To,

Honorable Prime Minister of India,

Shree Narendra Modi

Sub : RBI have got Detached from reality

Dear Sir,
There are two most powerful persons in India whose decision can affect the lives of common man
in most profound way one is you as a PM and second is Raghuram Rajan. Unfortunately your
every step is analyzed up to depth and Raghuram Rajan is given a free pass for all his decisions.
Biggest change in policy that India witnessed post 1991 economic reform was in March 2014
when we shifted to CPI from WPI. Affectively you have been given India whose currency got
changed. A Central Bank whose only mandate is inflation, when changes its inflation measures
dramatically virtually means it changes its currency and surprisingly there is no debate on such a
massive policy shift and its pros and cons.
As I have a passion for economic studies, and after years of observation of world economics and
central banking, I want to present in this letter how this change in policy of RBI can become
single biggest mistake that India can commit at this stage of Indias development and present
state of World economics.
WPI vs CPI
First looking at diverged indication of WPI and CPI we need to conclude as an Indian, which
inflation measure reflects reality as both cant be true with the gap of 7-10% as this difference is
equivalent to Greece and Germany to the Bond markets.
Its true that WPI is not perfect as it should have housing and services data embedded into
it. But still WPI have been the impeccable predictor of state of Indias economy which can
be
seen
in
the
chart
below.

Above long-term chart clearly shows that WPI has clearly predicted some of the most
important events of India such as rise in inflation after dissolution of Bretten-Woods
agreement that finally led to JP movement and emergency, 1989-91 higher inflation that
led to liberalization or Asian Financial crisis and resultant inflation that made Vajpayeejees
task so difficult that finally just at the beginning of change people lost faith in him. And
same chart shows- barring emergency, there has never been a time in post independence
India when our inflation have been negative and that too for so long as it is now. And its
implications are visible on ground.
When there was a wave in favor of UPA in 2008 , with inflation totally in control and Indias
growth near to 8 % under UPA1, and on the other hand your Gujarat Government had a
massive crack down on farm theft and even kishan sangh was against you , results of
your work was still not totally visible on ground; yet as per me in the most important
election of India ever, Gujaratis voted for you in 2008. Just 18 months ago there was not a
single seat that was won for margin less than 125000 in Loksabha elections by BJP. But in
18 months BJP lost panchayat election or Hardik Patels irrational demand got resonated
among the Gujaratis is worth noting. Its a protest by most matured electorate in India as
they feel something is wrong. As most other events are predicted through WPI chart so is
this. WPI is negative. Its a vote against RAghuram Rajans understanding of real India.
People are in real distress at lower bottom of the pyramid and for many reasons.

1.) 52 % of Indias population is dependent on Agriculture. And CPI has 46 % weight age
for food on which RBI has no control. Irony of the fact is if there is a draught, 52 % of
the peoples employment will be adversely affected. Biggest source of farmer suicide is
debt and RBI which should have come to rescue of these rural residents will increase
interest rates to burden these bottom of the pyramid people to see the savers who are
among top bracket gets more interest rate. Politician are questioned on every account
for farmer suicide but no one surprisingly asks anything to RBI governor how he
explains this paradox. With this policy RBI is now the biggest threat to rural India as
when they will be in distressed instead of decreasing interest rates it will increase rates
due to skewed inflation measure. Using CPI to increase interest rates during draught is
akin
to
closing
Bhakhara
Nangal
dam
doors
for
floods
in
Surat.

2.) Raghuram Rajan himself uses a word Quality of deficit every time when he cuts
interest rate, but has never followed what he says. For a country like India where
inflation on large extent depends on currency movements, most important parameter
for RBI governor to watch for is the kind of deficit. During UPA 2, subsidies were
disbursed through various schemes directly to rural areas which were causing
immediate consumption with no asset or infrastructure building- a perfect recipe for
future inflation. But under your new NDA government precisely opposite thing is

happening. Money is getting diverted to productive assets.

Just through DBT
according to one estimate Rs. 15,000 crore have been saved from leakages but though
leakages this is financial tightening which naturally results in rationally decreased
consumption and hence structural decrease in long term inflation. For left of the center
government it is so easy to give Loan waiver of Rs. 40,000 crore to farmers but for right
of the center government it is so difficult to spend Rs. 40,000 crore for housing for all.
So right of the center governments decisions takes time to reach to masses as it
requires executions unlike subsidy disbursement. This delay should be compensated
by lower interest rates for smaller fiscal spending and future supply creations.
Raghuram addresses this with his own acronym of Quality of deficit but fails to act on
it as should UPA 3 would have been in power his interest rates be even higher? This
double whammy of prohibiting leakages and subsidies, and higher interest rates is
creating huge tightening in financial conditions in rural areas.
3.)Various estimates suggest Indias 30-40% economy is unaccounted which is unique to
India as no other major country faces this issue at this scale. Add to this the fact that
Indias lower bottom of the pyramid are all in unorganized sectors and are affected
most with this black economy. With various steps taken by governments from center to
state and more by new NDA government there is a massive crack down on black
economy. Every state has increased circle rates of land and market rates have
decreased dramatically in past two years. This has resulted in crack down on black
economy as biggest source of hiding money is shrinking. This massive reduction of
black economy is good for the nation but has maximum implications on lower bottom
of the pyramid in short run and RBI has taken no note of it. In foreign emulated policies
it has lost Indias ground reality again and is not able to compensate reduction in black
economy with channelized economy.
4.)If 1998 was an Asian Financial Crisis, 2000 was Dot Com Bubble, 2008 was housing
Bubble for India 2012 was a Discom crisis. How west would have solved Discom crisis?
Central bank would have purchased floating bonds of discoms by quantitative easing
and there would not have been any NPA nor any distress in discom and UDAY would
have got fast forwarded by 4 years. Its true India should not follow that extreme path
but pragmatism suggests that when there are Rs. 3,00,000 crore of debt in disarray
lower interest rates are the only panacea. 22 crore people in india dont have power,
another 22 crore people dont have power for more than 2 hours, and instead of
addressing Discom problem we are aggravating it by keeping interest rates insanely
high due to our disconnect from real economy which is choking credit to every other
segment of economy.
1.25 crore people in India are entering workforce every year,
meaning we are adding Australia to our workforce every year. In order to create
employment for these, India needs massive infrastructure investments and all the
initiatives that government is rightly taking. But life blood of all these initiative is
invariably credit which RBI is deliberately inhibiting. RBI should be given dual mandate
of not just right kind of inflation targeting but also Employment like USAs Federal
Reserve as Raghuram Rajan neither speaks of employment nor do he take it into
accounts in his policies. Indias youth cant wait for long and if RBI s missteps results in
failure of government policies, there can be dozens of Hardiks emerging in country as
people have immense hope in new government and when they protest they dont need
a rational reason but just unemployment.

Raghuram Rajan says that WPI is international inflation and CPI is domestic one. This is
most ill-informed statement by RBI governor. CPI is not domestic driven inflation but its
domestically spent inflation. Meaning agreeably its spent in Indian Rupee and hence its
spend dont go out of country but to say its domestic inflation is absolutely wrong. CPI has
46% food items whose rates are on large scale decided by global commodity prices. Also
it has energy in it again dependent on global commodity prices. So if he thinks CPI is
solely controlled domestically his whole understanding is wrong.
Also because it is
domestically spent inflation and Indias wages are at bottom on global scale we have far
more resilience to tolerate its higher read and is desirable at times, if other aspects such
as stable fiscal and current accounts are in place.

WPI is derived more from market driven data and CPI is more a survey based data. Also its
worth noting that CPIs major weight age is through rural CPI which is surveyed by 1100
odd post offices in villages who have no experience or dedication of doing the survey. In a
country as diverse as India, where less frequent and more professional election poll
surveys vary so much, how can we rely on post office collected data on monthly basis on
which we predicate such a huge policy decisions. This is shear adaptation of OECD
methodology with no consideration of diversity and reality of Indian conditions. Also CPI
dont have credible history as it was initiated in 2011.
Let us for a while assume that CPI is a right measure. But Raghuram Rajan has other
predetermined conditions - repo rate should be CPI+1.5-2%. And this insanity dont stop
here as Indias CPI inflation is averaging around 4.5-5 % from past one year, and by that
measure rate should be 6 % but no, he will takes base affect into consideration and he will
predict what will be the inflation in coming January, though all his past inflaton predictions
have been proved wrong on both sides, and whether he is right or not his assumption will
super cede all data and hence rate will be kept at 6.75% !!!. Even though market driven
rate transmission system is able to pass just 75-100 bps of his 125 bps so be it because
its the fault of market and banks but not his. Affectively in spite of once in decades
event of collapse of commodities of this unprecedented manner, Indias rates have got
decreased by just 75-100bps. There is no doubt he is man of integrity but India has
always suffered because of people of integrity but with wrong economic ideology and he is
one among them again.
Former Governor Subbarao did excellent job during financial crisis when he reduced
interest rates from 9% to 4.75% in a matter of 7 months. This made India go unscathed in
a generational financial crisis in 2008-09. But Raghuram Rajan takes this the other way.
He thinks that inflation and subsequent financial crisis that India faced was all because of
this fall in interest rates. This again is his incorrect understanding about Indias economy.
Indias 2013 crisis and all previous crises have just two roots- external or governments
socialist spending. Crude bounced from $33 to $ 120 in a matter of 3 years but
government failed to pass these and subsidized it with a bill of Rs. 50,000 crore per
annum? Does he think crude will again bounce to $120 so quickly and if it does do he think
present government will subsidize it? Does he think government will go for socialist
spending spree to increase its deficit to 6%? Do he think that present governments
massive work for Make in India will go in vain and Indias current account will again rise to
6% of GDP?. As in 2013 and before, always Indias inflation is a function of INR which
again is a function of Governments Economic Ideology. For Federal Reserve, ECB and
PBOC their demand is world demand and hence their central bank has a large control on
their inflation. Indias demand in present state has very little influence on world demand
and hence Indias Indias entire inflation problems are related to government and its

policies that affect currency movement. RBI can do crisis management during higher
inflation or during deflation or during INR volatility but ultimate control always lies with
government unlike western central banks. So RBI is trying to control things that are not
caused by it. RBI has been the most pragmatic organization in worst of Indias financial
crisis until March 2014. This is for the first time RBI is trying to influence the things that
are all because of government and in the process aggravating it. Present higher CPI is
because of higher pulses and why are pulses higher? In 2004 UPA disbanded river
integration project and hence the future supply and resorted to subsidies and
unproductive spend. Present government tries to reverse this but RBI is inviting future
inflation by keeping interest rate high and stopping infrastructure spending in various
sectors irrigation included. Again hence its a question of Quality of Deficit where again
he is failing on his own words.

Let us compare where India stands with respect to other countries and this is with CPI
which again is by no means real indicator of Indias present state.
Count
ry

Inflatio
n

Interest
Rate

Real Interest
Rate

USA
EMZ
Japan
UK
S
Korea

1.80
0.30
0.40

0.25
0
0
0

-1.55
-0.30
-0.40

1.30
4.85(CPI
avg
12mont
hs)

1.50

0.20

6.75

1.90

India

Even if we consider CPI to be relevant for India, above table shows we are totally at odds
with other major economies. And its not just about interest rates, after turning their
interest rates to zero they have resorted to massive money printing to increase inflation.
Also it should be noted Federal Reserve never looks at CPI, but core CPI which excludes
food and energy as they are volatile and not part of persistent inflation. ECB follows HICP
but in all policy meets they take a note of core HICP which again looks into CPI less food
and energy. And we are following CPI which has 46 % weight age of food only. In these
scenarios with such a massive policy ideology difference between India and all the other
central banks and hence the rate differences, can India compete on global scale? Wont
this be huge hindrance in make in India, solar mission, smart cities, etc
? Even Pakistan has interest rate of 6 %, 75 bps less than India.

Chart showing Money Printing by Global Central banks after 2008 crisis

GDP deflator vs CPI

GDP deflator is far better indicator of inflation than CPI as it covers broad range of goods
and services unlike CPI. GDP deflator is pointing to zero inflation in India almost for a year
now.
As above chart suggested every major economy in spite of having negative interest rates
is adamant to bring their inflation to 2 %. Implicit target of all these central bank is just
one- higher nominal GDP because- it decreases their total debt to GDP and increases tax
collection, decreases fiscal deficit and more importantly it keeps ratio of countries GDP to
world GDP elevated. Nominal GDP for a country today is what landmass captured used to
be for a country prior to World War 2 as it is the single most powerful measure that gives
power to a Nation.
Indias GDP deflator at zero and RBI observed inflation at 5 % has unprecedented long
term implications on many fronts including foreign affairs and Indias global standing. Our
government is doing everything to be part of UNSC or make INR a part of SDR but there is
no other figure that is more important for this than Indias GDP to world GDP. At present
this ratio stands at 2.5 % and if this reaches to 5-8% or above it will become impossible for
anyone to stop us from being part of both. But if this kind of yawning gap exists between
GDP deflator and RBI observed inflation it can cut 20- 50 % from our nominal GDP in a
decade in constant dollar term and can have massive implications on Indias standing on
world stage. Inflation that RBI observes for policy decisions, should he as close to GDP
deflator as possible.

Raghuram is struck in his own statement of CPI+1.5-2 and hence have lost grip on subjective
analysis of the situation. Tied in his own words and in his decade old ideological war with western
central banks he has made India an experimental ground for his unrealistic policies. There are
many One Call wonders in global financial markets, and he was right in predicting financial
crisis but have been wrong on every call of his on western markets after that and is again wrong
on knowing Indias real problems.
If he would have followed right kind of inflation indicator and would have taken a cognizance of
global economy and massive excess supply of all commodities and capital, our interest rate
could have been as low as 4 %. This would have given immense opportunity to India in taking
maximum advantage of those excess supplies in every sector to fulfill the needs of Indias poor
as there is just one place where demand is and that is India. This would have solved all the
legacy problems of India such as PSU banks distress, Discom Distress, Infra-corporate distress
and would have provided domestic funding for all important projects like housing for all,
infrastructure, railways, make in India, digital India and could have increased tax collection in
leaps and bounce -true achche din which our government and people rightfully deserve and are
held hostage by one man Raghuram Rajan.
Suggestions for better RBI

MPC is most refreshing news as it eliminates dictatorial policies. But MPC should be given
dual mandate Inflation and Employment. Only inflation is power with responsibility. If we
can survey inflation then surely employment and its worth having employment data as not
just monetary but political system may get changed in long runs with its figures.
Inflation measure should be as close to GDP deflator as possible and robotic fixation of
inflation should not happen instead it should be subjective on global and domestic
conditions and most importantly Quality of Deficit
India should strive hard to be part of SDR and with higher share, as well as to be part of
SDR equivalent in AIIB and BRIC with higher share, and India should make opening of swap
lines with foreign central bank an integral part of foreign policy as there is no bigger
control on inflation than ultimate stop option for currency slides in the form of swaps.

Hope my observations if pragmatic can be helpful for nation.

Regards,
Bhavik Joshi
M : 9825506266 Email : corres.bhavik@gmail.com
Bhuj