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| Inflation in the Election Season |
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| Laveesh Bhandari | |||
| Tuesday, 22 July 2008 05:30 | |||
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Indian political economy in the next few months is going to be about emerging political coalitions. The vote is over, and the nuclear hungama is thankfully on the backburner for a while. And the election season is in. Indian political economy in the next few months is going to be about emerging political coalitions. And the forthcoming elections are going to be about India’s inflationary crisis. Whether we blame international pressures, or high growth, or government mis-handling, the fact of the matter is, there is a crisis on the price front. To make matters worse, poor rains in western India have raised the price of onions – up to Rs 880 per hundred kgs from about Rs 430 on 30th of June. Prices are going to have serious political ramifications, not to mention economic and social ones. It appears that inflationary conditions are going to persist and may even, god forbid, get worse. Much has been written about the price rise, many believe price rises are primarily due to rising energy costs. In India however, the data shows that inflation is being driven by food and commodities and less so petro products. In other words, despite the fact that the government has not passed on a large part of the petro price increases to the consumer, prices have been rising rapidly. But the petro price will be passed on to the Indian citizen one way or another. The government may do so directly (by ramping up petro product prices) or indirectly through greater losses borne by PSEs backed by some accounting jugglery like oil sector bonds. It might seem to some that the latter implies that government is ‘absorbing’ the price rise. Nothing can be further from the truth. It is not in the government’s DNA to absorb anything, all that it can do is control the manner in which such shocks are directed into the national economy. By not passing on the price rises in the past, the government has only delayed the price increase pass through into the economy. This will happen over the next few months and this time it will not be in the government’s control. Various businesses both in the unorganized and organized will also be passing through increased costs. Poor rains in western India will also do its bit. Commodities are also on a rising trend. Steel producers are about to further increase prices. There is little that the government will be able to do. The best that we can hope for is that food and commodity prices stabilize in the next few months, which may very well happen due to good monsoons in north and east India. But no one can be sure really. The current inflation was expected, and was predicted much in advance (including in this column), and at least the key players in the government had more than an inkling. But they did not want to assert themselves. In the process they have grossly harmed those they were acting on behalf of. As a consequence the Congress will go into election season with ever increasing prices. Compare the current situation to an imaginary one where government had kept a tight leash on its expenditures, used its money carefully and not thrown it away on leakage prone schemes, ensured increases in agriculture sector investments (something that we have not for the past two decades) and prices of oil products were passed on as they were felt internationally. Inflation would not have been as high, and much more in line with other countries. To give some figures, developed countries’ inflation rates even in these times are typically less than 4%, that of most developing countries are no doubt higher, but inflation in India is far greater. Though government data shows inflation to be in the 12% range, it is actually more likely to be in the 20% range. (The government cannot underestimate inflation for long, and keeps on revising its old figures upwards.) This is a lesson for the professionals that work on behalf of the politician. Subservience should not be equated with serving the best interest of your political masters. When the ruling political conglomeration pushed for greater welfare expenditures, when they prevented oil prices from being passed on, when they delayed infrastructure investments at the state and central level, the economists and bureaucrats kept quiet. They gave in each time. Had they stuck to their the first principles which each of them has spoken about many a time, their party would have been in a much stronger position now. Economic policy based on first principles is actually not all that complex. Value the money that you have and don’t throw it away; invest in the future as much as is possible; don’t mess with the prices; and if you expect prices to go up in the future increase its supply now. But these principles need professionals who stand their ground, whether they are lawyers, bureaucrats or economists. This government had its share of the best. But they gave in. And their politician masters have lost out big time.
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