As we have been emphasising in the past few newsletters, despite the negative WPI inflation numbers, all is not calm on the inflation front. Right now attention has focused on inflation in food articles and manufactured food products, standing provisionally at 9.7% and 8.5% for the week ending July 25th. Consumer price indices for June are also registering higher inflation than previous months, CPI AL for instance stands at 11.52% inflation; this is on top of the 8.77% rate in June 2008. Clearly, the government’s ‘touchy feely’ talk on being the saviour of the poor has been negated by inflation. Could the government have done anything different? We believe it could have and should have. By preferring to reduce emphasis on the consequences of a high fiscal deficit on inflation, the government has done a great disservice to the country.

This quarter’s story will be repeated for many quarters to come. Though the focus on price rise will change from product to product over time, there is no doubt that we are heading for higher levels of inflation in general. Right now the story is about pulses, and within that mainly tur. Prices of tur or arhar have risen 45% in the WPI since Jan, other pulses are in double digit rises, except gram. The problem with tur specifically is because last year’s output was 25% lower than the previous year. But tur being a crop that survives when rain is inadequate, going ahead, the high prices and low rain have already raised acreage sown under this crop this year. Import tenders have also been floated, pressures on the prices of tur will therefore lessen by winter. Meanwhile rain is still deficient in the granary of India, but stocks of rice and wheat are high. The problems therefore appear less this year but will aggravate in the year ahead, especially if rains fail the Met prediction in August.

As we have said time and again, the time is past for just pushing money in the hands of people, without raising production and productivity levels – If Punjab and Haryana get through this poor monsoon with a halfway decent crop, it will be thanks to the irrigation systems set in years or decades ago. So what can a soft-hearted government do?

Economic policy requires hard headedness at its very foundations. Want to give 100 rupees to the poor? Go ahead, but get Rs. 100 productive asset out of it. Want to give more money to government servants? Then get them to deliver that much. And it is possible to do so. A large majority of government staff provide services of some type – education, health care, water supply, safety and security, justice, etc. Their output is measurable and it is possible to link salary increases with their output improvements. And all of these have direct productivity benefits for the country. But we hear of no such talk. What is this government scared of? It has no opposition.

Issues of inflation, upward pressures on interest rates, weakening currency apart from pressures on the fisc are here to stay for many years to come. The point is we are stuck with higher levels of inflation in the year ahead, the RBI has already raised its estimate to 5% and will need to raise it further still as time goes by; one after the other, more spikes will be seen in some products which might eventually abate, but overall inflationary pressures cannot be wished away. As global growth picks up, prices of commodities will also pick up, thereby impacting the manufacturing sector pricing as well. It is better we are prepared for all of this. Governments internationally had gone in for unbridled spending in the past, hoping that growth will create a pie large enough, but when that did not pan out, the poor and underprivileged had to suffer the most. Soft-heartedness and hard-headedness can go together.