It was bad enough when top finance professionals showed their total lack of comprehension in calculating sub-prime losses, now central bankers are catching the ‘ I just don’t know” bug. With slowing growth and high inflation, US Federal Reserve Governor Bernanke summed up future outlook concisely as “unusually uncertain”. Of course, many central banks are not getting much help from their governments, who are either busy rescuing overstretched financial institutions, or as in India are pouring money into fuel and food subsidies. Either way fiscal and monetary policies are at odds.

And why do we have double digit inflation when the West is getting away with just 4-5%? To begin with, the double digit numbers are in wholesale inflation. And actually India has been quite good at fighting consumer inflation if the numbers are to be believed. May-June CPI inflation in India is around 7-8%, comparable to Malaysia (net oil exporter and provides heavy subsidies), Brazil (uses local ethanol for transport), and China (with administered fuel prices). In China and Malaysia, which raised petrol prices recently, inflation has since risen. Inflation is much higher in other countries, precisely because fuel prices have been passed on - countries such as Russia (16%) Indonesia (11%), and South Africa (12.2%). The reason why India has done moderately well in consumer price inflation is simple – it has not passed on price increases in oil.

Essentially, the Indian government has taken a call – have longer term high inflation rather than a short term spike. Cutting taxes, raising subsidies, public sector bearing the costs, oil bonds, etc affect government finances. While such accounting jugglery and hocus pocus is politically expedient as all of us know, the impact will leak into the economy over the next few years. If other countries also take the same path, this may be all right; but if they do not, then the next few years will see a high inflation India competing with a moderate inflation world. As we have always said, taking the tough decision now will spare the pain later.

The government is not responsible for the inflationary conditions today. But it will be responsible for a highly inflation prone economy of the future.