Interest Rates Jugglery Can’t Control Inflation Driven by Monopoly Profiteering
May 31, 2022Peoples’ Movement Must to Control Rising Cost of Living
Editorial, May 2022
The Reserve Bank of India suddenly hiked Repo Rate by 0.4% and Cash Reserve Ratio (CRR) by 0.5% on May 4th. It was stated that an emergency meeting of the Monetary Policy Committee (MPC) was convened without advance public announcement, which decided to increase these rates considerably citing worrying hikes in prices in general and of essential commodities in particular. Governor Shaktikanta Das specifically mentioned the rising prices of food products several times. However this severe increase in prices of essential commodities and the resulting suffering in the lives of poor working people of the country was known to all for quite some time and the retail prices index which the RBI is legally obliged to keep at ~4% with a +/- band of 2% had already breached the upper limit reaching 6.95% in March itself. Still, despite much criticism RBI was behaving as if 6% was the primary target and not the upper limit of the tolerance. RBI was constantly denying that inflation was out of control and a worrisome problem. Instead it was consistently declaring that economic growth was its principal objective and ensuring cheap capital funds with ample liquidity to industrial capitalists as its primary responsibility to meet this objective. Though one member of the Monetary committee JR Verma had been warning in every meeting for a year that rising inflation was a serious risk and could get out of control if RBI failed to take suitable action in time, the other members disagreed and continued to focus on government priority of economic growth. The previous meeting of the Monetary committee was held on 8th April. Though risk of rising prices was conceded for the first time in this meeting, the committee persisted with its commitment to ensuring flow of cheap capital funds. Although the impact of interest rate changes on inflation itself is questionable, we want to emphasise that RBI had consistently and for long denied that rising prices were a real problem. Hence its present sudden u-turn demonstrates that both the government and RBI are aware of the reality of the present severe inflation and risk of further increase in prices and therefore they want to be now seen taking some measures controlling inflation. However the real reasons for this sudden urgency are different from the inflationary crisis.
According to some reports, in addition to official public inflation statistics, RBI was also tracking price rise through the Ministry of Consumer Affairs, agricultural markets and other means and found that not only the prices were rising but the pace of this rise was unexpectedly higher than estimated earlier. It found (and it was later confirmed) that the Consumer Price Index (CPI) was to reach 7.6% in April (Hindustan Times, May 6). However it’s also a fact that the CPI, owing to the way it’s calculated, fails to reflect the true extent of the seriousness of inflation. Still the high level of this index indicates the reality that the prices are increasing. On the other hand, the Wholesale Price Index (WPI) has been in double digits for the last 13 consecutive months and has reached 15.05% in April which is its highest level in 3 decades. In this context the sudden u-turn by the RBI to raise interest rates shows that despite denials, the continuing rise in rate of inflation is worrying for the government and it at the least wants to be seen taking some measures to control it. It will enable it to claim later that it made all possible efforts to control rising prices but it was beyond its control and it was not responsible for the international events which resulted in this sudden bout of inflation.
Government inaction on inflation can be seen from the fact that it is taking no action to control prices directly controlled by it and reduction in which can bring down prices of all essential commodities across the economy. Prices of petroleum and gas products are one such example since their price rise results in cascading rise in prices of all essential products. These prices have not only been raised by the government directly through administrative decisions but also indirectly by imposing high indirect taxes and duties by both central and state governments. These taxes and duties actually contribute nearly two thirds of their price. Being necessary energy inputs in the production as well as transportation, the high price of these products have contributed to higher prices of all essential commodities. Despite this the public sector oil companies are creating grounds for further hike in petrol and diesel prices by claiming losses and under recovery on current prices. These companies claim that they are losing Rs 30 per litre of diesel and Rs 8-10 on petrol (Hindustan Times, May 18). They have also reduced supply of diesel in the markets to create artificial scarcity which will be useful in raising prices later. It’s pertinent to mention here that these losses are purely notional since these are not calculated on actual costs and prices but on export parity pricing vis a vis prevailing international prices which are quite high at the moment in US and Europe because of sanctions on Russia as well as manipulation by US refinery companies in creating artificial scarcity of diesel and gasoline. The level of profiteering is such that Reliance Petroleum which runs the largest refinery in the world at Jamnagar is exporting all of its diesel instead of selling it in India. This is despite the fact that the discounted price crude from Russia is being wholly allocated to Reliance by the government instead of the public sector oil companies.
Some will object saying that the government has reduced indirect taxes on petroleum products twice, once before UP assembly elections, and again on 21st May central excise duty on Petrol and Diesel has been reduced by Rs 8 and Rs 6 per litre respectively. In fact, the new reduction is also in view of the forthcoming Gujarat state assembly elections. One can also recall that both reductions have followed sharp increases in prices of these products by public sector oil companies just a few days before these reductions which do not cancel the increases. Nothing more needs to be said on this.
There are many other prices, fares, fees, charges, cesses, etc in all spheres of day to day life directly controlled by the government which have been steeply raised in recent years as part of its neoliberal economic policies and reduction of which can bring immediate relief to the people. Many prices have gone up because of the imposition of high indirect taxes in the form of the Goods and Services Tax (GST) introduced a few years back. However instead of providing relief in such high indirect tax rates there are rumours of further increasing GST rates in the name of rationalisation of tax rates despite the government itself blowing the trumpet of economic recovery and record tax collections much higher than budgeted estimates. This will further push up inflation.
Regarding the role of price gouging by monopoly corporate capital for their super profits we have written separately earlier about the profiteering and speculation indulged in by the capitalists. For example we had dealt in detail with more than doubling of edible oil prices in India in which profiteering and manipulation by large monopoly capitalists like Adani and Ramdev played a major role and they secured immense profits. Similarly we can see the telecom sector where the remaining companies in the market have been raising telephony charges in open collusion and earning huge profits. Financial results of one of these companies, Airtel show that average rates (ARPU) have risen by 22% while the profit has gone up by 162% and the company has expressed the intention to furthermore than double the average rates. Similar examples of profiteering by monopoly capitalists using their monopoly power to raise prices can be seen in many sectors of the economy.
It’s quite clear that the government is not keen to take real and effective measures to control rising prices. It only wants to be seen doing something. Besides there’s little evidence that monetary measures to reduce liquidity and increase the cost of capital for industrial and commercial capitalists has any real effect on prices. Yes, it had some indirect effect with a considerable lag in the past when the wholesale trade and stocking of inventory was in control of relatively smaller proprietary and partnership trading firms who could be forced by the financing banks to liquidate their stocks by putting a leash on credit availability and higher interest costs. However it doesn’t have the same effect on larger monopoly capitalists not solely dependent on bank lending for funds, and in a market where immense capital is chasing profits through manipulation of prices. Why then has RBI been forced to this emergency action of raising interest rates and putting squeeze on liquidity flows? There must be some other compelling reasons for that. We’ll come back to that in a while.
It is also pertinent to mention here that the interest rate on which banks borrow short term funds from RBI by pledging their securities or bonds is known as Repo Rate. It’s supposed to increase the funding cost of the banks and hence increase in this rate is considered to be a signal by the central bank for raising of interest rates. Cash Reserve Ratio or CRR is the ratio of bank deposits which are required to be kept in cash or in deposit with RBI and hence cannot be lent. Hence the loanable funds with banks at present will reduce by 87000 crores rupees. Therefore the cost of lending will further increase and banks will need to raise interest rates on lending. Combined effect of both will be to make borrowing expensive as well as difficult. The economic wisdom in vogue says that this higher cost of borrowing will make hoarding expensive and non remunerable for the capitalists forcing them to release their stocks in the market which will reduce prices by increased supply. How effective this really is, we will come back later.
The current global crisis of high inflation is really the result of the severe economic crisis caused by the nearly 5 decades long neoliberal economic policies, which has been further accentuated by first covid and then the imperialist war in Ukraine. Sri Lanka in our neighbourhood is going through a severe economic disruption and immense hardship for the common people right now, where the official rate of inflation has reached 19% but the unofficial calculations have found it going up to 55%. In Turkey it has been reported upto 69%. Even in developed capitalist countries it is touching nearly 10% with the Bank of England having already warned of inflation rate in double digits. In Pakistan also the first thing that the new government has faced is the IMF pressure to raise petroleum products prices to avail a loan from it for meeting liquidity requirements. Even in Japan it is at 40 years high.
What is the basic reason for this? Bourgeois corporate media and their experts say that this high inflation has been caused by the lower supply and increased costs because of disruptions in global supply chain owing to covid and then the war. Departing from this most bourgeois economists oppose any attempt to control prices since in their view high prices are the solution for high prices. Their rationale is that the high level of inflation is transitory and higher prices, by increasing the rate of profit, will bring in more capital investment lending to increased supply and lowering of prices. They therefore argue that prices should be left unregulated and more inflation will actually bring down inflation sooner. However they ignore the fact that the capitalist economy is already beset with the problem of overproduction (overproduction not in the sense of it being more than social needs but more than the demand or purchasing power available in the market). When the industry facing overproduction is already operating far below its existing installed capacity, how high prices will bring in more productive investment to increase supply and lower prices? Moreover this is the age of monopoly capitalism where prices are still high despite overproduction because of the corporate price gouging capability owing to the domination and control of monopoly capitalists in the market. In this age monopoly capitalists not only control the market, but also exercise increasing control on the bourgeois state. Hence they can put not only economic but also significant non economic barriers in the way of their likely competitors. Warren Buffet, one of the richest capitalists, terms it as the ability to build moats around their businesses. It is sufficient to see the recent behaviour of the Indian bourgeois state towards smoothing the path of Ambani, Adani, Tata, Ramdev, etc to understand the complete falsity of free competition increasing supply and bringing down prices. Moreover, if the low supply is considered responsible for high inflation, high interest rates will actually discourage productive investment by making capital dear. In reality, interest rates are less important for inflation control and have a bigger role in distribution of profit between the industrial and financial capitalists.
According to many Bourgeois economists the reason for inflation is high demand driven rise in wages since the post covid economic recovery has increased demand for workers leading to high employment and increased wages. This is the view especially of the American Federal Reserve whose governor Jerome Powell has repeatedly been vowing not to let wage levels increase even at the cost of another recession. The Federal Reserve has already started raising interest rates to make capital dear and slow down the economy to reduce demand for workers and lower wages. They assert that lower wages will also shrink market demand and bring down prices. However the rise in prices has already been more than the increase in wages thus reducing effective wages and demand. Hence even many bourgeois economists do not ascribe to the view that inflation can be controlled by higher interest rates at least not without a long time lag.
While the above two reasons play some role in inflation, we have written at length earlier that in the age of monopoly capitalism the chasing of super profits by the monopolies and the financial speculation is playing the chief role in these bouts of high inflation. Without repeating those arguments we will just point to this recent study of the contributory factors for the current spate of inflation in the published by the Economic Policy Institute, (https://tinyurl.com/4wcxk55m) which on the basis of actual public price data of companies concludes that the main contributor (54%) to price hikes is corporate profits, whereas wages are responsible for only 7.9%. Even otherwise if the corporations are so hard pressed to absorb higher costs it should have been reflected in their profit margins but we see record profit growth in this period of high inflation which is supposedly because of higher costs! Let’s just take a single example of Adani Power which in the very period of hue and cry on shortage and high price of coal has seen its profit increase from just Rs 13 crores in March 2021 quarter to 4645 crores in March 2022.
Without going into any more details let’s come to the real issues behind this emergency interest rate action by the RBI, i.e., interest rate hike by US Federal Reserve. As soon as the possibility of interest rate increase by the Federal Reserve became real, there was panic in the government and RBI leading to the emergency meeting and a preemptive hike in rates just hours before that in the US was announced, along with curtailing the liquidity of the banking industry. But the RBI has still promised to ‘accommodate’ the financing needs of the capitalists!
To understand the reasons for the linkage between US interest rates and RBI decision we need to take a cursory look at the Indian balance of payments. Recently we saw a lot of media noise about a 24% increase in Indian merchandise exports taking total value beyond USD 400 billions. However those who paid attention also found that imports increased at a still higher pace and became more than USD 600 billions. April trade data also showed a monthly deficit of USD 20 billions. With this trend, the annual deficit is estimated to be greater than USD 200 billions. Now the problem is how to prevent this trade deficit from transforming into a payments crisis like the ones India has seen in 1990 and 2013 and Sri Lanka is passing through currently. In 1990 RBI had to airlift gold to Switzerland for pledging it to borrow foreign currency funds and in 2013 RBI under governorship of Raghuram Rajan had to lure NRIs to bring their foreign currency savings in India at high interest rates.
It can be argued here as an objection that foreign exchange reserves of India, unlike that of Sri Lanka, are quite high, around USD 600 billions. Hence there’s no realistic risk of a payments crisis. But we need to understand that the foreign exchange reserves of a country like India which has a monthly trade deficit of USD 20 billion are not really its owned funds like those of Japan, Germany, China, etc but built up from foreign investments and loans taken by Indian banks and corporations to take advantage of earlier low rates of interest prevailing abroad. A lot of these are speculative FII investments in share market which is known as hot money. It comes in quite fast for making a quick buck, but can leave still faster if there are profits to be made somewhere else or to avoid the slightest risk. The Federal Reserve raising interest rates comes into picture here as this makes the US market more attractive for these speculators currently from both returns as well as security point of view. The 2013 crisis was the result of a similar sequence of events. Hence as soon as the Federal Reserve was expected to raise interest rates, the RBI panicked and called for an emergency meeting of the MPC which decided to raise rates. The only points debated, as the meeting minutes show, was how much the quantum of hike should be immediate and how much to come in the future and at what speed.
But there’s news that it has created another crisis. RBI is also the debt manager of the government. Now the government has reportedly requested it to take care that rising interest rates should not increase the interest costs of government debt which is also quite high reaching nearly 153 lakh crore rupees despite much chest thumping about economic recovery and record high revenue. The fact is the government is chest deep in debt because of the bailouts, tax concessions, ‘incentives’ and so much more assistance given to capitalists at the cost of cutting expenditure on public services and incurring huge debt. This is all to be extracted from the people in the form of high prices, fares, fees, cesses, charges, duties, taxes, etc. Hence the government can’t really control the prices, it can only be seen doing something like this: interest rates juggling. Price control to whatever extent it can happen to provide some temporary relief in the existing capitalism can happen only through pressure brought in by a massive people’s protest movement as it’s they who suffer from this additional tax on them in the form of inflation.