Wednesday, October 12, 2016

A Possible Financial Future of India

As expected from the forceful removal of former RBI governor Raghuram Rajan by the Modi government and his replacement with Modi's own man Urjit Patel, the new governor has reduced the interest rate as told to him by his political masters. Narendra Modi and his lawyer turned finance minister Arun Jaitley think that higher interest rates is what is keeping the Indian economy from growing at a faster rate, and the solution of this problem, naturally, is a lower interest rate. This is an obvious outcome of they being surrounded by Keynesian economic advisers. Modi and Jaitley have no clue whatsoever about economics; they are doing whatever their advisers are telling them.

As I have said many times in past, this Keynesian thinking is totally wrong. Artificial lower interest rates will never help the Indian economy grow. In fact, it is this manipulation of the market rate of interest by the RBI governor, and now the monetary policy committee (MPC), is what is stopping the Indian economy from growing. An economy grows not via the regime of artificial lower interest rate produced by creating fiat currency notes out of thin air, but by the process of prior production, saving, investment and capital accumulation (to understand this economic logic further please read Peter Schiff's book, How and Economy Grows and Why It Crashes). The only effect that the policies of RBI will have on India is to create more boom-bust cycles in future and more inequality of income and wealth. The biggest danger of RBI's low interest rate policy though is a possible creation of hyperinflation situation in India. I am seeing the Indian economy moving in the direction of countries like Zimbabwe or Somalia or Venezuela where hyperinflation in recent times have ravaged their economies. For those who are not aware of the dangers of hyperinflation below I give you some demonstration of what a hyperinflationary economy looks like.

1) Zimbabwe Hyperinflation:


2) Somalia Hyperinflation:


3) Venezuela Hyperinflation:


The Indian central bank RBI is taking us into exactly the same direction as those above cited countries with it low interest rate policy. The danger of hyperinflation in India is very real and people will ignore it at their own peril. An artificially low interest rate set by a central bank can never grow any economy. It can only destroy it, and that is what I am fearing will happen in India in future.