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Price Rise, fall in economy, Economic policies

09/06/2012 pcg

1. Decrease in Bank Interest Rates:

Few years back when bank interest rates were cut from almost 11% to about 5-6%, most of the middle class including me was badly affected as their savings were now earning almost half of what they were earning earlier.

I saw it as if the Govt. wanted to help the industrialists that is the rich men, by providing them money at low interest rates at the cost of middle and poor class.

Industry did gain a lot due to this wind fall. However it helped India to start growing at almost double digit rates.

2. Housing and car Loans:

Then the banks started giving high loans at low rates for homes almost up to 85-90% of value. Similarly large car loans were disbursed though at a little higher rate. These loans have lower risk for the banks than the Industrial loans. Result:

People started investing in housing. They committed their savings for the next 15-20 yrs to be spent on housing. Mind it, investment in housing was a liability and not an asset as it did not give them returns unless the prices were rising. Personal cars are also a pure liability.

Investment in manufacturing industry and infrastructure fell short for money availability being costlier for them as money was transferred to housing and car industry. Availability of loans at low rates continued feeding in the housing industry.

3. Foreign Investments:

Foreign funds, mostly black money started coming in through dubious routes and economy continued to grow.

4. Entry of Big houses in Retail:

Then came big industrial houses like Reliance in retail. Retail was hither to taken care of by small and medium traders. When these big houses started selling vegetables, fruits and food grains, they having lot of financial power were able to buy at higher rates and also sell at high rates. Their own cost inputs were much more than the cost inputs of the small retailers. This started the period of high price rise.

When small retailers found that these big houses can sell these goods at high rates, they also started increasing their rates disproportionately. People have to buy the consumables hence price rise continued.

5. Fighting increase in Prices:

Instead of stopping big houses from the retail sale of consumables, Govt. decided to increase the interest rates with the purpose of reducing the money availability in the market. This was a totally wrong policy. Because

i) It put more money in the hand of retail consumers as higher interest earnings from their savings.
ii) It made the money costlier for the Industry.
iii) It did not very much hinder the persons to invest in housing as prices of housing were increasing at a rate much faster than bank interest rates.

6. Free fall of economy:

As Anna’s campaign against corruption took strength and scams came to public glare, flooding of black money through so called foreign investments dried up. So Industry was short of easy money. Prices of consumables were increasing, thus labour cost increased, industry went into tail spin and GDP growth rate came down to around 6% only.

7. Dollar Conversion rate:

With fall in growth of GDP from about 10-11% to about 6% Rupee weakened to as low as Rs. 56.40 to a USD.

SOLUTION suggested:
  1. Reduce the savings interest rates.
  2. Ban the big houses from retail of consumables.
  3. Stop advancing loans to the housing industry. At most loan should be for 25-40% of the total cost of the house and that too disbursed after the person in whose favor loan is sanctioned has paid his full share.
  4. Stop advancing loans for cars, invest in public transport.
  5. Advance loans to power sector, Industry and agriculture sector. Spend on Infrastructure, health sector. Open a Govt. medical college in each district.
  6. Stop subsidy on Diesel used for cars immediately. There is no rational to continue that.

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