Geared for inflation

The roots of the inflation problem are not in economics but in politics
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First Published: Sun, Jan 27 2013. 09 11 PM IST
Illustration by Shyamal Banerjee/Mint
Illustration by Shyamal Banerjee/Mint
Amid all the excitement of the courtiers following the official appointment of Rahul Gandhi as the next leader of the Congress party, few seemed to notice that Manmohan Singh also had a few things to say at the party meeting held in Jaipur last week. The Prime Minister admitted that his government has failed to control inflation. He described it as the “one shortcoming in our record”—as if fiscal mismanagement, policy inertia, investment slowdown and the general loss of confidence are creations of some other government, not his.
It is still worth lingering with the inflation issue, since the inability to manage the price situation is a meta-indicator of the broader economic failings of the United Progressive Alliance that the Congress leads. India has one of the highest rates of inflation in the world, in the same league as such paragons of good economic management as Pakistan and Venezuela. For more than three years, inflation has been way above what the Reserve Bank of India says is its comfort level. Such persistently high inflation will eventually undermine the credibility of the monetary authority.
One could point to structural reasons such as the rapidly growing demand for proteins as a result of higher incomes or to other reasons such as loose monetary policy by the central bank, but the main blame for the way prices have shot up lies with the way the government has managed the economy, especially since 2009.
The second Manmohan Singh government has given a perverse stimulus to consumption at a time when the economy needs more investment. It then allowed the investment climate to deteriorate. So, adequate new capacity has not been built to meet the demand created by the excess government spending. Supply has lagged demand. The result has been inflation. Also, previous episodes of high inflation—such as the ones in the mid-’70s or the early-’90s—coincided with global inflationary pressures. The situation is different this time around. India is experiencing high inflation when prices are muted in most other economies.
The roots of the inflation problem are not in economics but in politics. The ruling alliance has built its political appeal on spending commitments. It has nurtured a culture of subsidies, often captured by the urban middle class and rich farmers. It paid scant attention to the creation of new productive capacity. It has shown no serious intent to use tax revenues to create public goods. What is ironic is that all this has been done in the name of the poor, who are most likely to suffer from galloping prices.
Is inflation a political problem in India? Tell us at views@livemint.com
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First Published: Sun, Jan 27 2013. 09 11 PM IST
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