Taste of Monetarism

Taste of Monetarism THE Reserve Bank has set out the rationale of the seemingly drastic monetary policy measures announced on October 8 as follows: "Given the strong inflationary pressures in the economy and the anticipated slow-down in the real GDP growth ratel there is an imperative need to bring about a significant slow-down in monetary expansion in the remaining period of 1991-92". This does not, however, put the connection between monetary expansion and growth of GDP quite right; what would be more ace irate to say is that monetary expansion has to be curbed in order to bring about a slowing down of the growth of GDP For it is clear that the monetary measures announced by the Reserve Bank are a part of the particular strategy for dealing with the balance of payments deficit and inflationary pressures which the government has been persuaded to adopt and which consists essentially of applying a severe squeeze on aggregate demand in the economy. In this scenario, sketched by the IMF/World Bank for innumerable countries before doing the same in India's case now, slowing down the real GDP growth rate, with the inevitable attendant consequences of business failures and workforce lay-offs and retrenchments and rising unemployment, becomes the objective of economic policy in the short and even the medium term. Thus the union budget for 1991-92 effected sharp cuts in the growth of the government's capital and investment expenditure. Now the country's central bank has decreed steep increases in the cost of capital all round. Thus is monetary policy being harnessed to "support the cohesive package of measures of macro- economic stabilisation and structural reform" as the Reserve Bank governor has put it. The bank rate has been raised from 11 to 12 per cent and minimum lending rates by 1.5 per cent across the board