India’s latest political problem: inflation
One of the most curious aspects of Indian politics over the past decade was the dwindling importance of inflation in shaping electoral outcomes. Over the past decade, rapid economic growth accompanied by sharp wage increases fuelled expectations of ever greater increases in wealth and incomes, turning inflation into a somewhat less potent electoral threat.
The tide seems to be turning now. With the growth engine stuttering and wage growth tapering, inflation seems to be emerging as a key parameter of Indian politics once again.
Across the breadth of the political spectrum today, there seems to be a broad consensus that inflation was uppermost on the minds of voters who came out in large numbers to vote out the leading party they held responsible: the ruling United Progressive Alliance (UPA). Even though she refrained from mentioning her own role in stoking the fires of inflation through her ill-fated policy choices, the Congress chief and UPA chairperson, Sonia Gandhi acknowledged that the failure to tame price rise had created resentment among the masses.
Post-poll surveys conducted by CSDS and Lokniti delivered the same verdict. Across the five states where elections were held, price rise was the most important factor cited by voters. In the Delhi survey, for instance, 37% respondents identified price rise as the most pressing problem. More women than men considered price rise to be most important in the surveys. It may not be a coincidence therefore that the record voter turnout this time was driven more by women than by men.
Inflation’s bite may have become sharper in the wake of the growth slowdown in India but it has been pinching pockets for quite some time. Barring a brief phase in the immediate aftermath of the financial crisis, India has been facing persistently high inflation for more than half a decade now. Inflation’s role in wreaking havoc on India’s growth story is quite well known by now.
High inflation dented the savings rate by encouraging households to purchase non-financial assets such as real estate and gold, and contributed to the widening of India’s current account deficit.
Yet, inflation was not seen as a political problem, partly because the UPA was blessed with good luck so far. The drop in inflation in the wake of the global financial crisis ensured that prices cooled off just before the last general election in 2009. Also, the bounty of additional resources generated because of high growth ensured that the government was able to employ extravagant populist schemes to temporarily boost consumption levels.
At least in the short term, inflation was a boon rather than bane for the government, as it lowered the real costs of its outstanding debt. And so long as no one complained, the party could last. The opposition parties did make sporadic attempts to galvanize public opinion on the issue of inflation but they did not taste much success. The UPA government was even more emboldened. Instead of making efforts to tame prices, economic managers of the UPA government such as the former chief economic adviser, Kaushik Basu argued against sudden policy tightening to curb inflationary pressures.
It was as if high growth had eroded the social consensus in favour of moderate inflation, as economist Arvind Subramanian pointed out in a recent Business Standard op-ed column (http://bit.ly/19MZTdB). Subramanian cited research on electoral trends that showed that unlike in the 1980s and 1990s when inflation was a key determinant of electoral outcomes, voters did not seem to care about inflation at all in the 2000s.
The Reserve Bank of India (RBI) appeared to be the lone voice warning about the perils of inflation even as it faced tremendous pressure from both the finance ministry and industry lobbies to maintain an accommodative pro-inflationary bias. To its credit, RBI did not entirely give in to such pressures but it remained behind the curve for quite a while. In his last public speech as the RBI governor, D. Subbarao pointed out that the economy would have been better served if the fight against inflation “had started sooner and had been faster and stronger”.
Now that the tide of public opinion seems to have turned sharply against inflation, it will force policymakers to at least acknowledge the gravity of the problem, if not launch an effective anti-inflationary fight. Even if New Delhi is unwilling to reverse course on its populist policies ahead of the general election due in 2014, the changing consensus on inflation should aid RBI’s efforts to stymie price rise, and the finance ministry’s resistance to what RBI is doing.
New RBI governor Raghuram Rajan should seize this window of opportunity to cement his credibility as an effective central banker. The long bout of inflation in India has weakened its economy, and also dented the central bank’s credibility. It is time to make amends now.
Is inflation now a political problem in India? Tell us at email@example.com