When it comes to money, Bollywood and the government have similar ideas. Both believe in throwing money in the air to the accompaniment of noise (garish drumbeats in films and “welfare” announcements in the case of the government).As reported in Mint on Thursday, the government has increased the payout under the Sixth Pay Commission to its employees by Rs12,561 crore (this is over and above the Rs30,621 crore budgeted for 2008-09). A similar increase was reported in the case of the farm loan waiver — an increase of Rs11,600 crore over the original Rs60,000 crore.
Yet, at the end of the day someone has to bear the cost. That’s where the big illusion is: If, on the one hand, the government is increasing disposable income in individual hands, it’s taxing it, on the other (remember the 11.42% inflation figure). Because the process is continuous, inflation, too, refuses to die down. More money in one period of time can only mean higher inflation in the time to come. The effect is magnified when there are supply constraints on food, steel and other produce.
The manner in which these effects pan out is simple. To begin with, no one feels the pinch. The benefits are concentrated in a particular area or distributed among a special interest group. The costs are much more diffused: It’s individual taxpayers, companies and manufacturers who fund these outlandish expenditures. The government waits for the votes and no one feels the pain. The pain becomes apparent when government deficits go out of hand and macroeconomic problems such as inflation and exchange rate instability emerge.
This is already taking place. Inflation in present conditions is the result of excessive monetary loosening. Steps such as the extension of the National Rural Employment Guarantee Scheme to all districts in the country, the increase in the amount under farm loan waiver scheme and now the increased payout to Central government employees are akin to adding fuel to fire.
Clearly, when the Reserve Bank of India is tightening money supply, it’s thoughtless of the government to give more money to citizens. A typical case of one hand not knowing what the other is doing.
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