India's New Central Banking Headache

Here’s a chart illustrating what Subbarao inherits as incoming central bank governor of India. Yesterday the ministry of commerce came out with trade balance numbers –the trade deficit continues to be driven by rising global commodity prices. Subbarao now must raise rates aggressively and increase debt in order to curb inflation and also pay for the administrations populist voter kickbacks (Bloomberg reports that Singh approved a 21% pay raise for civil servants and a $17B farm loan forgiveness package recently).

BTW: Subbarao was a Humphrey Fellow at MIT. The Humphrey Fellowship is a US state dept. funded program for foreign students of economics. The fellowship is named for Hubert Humphrey, the Vice President during the Johnson administration who helped to craft the “great society” platform of heavy government spending on social programs intended to eliminate poverty that resulted in inflation and increased debt (which, combined with the unpopular Vietnam war, cost Humphrey the presidency when he ran against Nixon in 68).

Andrew Barber
Director

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