Real Estate Gurgaon

The Congress party's inability to learn from its own past experience defies understanding. Step by inexorable step, it is going down precisely the road it took in 1995, and step by step it is heading for the same dire outcome.

In December 1994, the party lost the state elections in Andhra and Karanataka, and set up two committees to understand why it should have lost in these supposedly safe states. One of them reported that the cause was inflation, which had been high ever since the 1991 foreign exchange crisis and was being pushed up once more by the boom in the economy.

So in May-June 1995, with less than a year left for the next election, the party decided that this had to be brought down at virtually any cost. The belt tightening that began then killed the boom in investment of the previous five years and with that killed industrial growth. From 16 per cent in January-March 1996, it fell to zero in October 2000.

I have been warning readers in these columns that an exclusive reliance upon monetary policy to contain the boom that has set in will have exactly the same effect. (See: Monetary stability at what cost?) and also (See: Boom or recession: who decides?)

But my warnings have fallen on deaf ears. For politics has stepped in once again. After the Congress party's electoral defeats in Uttarakhand, Punjab and Manipur, the Congress has begun to look for explanations with the same frantic stupidity that it displayed in 1995.

Mrs. Sonia Gandhi has pronounced that the culprit is inflation once again. As a result killing inflation has been abruptly moved to the top of the agenda, and the burden has fallen once again entirely on monetary policy.

What no one has explained to Mrs. Gandhi is precisely how using monetary policy to kill inflation will end by killing growth. When it does that, the Congress will lose its sole selling point with the public so far, that in the past three years very high growth has made sure that no one who comes into the job market is denied employment.

If the recession that I now foresee develops — it will take between ten months to 14 months to fully reveal itself — by the time the Congress goes to the next election it will have next to nothing to show for its five years in office at least nothing that the ordinary people understand or care about.

Unfortunately we are so far down this road that it may be next to impossible to turn back.

Mr Y V Reddy, the governor of the Reserve Bank has been fighting a battle against the finance minister to give inflation precedence over growth for the last eight months. On Friday last week, he succeeded. After Mrs. Gandhi's pronouncement, the finance ministry caved in. So, instead of taking a close look at the most recent price and investment trends in the economy, Mr Reddy has pushed up the cash reserve ratio — the proportion of their deposits that banks have to hold in cash, by a full half per cent. (See: RBI steps up fight on inflation with Repo, CRR hikes) This is the third successive increase in the CRR in the past few months. Together they have sucked Rs43,000 crore out of the base of the financial system. The result has been predictable. Even before last Friday's increase three- to five-year deposit rates had crossed the ten per cent mark - 4.5 per cent higher than they were just six months ago.

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