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Inflation: License for UPA, silence for others

A king before demitting the throne gave three sealed covers to his successor and instructed him to open them should he face any problem in future. Years rolled by and the incumbent did face a problem. He opened the first cover. It read: 'Blame it on outsiders'. Again after some years when he faced another set of problems he opened the second one which read: 'Blame it on your opposition'. And finally time came when he was compelled to open the third which read: 'Time for you to quit'.

Readers by now may be aware that every Friday at around noon the government releases the inflation figure. And the latest inflation figures (11.05 per cent) do not auger well for the central government.


Given this situation, some political commentators have already begun to bet on the disintegration of the UPA while some others have pointed out that it would be extremely difficult for Congress (the cog in the UPA wheel) to get more than fifty seats in the forthcoming elections. While I do not wish to hazard a guess on the electoral fortunes of the UPA, I surely see inflation - read management of the economy - becoming a major election issue. And when it is an election issue how can one refrain from debating it, that too in a democracy?

What adds fuel to the inflation fire is that it is well known that these figures relate to Wholesale Prices (WPI) and not consumer price index (CPI). Further, the WPI basket largely ignores the services sector.

What must be indeed worrying the political managers of the UPA Government, is that no one takes even these high inflation figures with a pinch of salt. The reason is obvious. No one trusts the statistics of the government. Take for instance the retail prices of tea published by thhe Ministry Of Consumer Affairs. Note that the price of tea varies from Rs 100 in Hissar to Rs 204 in Chandigarh - a 100 per cent variation within a state!

Centre tea (loose)
Date 4/6/2008:

Rs per kg
Amritsar 165
Chandigarh 204
Delhi 115
Hisar 100
Kanpur 150
Karnal 100
Lucknow 180
Ludhiana 160
Shimla 105

No wonder, given such slip-shod manner of collecting data and by consciously ignoring the services basket, one realises that statistics, especially on inflation, are meant to be understated. Nevertheless, the aam admi, perceives inflation at 15-20 per cent while government maintains a figure of 11.05 per cent. Naturally, the government is worried as it is bound to have political fallouts. After all, what is politics without economics?

Lady luck deserts the government as its managers err

It was not so long ago that the FM saw himself as a "lucky" charm for the Indian economy. That was in his Budget speech on February 29, 2008. Riding high on the farm loan waiver scheme, extending the employment guarantee scheme to all rural districts of the country and accepting to implement the 6th Pay Commission report, the UPA government looked infallible then. But how times change rapidly in the Indian context! Surely, as Harold Wilson said a week is indeed a long time in politics.

Given this scenario expectedly the Opposition is sensing an opportunity and is readying itself for the kill. No wonder piqued by the Opposition's allegation about his mis-management of the economy, the normally composed FM retorted sharply in his rejoinder to the BJP's national executive resolution by stating "The current inflation is almost entirely due to the relentless rise in crude oil prices. This rise has also triggered the rise in commodity prices and, because bio-diesel is produced from food items such as maize, sugarcane and palm oil, food prices have also come under pressure. The Government of India, like governments all over the world, is fighting inflation." Well the first cover has been opened.

Further the FM, in the above mentioned rejoinder to the BJP, accused the previous NDA government of failing to control inflation during its time in office and leaving an inflation legacy for UPA government to tackle. Well, second cover too has been opened.

It is indeed strange that the UPA government, which till recently credited the robust growth of Indian economy to its economic policies has sought to blame the global factors for the current spike in domestic inflation. If this argument is accepted, the UPA must also concede that the substantial part of the spectacular growth (including the much touted tax buoyancy) witnessed by the Indian economy in recent years owes it to the global economy and not to the policies of the UPA!

Like many of its predecessors the UPA government has been faulty in its diagnosis, parsimonious with truth and fanciful in its prescriptions about the Indian economy. Let me illustrate:

Sudden appreciation of the Rupee in April 2007 (and a sudden depreciation since April 2008) without taking the exporting community into confidence is having debilitating impact on the domestic manufacturing sector, which is yet to recover from these shocks. The manner in which the Chinese took their domestic industry into confidence in similar circumstances is a study in contrast.

Failure to control the substantial increase in the aggregate money supply (M3) within the economy. The rate of increase was a paltry 12 per cent when this government assumed office. Now it stands at approximately 23 per cent. Obviously it is also a classical case of too much money chasing too few goods. I have dealt elaborately on this matter in one of my previous columns titled 'Profits for the elite, patience for the aam admi'.

And ignoring these facts, the UPA government has proposed to implement the 6th pay commission (a blatant attempt to appease government servants). It is bound to have a cascading impact on inflation in India as it is expected to cost the government anywhere between Rs 60,000-100,000 crore (Rs 600-1,000 billion) to implement the same.

It is indeed strange that the government was advocating a benign interest regime even as late as March 2008 when it was becoming evident by the day that inflation rate was surging ahead. Where is the question of a benign interest rate regime when inflation is not under control? No wonder as the RBI raised the repo rate recently, the policy disconnect between the managers of the economy becomes evident.

The increased allocations to the social sector (especially the NREGA) without a concomitant increase in revenues (viz., divestments) are having their own impact not only on the inflation but also on the finances of the government.

Needed a statesman, not a politician
But what is galling is that the UPA government seems to be completely diffused in its management of the economy. Let me elaborate. For instance, the average global price of wheat was $152 per MT in 2005, $192 per MT in 2006, $255 per MT in 2007. In March 2008 it reached a high of $484 per MT. Precisely at that point in time it became apparent that India would have a very good wheat crop. Immediately, the wheat prices fell to $320 per MT in May 2008.

It is quite obvious to analysts that the speculators were playing in the international market anticipating a poor wheat crop in India. And when their bets turned awry, global wheat prices fell. And between March and May, neither did South Indians give up eating wheat nor did Indians as a whole consume less of wheat.

Yet the Abijit Sen Expert Committee headed by Prof. Abhijit Sen which went into the issue of forward markets influencing the commodity prices could not arrive at any definitive conclusion. Experts have a right to be wrong, but never to be in doubt. And when they are in doubt, as the Abhijit Sen committee was, their political masters have to pay a heavy price.

Needless to emphasize the above mentioned list is merely illustrative of the fact as to how the UPA government by its action or inaction has failed to control inflation and mismanaged the economy. For all these reasons it cannot blame the rise in crude oil prices as the cause of inflation whose effect in fact begins only now.

Nevertheless, these are extraordinary times. It calls for extraordinary national effort and statesmen like approach - both from the government and the opposition - to remedy the situation that is fast spiraling out of control. But to effectuate the dialogue with the opposition and others, the onus is on the UPA government.

Given this situation the UPA cannot have a license to politicise inflation by blaming external factors and their predecessors and expect silence from others, especially from the NDA. Opposition or for that matter even the Left parties surely are not going to oblige with their silence. They need not and should not in a democracy like ours. What is economics without a dash of politics?

Whatever be it, this may well be the time for the UPA government to consider whether it is an appropriate time to open the third cover.

Published at: http://in.rediff.com/money/2008/jun/20infla2.htm

Last modified on Sunday, 07 July 2013 07:36

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