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Ourview | An economy in the frying pan

Ourview | An economy in the frying pan
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First Published: Tue, Dec 20 2011. 10 11 PM IST

Jayachandran/Mint
Jayachandran/Mint
Updated: Tue, Dec 20 2011. 10 11 PM IST
People learn from their mistakes. We hope governments do.
There seems no such wisdom on the horizon right now. The government has decided to go ahead with a law that will guarantee cheap food to two out of every three Indians, a move that will add an estimated Rs 40,000 crore to the subsidy bill at a time when there is waning confidence among investors in the state of public finances. Policy is being made in cuckoo land.
Jayachandran/Mint
A legal guarantee to provide cheap food would be fine if we knew where the money was coming from. It would also have been less of a worry if there had been empirical studies that such a programme would do more for poverty reduction than a similar amount spent on rural roads or irrigation projects or power generation. Sonia Gandhi and her advisors have no time for such inconvenient details.
Former finance minister Yashwant Sinha told this newspaper on Monday that the slowdown in economic growth, persistently high inflation and the collapse of investment could be traced to the unwarranted fiscal expansion in 2008. That was the original sin. Will the food guarantee be the final straw?
In 1973, Indira Gandhi had decided to nationalize the wholesale trade in wheat at the high noon of her Garibi Hatao days. She said it would finish off the despicable trader: the babu would replace the bania. It would help bring food inflation to heel. The grain monopoly of the state starved private markets. Food prices rose even further. Evil hoarders were blamed for the effects of bad policy.
Women collecting rice from a public distribution shop (HT)
Cut to 1989. V.P. Singh announced a farm loan waiver at a time when the government budget was already under immense strain. The road to the 1990 crisis was being paved by men with good intentions.
Both decisions proved to be turning points. Indira Gandhi learnt from her mistake. That marked the end of her flirtation with extreme socialism, which began in 1969. V.P. Singh did not have enough time in power to face the consequences of his actions; but the political class learned enough from the crisis to (albeit grudgingly) provide tactical support to economic reforms after 1991.
The food bill could well be another turning point. It is to be seen whether its effects will resemble 1973 or 1991. In other words, will the main effect be the complete disruption of private food markets? Or will it be the final act before a fiscal crisis? Or will we see some combination of the two? Or perhaps sceptics like us will be proven to be completely wrong?
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First Published: Tue, Dec 20 2011. 10 11 PM IST