capping prices of coal is still fresh. Second, the finance minister’s advice amounts to abutting into the Reserve Bank of India’s job of carefully weighing growth and inflation indicators to determine the credit policy. It is perhaps the outcome of the government’s frustration at the central bank’s stubbornness over easing interest rates. Unwittingly, the advisory indicates that the lawmakers believe that the monetary authority has the finger on the trigger for economic growth, unwilling to concede that they too have some responsibility for the slowdown. The bump that the equity markets around the world are receiving at the prospect of a third round of quantitative easing by the US Federal Reserve could have also encouraged the finance minister to think that lower interest rates could move the wheels of the economy. But the demand unleashed by soft lending rates will be temporary and could release inflationary pressures. Consumer durables manufacturers can produce more if raw materials and finished goods can be transported quickly and there is adequate power to run their facilities. A transparent and uniform tax structure will enable them to buy inputs and price their goods efficiently. There is no dearth of capital. The obstacle is the inability of the government to implement policies that would facilitate this environment.
It is time policy makers give up their obsession with interest rates. Heating up of prices is a characteristic of a growing economy and so also high interest rates. It would be surprising if they were not. Instead of trying to choke up inflation by tightening and increasing the cost of money supply, it would be interesting to examine the factors influencing inflation. The two biggest contributors in recent time have been crude and food items. The flow of both is beyond government’s control. Availability of oil depends on the growth of global economy and tensions in the producing regions. Food grains’ output is dependent on monsoon. The predictable response to surging oil prices is to ramp up interest rates in a vain bid to suppress consumption. The collateral damage is increase in the capex cost of companies as investors flee from equities to debt. The minimum support price is hiked to incentivise farmers to grow more and also to ensure that they do not suffer in case of glut. In the process the share of food items in the wholesale price index goes up. This means using interest rates to counter rising prices can prove counterproductive for a growing economy. Instead allowing the market to even out demand-supply, as demonstrated by gold, would ensure flow of investment in the right direction and at the same time keep prices in check.
Mohan Sule
By Mohan Sule
In the end, the government did nothing to discourage its consumption. Nor was there any patriotic fervor behind users’ waning interest. Rather high prices contributed to the fall in demand for gold by 20% in India in the June 2012 quarter over a year ago. Continuation of this trend could have a beneficial impact on the country’s current account deficit, easing the pressure on the rupee and, thus, interest rates. The reversal demonstrates how market forces are the best levelers rather than artificial efforts to suppress prices or discourage usage. Taken together with the low tariffs in the telecom services space, it should embolden the government to free prices of natural gas, power, coal, and fuel. This could be the signal for the market to break out rather than cosmetic tinkering with the minimum retail subscription for IPOs, which was recently raised by Sebi to attract serious investors and ensure allotment. This is despite increasing the cap for this category of investors to Rs 2 lakh from Rs one lakh producing no noticeable surge in participation by the small investors. Small investors’ disinterest stems from issuers pricing their offerings richly, leaving little scope for post listing appreciation. Inability to get allotment is due to the large portion (65%) allocated to institutional investors. Prohibiting big-ticket investors from withdrawing their bids would make them choosy and increase the selling expenses of issuers, and prompt them to opt for private placement, preferential allotment or tap the cheap overseas markets.
The flattening of gold consumption should also be a lesson for the finance minister from interfering with companies’ administrative affairs. P Chidambaram has suggested that banks reduce their interest rates on loans for consumer durables and automobiles. According to his reckoning, the resultant demand-push would accelerate GDP growth. As the largest shareholder of PSU banks, the government does have a right to opine on operational matters of state enterprises. So are funds with exposure to listed entities entitled to oppose any move that would hurt minority shareholders’ interest. The brawl between the largest institutional investor in Coal India and the Centre over capping prices of coal is still fresh. Second, the finance minister’s advice amounts to abutting into the Reserve Bank of India’s job of carefully weighing growth and inflation indicators to determine the credit policy. It is perhaps the outcome of the government’s frustration at the central bank’s stubbornness over easing interest rates. Unwittingly, the advisory indicates that the lawmakers believe that the monetary authority has the finger on the trigger for economic growth, unwilling to concede that they too have some responsibility for the slowdown. The bump that the equity markets around the world are receiving at the prospect of a third round of quantitative easing by the US Federal Reserve could have also encouraged the finance minister to think that lower interest rates could move the wheels of the economy. But the demand unleashed by soft lending rates will be temporary and could release inflationary pressures. Consumer durables manufacturers can produce more if raw materials and finished goods can be transported quickly and there is adequate power to run their facilities. A transparent and uniform tax structure will enable them to buy inputs and price their goods efficiently. There is no dearth of capital. The obstacle is the inability of the government to implement policies that would facilitate this environment.
It is time policy makers give up their obsession with interest rates. Heating up of prices is a characteristic of a growing economy and so also high interest rates. It would be surprising if they were not. Instead of trying to choke up inflation by tightening and increasing the cost of money supply, it would be interesting to examine the factors influencing inflation. The two biggest contributors in recent time have been crude and food items. The flow of both is beyond government’s control. Availability of oil depends on the growth of global economy and tensions in the producing regions. Food grains’ output is dependent on monsoon. The predictable response to surging oil prices is to ramp up interest rates in a vain bid to suppress consumption. The collateral damage is increase in the capex cost of companies as investors flee from equities to debt. The minimum support price is hiked to incentivise farmers to grow more and also to ensure that they do not suffer in case of glut. In the process the share of food items in the wholesale price index goes up. This means using interest rates to counter rising prices can prove counterproductive for a growing economy. Instead allowing the market to even out demand-supply, as demonstrated by gold, would ensure flow of investment in the right direction and at the same time keep prices in check.
Mohan Sule
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