Finance minister Pranab Mukherjee offered a disingenuous explanation for the inability of the government to keep inflation under control. He told Parliament on Wednesday that inflation is the price a country has to pay for rapid growth. This is a red herring.
One has to only look across the Himalayas to see how untrue this is. China has been growing at close to double digits every year even as inflation there has been muted. There have even been episodes over the past decade when China flirted with mild deflation—or falling consumer prices—amid strong growth.
The two obvious reasons why strong growth in China has generally not been inflationary: A high investment rate ensured that new supplies kept pace with growing demand, and labour productivity grew faster than wages.
India has been unable to sustain high growth for more than a few quarters before prices of goods, services and assets start going ballistic. The economy tends to prematurely overheat.
There are several reasons why this happens. One, the Indian economy continues to be cursed with bottlenecks that ensure supply does not keep pace with growing demand. Two, a narrow base of skilled labour means that wages run ahead of productivity very early in the business cycle. Three, the government tends to make things even worse by pursuing pro-cyclical fiscal policies; deficit spending increases aggregate demand at absolutely the wrong time.
Double-digit inflation is not inevitable in a growth economy. But India needs a long-term strategy to insulate itself from the scourge of rapidly rising prices if growth is to be sustainable. We need more investment in agriculture and infrastructure to ensure that supplies keep pace with demand. Reforms in important sectors such as organized retail will help build efficient supply chains, reduce wastage and keep prices down. The education sector continues to be trapped in a licence-permit raj that has failed to produce the skilled labour needed in a growing economy. Meanwhile, the government needs to run a tight budget so that the entire burden of controlling effective demand is not laid at the door of the Reserve Bank of India.
India has to have another round of critical reforms so that it can accelerate growth without setting off an inflationary fire. We wish the finance minister had offered the hard truth to Parliament rather than mere obfuscation.
Can India get to double-digit growth without overheating? Tell us at firstname.lastname@example.org