As the Reserve Bank of India readies its third quarter review of monetary policy and the economy for release on January 24, will it take comfort from the data on inflation, which suggests it is slowly climbing down from its high levels? In December, headline inflation fell to 7.4 per cent, the lowest in two years. To the central bank, that datum will appear a fitting testimony to the success of its policy, of persistent increases in interest rates. The falling rate may tempt it to stay its hand on further increases. But for the central bank, the victory will appear to be a hollow one, if it were to cast an eye beyond its immediate mandate for price control, to the overall impact rising rates have had on growth itself.

RBI'S POLICY

At first glance, it might appear that the RBI's monetary policy has, in no small part, contributed to overall spikes in costs for industry, handicapped by high raw material prices. Rising interest rates have also impacted the real estate sector (or so we are told by its representatives), with demand rolling back as consumers wait for lower interest rates to make their second investment in homes that they wouldn't live in but cash out on.

To that extent, the RBI's monetary policy has had a salutary effect in deflating what could have become a bubble. And to that extent, India is better-placed than China, where the real estate and construction boom could have turned into a bubble, with rising incomes and no place to invest in. With growth forecasts lowered to around 7-8 per cent for the new year, investments in real estate in China have come a cropper; Chinese monetary authorities are trying to rev up domestic demand with easy monetary policies, but Europe's ongoing crisis and weak US economic recovery are denting earnings and impacting the most attractive investment opportunity — the property market.

So, whereas in China global woes have deflated what could have become a real estate bubble, India's own ongoing one has been impacted by rising interest rates that have lopped off excessive demand, preventing overheating in other sectors as well.

But the downside is, of course, declining consumption and investment, and consequently a lowered growth rate. China's prognosis is somewhat similar. So, with the second and third-largest economies globally running more or less alongside at 7-8 per cent this year, it might serve to compare just how both came to this pass.

REAL ESTATE

In both countries, the real estate sector played a prominent part in stoking domestic demand. In India, however, real estate by and large drove investments. Anecdotal evidence suggests that ever since the SEZ Act came into being in 2005, opening up lucrative possibilities for rent, land has become the biggest profit-making asset, with manufacturing firms too cashing in on a booming property market.

In China, the real estate boom was more the outcome of an export-oriented economy, and robust global demand for that country's manufacturing. In India, investments in property drove economic expansion, in the bargain also stoking secondary inflation, and creating the dangers of overheating.

China's economy and its dangerously-poised real estate boom now faces a demand freeze in the US and Europe, and that explains the lowered forecast for the current year. In India, the 7-per-cent forecast is an outcome of an even more dangerous pattern of the bulk of private sector investments seeking outlets, not in the creation of productive assets, but in real estate clustered around urban sprawls.

EXPANSION RATE

Most stakeholders expect the RBI to ease up on rate hikes, or even better, lower its key rates as a signal for economic expansion. The assumption is that with an easing of monetary policy, the sluggish economy might just pick up and beat the official prognosis of a modest (by 2008-09 standards) expansion.

But that is unlikely. In the absence of any other actions from New Delhi, the central bank's generosity might just put the economy on its inflationary path yet again. Assuming that the only sphere for “real” investments remains land, growth would be highly inflation-prone. So the choice for the organised economy will be to stick to 7 per cent expansion, that is far lower than the last five-year pattern, or climb with an overheated bias, forcing the RBI, once again, to reverse policy.

Unlike in China, where the current forecast of 7-8 per cent represents a lowering of the bar, for India, a 7-per-cent expansion rate is the bar. It cannot climb higher without structural reforms that alter the boundaries of its limits, just as China may not fulfil its capacities without the global economy improving once again. In India, a promise; in China, the possibility.

The problem with that promise is that its fulfilment depends on investments in the real economy, and those aren't attractive for either domestic or global players. With the global centres of capital in a fix currently regarding options for rates of return in a convalescing US economy and debt-ridden, therefore unprofitable Eurozone, India should have been the best place on this planet: shortages of roads, power ports, pathetic education and health should have had global investors flocking to our shores. But if it isn't coming, it isn't because policymakers haven't figured out how to create the right financing ‘model' or ‘vehicle', but because they haven't created the right rules (and structures), by which to deploy that capital. And yet, policymakers believe India will average 9 per cent growth during 20 years: with high inflation probably. Between the promise and fulfilment, falls an attitude.

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