All of the above may seem as if there is a trade off between the Union government and the RBI to distract public attention from poor economic performance but unfortunately this is not correct. The more likely situation is that the Union government really wants to pursue growth even at the cost of spiraling inflation. The reasons for this may have to do both with internal politics and international situation.
The effect of inflation is not symmetric; inflation is a kind of taxation on poor and implicitly it helps the rich. The inflationary growth is oligarchic and plutocratic in nature. This increases the inequality and also increases the demand for subsidies. The increasing demands for subsidies put pressure on the government to further print the currency and borrow from the markets. Such compulsions result in higher inflation and therefore, in devaluation of currency affecting the exchange rates and buying power of INR negatively. Moreover, increased borrowing and printing by RBI makes the nation becoming more dependent on the foreigners. It increases the demand for the green bucks and would result in huge dollarisation of the economy.
Because of the increased tendencies to ask for more subsidies the tax slabs may get affected. It increases the predation in hierarchal society like India, increases capital flight and makes politics more bitter and identity-driven. As a result regionalism would overshadow the genuine nationalism. But inflationary growth has a beauty of attracting foreign investors if inflation does not cross an upper limit.
Because of lower value of INR, the foreign investors can easily invest and get high returns and because of the higher demands for the USD they can expand their operations both horizontally and vertically. The explicit law governing the society in inflationary growth is the survival of the fittest; a kind of cruel Darwinism; the big becoming bigger and small becoming smaller with the middle classes becoming irrelevant. It makes society more cruel and insecure. The defense mechanism for India under such circumstances would be high dose of crony nationalism which would again increase the stakes of the US-led West, resulting in increased caste-class divides.
On the other hand, a realistically stable inflation is good for the society. With stable inflation the government should try to maintain stable exchange rates, particularly the INR-USD exchange rates if the USD remains stable globally. The government should not artificially manipulate exchange rates by pumping in and withdrawing INR and USD. The investors and businesses, both Indian and foreigners, would any way sell their products at appropriate adjusted and rescaled prices.
The stable inflation lowers down the risks and uncertainties in the markets and contains the political, social and economic diffusiveness. With stable price system the future becomes more predictable and people can plan their future. It can also help attract non-predatory long-term investments. The interest rates would become stable and as a consequence when they become lower they would help increase the buying power of INR. There would be a healthier equilibrium between demand and supply of capital. The growth can become inclusive and pro-middle classes. The coercion would decrease and average value and worth of Indians as a group would increase.
The fact is that India needs to create primary stakes and primary wealth for itself. This requires investments in innovation and technology creating ventures. The primary stakes generation requires a stable currency and not so high interest rates; the capital should be available and it should have sufficient buying power. The indigenization and sustaining of a genuine nationalism anyway demands a stable currency and high intrinsic buying power to transact both internally and externally. If India continues on the path of generation of secondary wealth and stakes without converting them into primary ones then a day will come when elites, particularly the political ones, would feel the heat and their real powers may shrunk.
But elites do not give powers whatever the consequence. This could harm the whole economic activities and increase the predation. The political parties would segment among themselves and may reverse many reforms. The wealth generation capacity of Indian businesses would be badly affected. The rich would somehow be able to maintain their wealth but the middle classes and the poor would be worst affected. The people would start disbelieving in the system. The most important thing to remember is that India is not China and disbelief in system would affect the whole Union-states and inter-state relationships. The best thing for India would be to bring down the inflation level to a realistic value and set long-term goals for the economy.
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