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Government blaming others for the mess

Last Sunday, my church pastor was preaching about Cain and Abel. The story is known to all- Cain kills his own brother because his sacrifice was not accepted by God. Cain saw Abel as the reason for rejection, when in fact, the reason was elsewhere. If he just focused on bringing the best offering he had, God would have accepted his sacrifice too. It was not an either or nor choice before God.

Similar analogy can be seen in many of India's finance minister P Chidambaram's comments. Sample this: he advises Indians not to buy more gold. Or this, he advises India's central bank the Reserve Bank of India (RBI) to reduce key interest rates.

While its a fact that excessive gold imports has contributed to widening current account deficit- estimated at more than 5% of GDP. This is clearly unsustainable and opens the economy for big risk if something goes wrong. At present, the gap is filled by Indians remitting money from abroad or through services export (software firms exports) or through hot money (Foreign Institutional Investors or FIIs) flowing into India.

The problem, I feel, is not Indians importing record amount of gold but it lies elsewhere. Inflation - which touched double digit few years back and stayed there for a long time - is the biggest culprit. People felt gold to be the safest bet to protect themselves against inflation, and they weren't wrong too (probably because of self-fulfilling prophecy) as gold prices climbed astronomically.

Same is the case with RBI and interest rate. With central government borrowing in excess of Rs 5 lakh crore each (yes, that's how much our government borrows) and RBI mandated to ensure that government is able to borrow from the market, it leaves no room for the central bank to reduce interest rate. Its simple economics, there is only so much of savings people can invest and government borrowing alone sucks up most of it. This means corporate borrowers have to pay more.

The answer is simple: look inward and not blame others. Keep the fiscal deficit in order and take steps to control inflation!

Both are easier said and done.


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