Does falling inflation mean winter LS polls?

Does falling inflation mean winter LS polls?
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First Published: Mon, Apr 16 2007. 12 47 AM IST
Updated: Mon, Apr 16 2007. 12 47 AM IST
Inflation has been on the rise for several months, touching a peak of 6.73% in the week ended 13 February. So, the latest news that it has softened for the week ended 31 March to 5.74% brings a lot of cheer to people at large but more so to the beleaguered ruling party at the Centre.
A series of electoral defeats—starting with Mumbai civic polls, followed by assembly elections in Punjab, Uttaranchal and Delhi municipal polls recently—have unnerved the ruling United Progressive Alliance (UPA) establishment at the Centre.
UPA chairperson Sonia Gandhi has described inflation as the biggest factor contributing to the electoral defeats in Punjab and Uttaranchal.
The UPA government has reformists in crucial positions, led by the architect of economic reforms, Prime Minister Manmohan Singh. He and finance minister P. Chidambaram have come under sharp criticism from their own Congress party for pursuing growth unmindful of inflation.
Taking an unmistakable cue from the political leadership, Montek Singh Ahluwalia, deputy chairman of the Planning Commission and the Prime Minister’s Man Friday, said the other day: “There are signs of overheating in the economy and the 9% economic growth is putting pressure on inflation.”
Ahluwalia went on to say that “measures to tame inflation could cause slow down economic growth for a while.” This was in sharp contrast to the government’s stand earlier that growth would not be sacrificed at the altar of inflation.
After trying to rein in inflation with price cuts on petroleum products, duty cuts on a wide range of products, including agricultural commodities, and banning futures in pulses, wheat and rice, the Union government decided to start supporting the Reserve Bank of India’s plans to raise interest rates to reduce money supply and thus curb inflation.
The evidence available from many elections suggests that inflation indeed has a significant impact on electoral outcomes. Interestingly, price rise is a big issue with the urban masses and somewhat quite less so with the rural voters, many of whom are growers of agricultural commodities, which have seen the sharpest rise in prices.
People do not always blame the Central government for high prices. A large majority of people blames state governments for high prices. All the elections that the Congress party lost recently were in states where it was in office. From this, the Congress mistakenly concluded that it alone was paying a price for inflation.
The reality is somewhat different.
Favourable by-election results for the Congress in the Opposition-ruled states of Chhattisgarh and Madhya Pradesh clearly show that the incumbents at the state level are often the first to suffer electorally. As the BJP and NDA allies are in power in more states than the Congress, they could end up being greater beneficiaries of the Congress party’s attempts to contain inflation.
Hardening interest rates are hurting salaried middle classes who have borrowed heavily, thanks to the lower interest rates and tax incentives on home loans. They have now to pay higher EMIs or repay home loans over extended tenures. Furthermore, a whole lot of new loan seekers wanting to buy a house or a car or durables have to pay much higher rates of interest. This has the potential to stoke a “feel bad” factor among the salaried middle classes.
Gandhi decreed that the government must do whatever it needs to do to provide immediate relief to the masses from the brunt of price hikes. She feared that a continuing trend of raising prices would seal the fate of the Congress in elections.
The next round of Lok Sabha polls are still two years away, but the present fluid political situation may result in their advancement.
Unabated inflation may not only make the Congress unpopular with the masses, but can also force allies to leave the UPA midway.
With many allies having already left the ruling alliance—JD (Secular), TRS, Samajwadi Party and the MDMK—the government is surviving on a thin majority. The BSP’s support cannot be taken for granted and the compulsions of UP politics in the aftermath of the assembly elections will dictate Mayawati’s future course of action.
Given these predicaments, the Congress wants to be battle-ready. There are indications that the party leadership has already sounded out some chief ministers to get ready for snap polls to the Lok Sabha later this year.
The Congress may now heave a sigh of relief that the inflation rate is showing a declining trend. If the latest trend is an indication, experts believe that inflation may go down to the RBI-mandated tolerance levels of 5% within a couple of months. Will the interest rates go down equally sooner is the moot question. If the government succeeds in managing both inflation levels and interest rates in a couple of months, a winter Lok Sabha election is very much onthe cards.
(G.V.L. Narasimha Rao is a political analyst and managing director of Development & Research Services, a research and consulting firm. Your comments on this Monday column, which will alternate between the intersection of business and politics, and pure politics, are welcome at thebottomline@livemint.com)
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First Published: Mon, Apr 16 2007. 12 47 AM IST