| A different tune
The World Bank is a rich, wise, serious-minded body. It always knows the best, it should not therefore be made fun of.
What does one do then in the circumstances' A recent report prepared by the Bank has warned India about the grave consequences of raising the bank rate. A high rate of interest, in its view, stifles industrial growth since it raises the cost of production for entrepreneurs. It would therefore be, it says, an act of folly on the part of the Reserve Bank of India and the government in New Delhi to listen to stray counsel from bystanders and reverse the present cheap money policy; to do so would, by implication, adversely affect Indian efforts to maintain an eight to ten per cent rate of growth. There could seemingly be no greater calamity. The acolytes who have infiltrated the different strata of India’s policy-making would lose their face, as would the Bank itself.
The Bank’s words cannot be brushed aside just like that. There is a problem though. For nearly four decades beginning with the early Fifties, this same institution, the World Bank, had been admonishing the government of India, in stentorian terms, on the rights and wrongs of economic policy. What it used to preach during those days is roughly as follows. India is an abysmally poor country. A poor country is in a position to save very little; it is, therefore, awfully short of capital resources so necessary for investment and growth. The limited capital that the country has must be put to the most effective use. This objective would be best served if the rate of interest in the country is set at a relatively high level.
A high rate of interest serves three purposes. First, it stimulates the expansion of deposits and thereby boosts savings. Second, it discourages projects, which have low productivity, and hence low profitability, from competing for scarce capital funds. In the third place, high interest rates induce greater efficiency in the system. Since the rate at which money is borrowed is steep, those who borrow funds strain their utmost to raise their efficiency which would ensure them a satisfactory rate of return after the cost of production, including the cost of money, has been taken care of.
For decades on end, the World Bank had served such fare. Those in charge of official monetary policy, had trained themselves to consider the Bank’s advice as inviolable. Interest rates were accordingly set at dizzy heights. Investment activity in the country, as a result, became reserved ground for a select few private entrepreneurs who operated on a relatively large scale and had the necessary organizational ability to cultivate economies of scale; this allowed them to earn a decent rate of return even after paying through their nose for the money they borrowed from the banks. Both the limited nature of industrial growth during these decades and the severely skewed structure of that growth owed a great deal to the World Bank dogma concerning the appropriate rate of interest for a poor, capital-starved economy.
Middle-level and small-scale entrepreneurs were shut out of the industrial arena because they could not afford the high interest rates charged by banks. Aspiring young persons, eager to explore avenues of self-employment, were stopped in their track for the same reason. The plight was no different for millions and millions of the petty peasantry. The hard money policy, it is worth noting, was not much of a success in the pursuit of the goal of maximizing efficiency either. For the industrial sector became the monopoly of big industrial houses; under conditions of monopoly, even the World Bank would admit, production comes to a half before the point of full capacity utilization is reached.
It is a different epoch, and the World Bank is now chirping a different tune. The Bank is now a proponent of cheap money policy. Whatever it says is, to its poorer member-countries, worth its weight in gold; the Bank is their principal lender. Politeness apart, they cannot quite gather the courage to remind the Bank what it used to say only a couple of decades ago. After all, great people and institutions revel in contradicting themselves. A new doctrine is on the anvil, and credit-seekers henceforth better fall in line. Whether a country has enough of savings is no longer considered as a desideratum. On the contrary, we are being asked to proceed on the assumption that enough of loanable funds is available in the system and it is a question of stimulating the demand side alone.
A regime of low interest rates, the Bank is now cocksure, encourages entrepreneurs to borrow funds on a generous scale and expand their activities; a nation wishing to accelerate economic development should therefore adopt a monetary policy which places the most emphasis on cheap money. The government in New Delhi and the Reserve Bank of India have been, in the more recent years, following this piece of advice with scrupulous reverence.
Is not there, however, more than what meets the eye in the wisdom the Bank is currently dispensing' It is conveniently silent on the issue of the inverse relationship between the rate of interest and the rate of growth in deposits. Low rates of interest discourage savings and deposit growth, while high rates do the opposite: if this dictum was true fifty years ago, it should also be equally true today. But the Bank, to all appearance, is no longer overly concerned with the possibility that, with the enforcement of a cheap money policy in India, domestic savings would either shrivel or turn sluggish.
No need to worry on this score, the Bank will say; excess capital funds from rich countries, badly seeking a resting place, will arrive and take charge of the investment process activity over here. What the Bank fails to mention, owners of such foreign capital will thereby also expand their control over India’s industrial and infrastructural sectors. A low-interest-rate regime would serve foreign investors in another way as well; cheap money would enable them to keep their operational costs at reasonably low levels.
To commiserate with potential savers, who might be discouraged by low interest rates, will be, however, somewhat beside the point. Low interest rates are a great civilizer; they induce citizens with excess funds at their disposal to travel toward the direction of the stock exchanges. Foreign institutional investors have, of late, marked out the Indian stock exchanges as their favourite hunting ground. They relish the prospect of a growing population of suckers in the Indian bourses; that would help them organize bull-and-bear runs with greater frequency and squeeze more and more profit from such operations.
A handful amongst the comfortably placed citizenry may, of course, feel querulous about speculating in the share market with their hard-earned money. An alternative choice is available to them. With globalization, the surging waves of consumerism have reached Indian shores; luxury consumption would take care of the excess income of those who are reluctant to indulge in share-market speculation. The World Bank has its friends among the transnational corporations which preside over the production and distribution, world-wide, of sophisticated luxury goods.
So, please be at peace, nothing has really gone wrong with the World Bank. The Bank is not bashful to be inconsistent. Behavioural inconsistency advances its global class interests. It is impossible to catch napping this deus ex machina for all seasons.