With industrial output in March 2008 falling to a six-year low, inflation has signalled to catch its next victim? growth. So far the government has been claiming that growth will not be a casualty of inflation?that inflation is a temporary phase in growth, that it is global, that it is driven by food shortage, crop failure in Australia and EU, increase in price of oil, bad weather and that it will disappear during the cyclical downswings. It is also being suggested that inflation has stabilised below eight per cent, which according to the Finance Minister P. Chidambaran is a good sign and shows that the anti-inflation measures have started showing results. A feeling however remains that the government has either not understood the real problem or it is hiding it because of its compulsions of globalisation.
Consumerism which the government and the private sector are promoting in a big way is a major driver of inflation. But the Finance Minister or the political leadership of the country will not ask the citizens to curb unnecessary spending. The government has to have a policy to encourage saving and thrift educating people about simple habits. Many years ago I read a book, Inflation?A World-Wide Disaster by Irving S. Friedman, which Peter F. Drucker described as ?The best book on inflation?. Perhaps even today, it remains unsurpassed. What Friedman wrote a decade before globalisation reads like a contemporary Indian economic commentary.
Describing the causes
of inflation Friedman wrote, ?The demand for consumption dramatically altered in a number of dimensions. Some products?automobiles, houses, refrigerators, cosmetics, clothing, radios?became ever more elaborate and subject to frequent changes in styling and technology. Simultaneously, new products?television, dishwashers, clothes dryers, countless small appliances and gadgets?entered into common consumption patterns. The market for these products seemed ever expanding. There were more people; many had higher incomes. And consumption per family increased. Because products were used more intensively, or deteriorated faster, they required more frequent repair, if not replacement.
?One dramatic illustration of the change in consumption habits is travel. The airplane has not only made travel physically possible, but travel is now within reach, not only of the once well-publicized, wealthy ?jet set,? but of the rapidly expanding higher-income classes? to say nothing of their offspring. In a few years, what was the prerogative of the wealthy has become an ordinary event. With more travelers visiting more places, still other demands arise: for hotels and restaurants, expanded airports and roads, for drinkable water and sanitary facilities in areas where these are luxuries for the ordinary residents, for cultural and sports festivals to attract tourists, for travel literature, for ?appropriate? clothing and sports equipment, for special schools to teach managers, counselors, and guides. Tourism has become a major world-wide industry, jumping over national frontiers and scornful of barriers such as thousands of miles of ocean or jungle. And this is but one example.
?What had started? as the Americanization of world consumption by a slow process of imitation accelerated into a frenzy of everybody imitating everybody else. Anything ?foreign? is more chic everywhere than anything ?domestic.? Advertising, in all media, fosters this frenzy. Consumers are lured into decisions they are told will satiate some basic psychological or physiological need?one perhaps only remotely related to the particular product. The popularization of Freudian psychology opened new vistas to merchandising products; conscious or subconscious sexual needs can be implicitly or explicitly satisfied with products previously regarded as merely satisfying some simple, obvious or conscious need. Automobiles are sold as sex symbols, and airline stewardesses parade like the burlesque queens of previous eras.?
I am reminded of an incident narrated by Z.K. Brzezinski, a former adviser to President of America when he visited the then union HRD Minister Dr. Murli Manohar Joshi. Expressing his concern over the growing craze of consumerism, he said, one day his daughter told him that she was going for shopping. Brzezinski asked her as to what she was planning to buy. The daughter replied that she will decide it after going to the market, seeing what all are available. This, he explained, was not need driven demand but insatiable spending craze prompted by saturation advertising. This is what modern consumerism is driving people to. India too has a burgeoning number of shopaholics.
The change in consumer attitudes is the result of more than mass advertising, mass production, and mass selling; it also reflects mass consumer-credit facilities, says Friedman. Look at this. ?These are relatively easily, if expensively, obtained. They are advertised and sold like consumer products. Individual tastes and consumption demand need no longer be (and indeed are not) directly related to income, or even to expectations of income. The result is ever-increasing demand for consumer commodities and services. Governments, even when dismayed by the presence of inflation, make use of this attitude toward consumption, when confronted by politically and socially defined intolerable unemployment or lower rates of growth; repeatedly, they stimulate the economy by encouraging still more consumption. Where a relative decline in capital expenditures?in investment?used to be an urgent warning of imminent economic recession or economic stagnation, failure to stimulate consumption now sends tremors through the economic world. For we have come to rely on seemingly insatiable consumption to revive declining economies and to do so with little delay?before unemployment becomes prolonged or severe,? wrote Friedman.
India today, according to the Economic Survey 2007-08, has an 8.6 per cent unemployment rate which is monstrous by world standards. In America an above three per cent unemployment becomes a national scandal. But in India unemployment has been on the rise since liberalisation.
Industrial output growth slumped to 3 per cent when inflation is soaring at 7.61 per cent and the rupee sliding, there is little hope of a rate cut for the investors. The rise in input cost has affected prices, production and demand. The sharp drop in industrial production may have triggered fears of a slowdown, but economists are still holding onto an 8 per cent plus growth projection for 2008-09. The optimism among policymakers and economists, however, is not shared by industry players. According to reports they believe that high interest rates and rising input costs have started impacting demand.
High inflation, however, rules out any possibility of rate cuts to stimulate growth. As it is high interest rate is an incentive for saving and traditionally Indians are no spendthrifts.
The growth rate for March 2008 is the lowest since February 2002. But the government has little leverage to boost growth. Economic Times reports quoting experts that because of high inflation as well as inflationary expectations looming over the economy due to spiralling crude and commodity prices along with a depreciating rupee, maintaining price stability will be a difficult task for the central bank. Thus, expecting any kind of rate cut is completely out of question.
Friedman says out of this emphasis on consumption comes the demand for steadily rising money incomes, for without the prospect of increased money incomes the bubbles burst. ?Rising prices increase the demand for rising incomes. Thus, the need for ever-increasing money income becomes greater, many people may well find themselves consuming less and less, despite increased money income or greater debts. Consumption has taken on an orgiastic character. The results are by no means all bad, particularly for those able to satisfy their demands despite rising prices. But many, lacking income or credit, remain frustrated and increasingly discontented. In this process of artificially induced demand and excessive debt, the producer and the consumer whose income cannot keep up with the persistent inflation pay the piper.?
The Indian scenario cannot have been described better. And obviously India is at least two decades behind the West, the time of writing this book. The Rs. 60,000 crore loan waiver, sixth pay commission pay-offs to employees, astronomical private sector pay cheques and the so-called social welfare schemes like NREGA and minority schemes are to be seen in this perspective. All this increases demand, creates a euphoria, increases corporate profitability and keeps the engine of capitalism running.
Cyclically, the West is experiencing this. They had the booty of colonisation and spoils of war to fund and finance this unsustainable lifestyle. Today, the WTO and globalisation are acquiring a pattern of modern colonialism. Following blindly the Americanisation of consumption can India survive economically?
(The views expressed in this column are personal. The writer can be contacted at [email protected])