As RBI Governor Shaktikanta Das announced an upward revision of the repo rate, it is clear that we are back to the traditional idea of ivy league economics that it is the cost of money that is the prime driver of the inflation.
I am not denying that that there is a direct and logical link between the lending/borrowing interest rates and inflation, as it is easy for even a layperson to understand that if interest rates are reduced, more money will flood the market and that abundance will surely push the prices up, but is the cost of money the only cause of inflation?
It may be the case in the economies where Ivy league colleges exist, but there is one other driver of inflation (unique to India or not is a different question), and as we keep ignoring it and instead play with interest rates, we could be really harming not just our economy but also the sentiment of the entrepreneurial youth of India.
As inflation is about how people spend money, more important than the interest rates is how people make money.
In India we can see real extremes in how people make money.
Our construction and farm labor, our factory workers and clerks or even our maids and cooks barely make 20,000 Rs. per month. Their money is so hard-earned that they have no option but to haggle and negotiate through the life, even when buying vegetables or cloths. This is a massive group of people in India who spend money very differently than one other group, and that is of the corrupt.
Those who are corrupt make astronomical amount of money with absolutely no effort. They can take home more cash money in a day in one deal than what a laborer can make in a life time.
The real problem with Indian economy is that those who make money through real hard work share an economy with the corrupt who have a diametrically different sense about spending as they make money with almost zero effort.
What we seem to be missing in our economic policies is the impact of the spending ways of those who make free money on the economy.
As corruption money is made without any effort, it is easy for a person to spend it without really bothering about the price of what he/she is buying; and, as in India that money gets spent mostly in real estate, we see real estate prices moving up at an unbelievable rate.
Unfortunately for the poor, this real estate inflation is a the most powerful force deciding their fate, as a home or a work …….