Pranab babu’s war on inflation

Pranab babu’s war on inflation

Political explanations for inflation are always interesting. They are also mostly wrong. The heated discussion on the subject in Parliament was no different. There was little application of any economic logic during the debate.

On Tuesday, finance minister Pranab Mukherjee had this to say in the Rajya Sabha: “Price rise is a matter of concern as it affects the common man the most. This situation is mainly due to shortage of essential commodities like pulses, sugar and edible oil. To ameliorate the effect of inflation, public distribution system (PDS) needs to be strengthened." He also wanted states to tone up the function of PDS; more on that anon.

But first, notice the words carefully. There is no explanatory hint as to why the problem emerged in the first place. Yes, there is shortage, but how did that come about? Two causes suggest themselves fairly quickly. First, the phenomenal growth in government expenditure (on salaries and social sector programmes). Second, since the October 2008, there has been phenomenal monetary loosening. This huge increase in money supply has fuelled inflationary pressures and more importantly, inflationary expectations.

These factors when combined with three other, administrative and political, issues make managing inflation a difficult task. First, the government’s passing the buck to the states. States manage PDS, but are dependent on Centrally directed supplies of foodgrains, pulses, sugar and other commodities. It is plain evasion of responsibility on the finance minister’s part to say that states need to be proactive on PDS.

In fact, if anything, Union ministers ought to be more responsible in what they say. For example, frequent statements in Parliament on the supply situation (shortage of sugar is one good example) only add fuel to the fire.

Finally, as has been commented before in these columns, what has been witnessed in recent years is “administrative inflation". The Union government has been unable to reform agencies such as the Food Corporation of India. This gigantic organization has literally little control over costs. The ability to deliver commodities at the right time, the right place and at right costs is key to fighting inflation. The Centre is far from the prices battlefront.

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