RBI looking at liquidity: Pronab Sen, Former Planning Commission Member

In a chat with ET Now, Pronab Sen, Former Planning Commission Member, says RBI’s fear about the impact of higher HRA in CPI may be misplaced



Mythili Bhusnurmath: The RBI seems to have a slightly different perspective on the outcome of the Seventh Pay Commission recommendations. Would you think that the RBI is being excessively conservative because you seem to suggest that you did not see much fear to inflation? You felt that most of the money would be safe post the NPS?

Pronab Sen: I would stick with that. We do not recognise the fact that there has been a dramatic change in the lifecycle income of government employees. Earlier, your pension was very well defined. You really did not have to worry about your lifestyle dropping after retirement. Today you do. Today, the NPS makes one extremely vulnerable to market conditions and as a result if you are wary as most people are given what the markets have been doing over the last couple of years, you would want to actually over save rather than under save. So I do not think there is any fear coming from the Seventh Pay Commission at all in terms of excess demand in the system. Having said that, the other thing that is important is that the RBI is looking at liquidity.



Mythili Bhusnurmath: Before the Governor’s press conference, I had asked you why does the RBIseems to have a different perspective on the impact of the Seventh Pay Commission on inflation and in the Press Conference the governor explains that it is mainly because of the weight that is attached to housing in the consumer price index (CPI). Now, if we look at housing, it is a relevant factor as far as the urban audience is concerned but as far as rural people or population is concerned, it is not a major factor at all and given that the rural population is far more than the urban population, is this worry about the damage that exceeding in higher housing rate allowance can do to CPI is a little misplaced? Ultimately, at the end of the day, it is the rural population that we should be concerned about not just in terms of numbers but also because this section of the population has the least capacity to bear higher inflation. So is the RBI’s fear about the impact of higher HRA in CPI misplaced because it is partly artificial?

Pronab Sen: On the HRA, the presumption that government servants who do not have government housing live within the HRA limits is completely misplaced. Most of them actually are probably paying rents which are significantly higher than the HRA and so all that the HRA will do would reduce the discrepancy. So I do not think that really in itself is a concern. I do not see it making any dramatic difference to the rental rates even in the urban areas. Rural areas of course are not effected at all. No, I do not quite buy that argument.