“The Finance Minister is not a solo player. He is the conductor of an orchestra. He must take charge and conduct all other players to play the same tune. The buck, so far as the economy is concerned, stops at his desk.? This was Mr. P. Chidambaram on September 14, 2003. Quoting to the Finance Minister his own words is like taking coal to Newcastle. One cannot afford to make the Finance Minister angry. But some home truths have to be told.
On June 6, 2008, Chidambaram has a different take. Harassed as he is, with the persistent and unmanaged inflation, which since March this year he has been trying to tackle and insisting that it will come down in a fortnight, he charged the opposition BJP with not giving him creative suggestions (of course, free and thankless), ?if implemented would help in moderating inflation?. As a neo-liberal Chidambaram should have known that there is no free lunch, especially in politics. After all this is a national calamity, all of his own making.
Obviously, Chidambaram is at his wit'send. To be fair, it has to be admitted that in the UPA circus neither the Finance Minister nor even the Prime Minister is the conductor of the orchestra (The conductor, Comrade Prakash Karat, according to an Economic Times report, is chilling out in the salubrious capitalist Mecca, United States.) and the buck stops at 10, Janpath. So all these four years we had a government in denial. The World Bank and IMF have listed a series of pending reforms for the Manmohan Singh government but in the last four years the UPA has not taken any initiative to implement them. So we are left with a capitalist macro-economic regime corroded by communist micro-economic priorities.
Since Chidambaram has invited suggestions I am venturing to offer some freelance suggestions. As a long-time economic journalist, I have to clarify here that I am not running any consultancy, lest the FM will slap a hefty service charge, which now-a-days has become an inescapable bane of every poor Indian.
The Finance Minister cannot conceal the fact that he was lucky to have inherited a robust economy from the NDA. He also cannot conceal that he has mismanaged it to create the present trauma. He has admitted, in the article I quoted in the beginning that the inflation was low during NDA. Vajpayee government had shown how it was possible to have growth without inflation. The Economic Survey, 2004-05 also underlines this. In his book, A View From The Outside, a collection of articles between 2002 and 2004, mostly on economics but also on sundry topics as AIDS, Kanchi Seer and Iraq, he has not written a single piece on inflation; which shows that it was never a topic of concern or interest during the NDA.
Thanks to UPA, India is once more looking like a shortage economy. Even the Prime Minister is talking of cutting his expenses?he always enjoyed a reputation for simple living, though a confirmed capitalist? and his ministers have been forced to spike their annual holiday plans?an essential survival kit for the north Indian elite in these hot May-June months. Serious public policy trade-offs was part of the UPA Common Minimum Programme. The Finance Minister is now under pressure not only to keep the inflation low but to sustain growth.
Of late the UPA has been trying to cover up its economic mismanagement by creating a fa?ade that the unprecedented oil price rise was the real villain. This is not true, though it is one of the latest ingredients. For instance, The Economic Survey, 2006-07, had warned that the pressure of inflation was continuing. But the government was not able to curb it and continued to ignore it. Till last month, the Finance Minister repeatedly tried to mislead the nation on inflation. Presenting the budget for 2008-09, he claimed that inflation was under control. Earlier in January 2008, he said that inflation was good and natural in a growing economy. In April 2008 he expressed satisfaction that the rate of increase in inflation showed that his efforts were yielding results. Now the Finance Minister is annoyed that opposition is making it an issue.
Prices were steadily increasing under the UPA. China has shown that though it has a higher growth rate than India its rate of inflation is below two per cent. According to a research paper by economist Vandana Shiva titled, Price Rise in Essential Commodities?Inflation resulting largely from the increase in prices of wheat, rice and pulses has affected the poor more as food comprises a much larger component of their expenditure. The steady rise in the price of essential commodities is borne out by the percentage increase in their WPI between January 2004 and September 2007. While the WPI of wheat was up by 20.17 per cent, the increase for gram was 59.60 per cent, for arhar 17.36 per cent, for moong 31.90 per cent, for urad 60.22 per cent, for rapeseed-oil and mustard oil 45.70 per cent, for groundnut oil 33.37 per cent, for coconut oil 19.50 per cent, for potato 222.43 per cent, for onion 19.80 per cent and for sugar 14 per cent during this period. This study does not cover the high inflation after March 2008. However, the data reveals that during these years the price rise in wheat, rice and pulses has been the major cause for misery for large sections of the population. Perhaps most of the UPA anti-inflation measures failed because it promoted a capitalist consumption pattern while it applied traditional methods like keeping down the growth of monetary aggregates, lower interest rates and restricting budget deficits to fight inflation. In fact the media reports and government pronouncements, particularly on oil price and food scarcity have only helped promote inflationary expectations. The panic reactions of the Finance Minister, prompted mainly by Left pressure only fuel inflationary expectations and in turn inflation. Hedging against continuing inflation has also become a major factor in all decision making. It creates havoc with government policies particularly in an election year.
First of all the government will have to admit that there is no quick fix to arrest inflation. That its policies so far have failed and that it did not comprehend that its populist policies like NREGA, loan waiver, and minority enticement projects have increased money supply without leading to productive investment. The stagnation in public spending on productive ventures like national highway projects, prime minister'srural road programme, national river linking mission and power projects have also contributed to the inflationary spiral. Sloganeering is not economics. Infrastructure suffered under UPA. It is surprising that the government has still not called a halt to its wasteful spending. It is in these areas that the NDA showed the way which created the India Shinning euphoria.
Add to this, the UPA failure to tackle terrorism. The thousands of millions of bad money and terror fund in the market both as black money and fake currency, which the government is unwilling or incapable of tackling is propelling inflation. The attack on persistent inflation has to be a long-term, multifaceted war. What the Finance Minister was trying to achieve was declining rates of price increases over a period of several cycles Achieving increased productive investment and productivity in many sectors is the first long-term initiative towards containing inflation. The government can do a lot on the monetary and fiscal policies like incentive to increase in voluntary savings, better management of private and public enterprises, reducing the relative share of taxation, increasing employment opportunities and better mobility of goods and services. The UPA has adopted a policy of higher taxes, more taxes on endless heads. It is also encouraging low returns on savings including provident funds and other long-term investments. This was basically to help consumerism. The policy is meant to ensure quick profit to corporate and encourage people play in the stock market. This created inflationary pressure and mindless spending. Political parties spent millions on fighting elections which have now become a quarterly affair. This also contributes to waste and inflation.
The Finance Minister can try to attack the problem on demand and supply side. Demand must be realistically related to the productive capabilities of the economy. A process has to begin, as Irving S. Friedman says of ?reformulating expectations of improved material well-being to realisable levels?. Priorities have to be set in easiest to achieve areas like food, energy, water, health care, housing, clean environment, better transportation, education and availability of raw material to increase the supply capacity to benefit the largest possible number of people. Making windfall profits and accumulation of wealth in smaller sections of society should be discouraged by legislative action. This is not an enemy of liberalisation.
Any national anti-inflation programme will require changes in the lives of all people. These can be made popular by leaders setting new levels of austerity, simplicity and strict eschewing of all kinds of ostentations. This is the only way to sustainable development. Perhaps this realisation is what prompted the Prime Minister at least belatedly to make demands on industry and his own colleagues to adopt simplicity. This must become a national mission. Because of our cultural roots India has a good chance in achieving this goal.
To make growth without inflation possible different combination of policies are needed. Like major changes in consumption, savings, and investment patterns. ?Persistent inflation is manmade, not inevitable consequence of modern societies? aspirations for their people. Our aspirations can be achieved if we have the ingenuity and will to make the changes that will produce growth without inflation?, said Irving S. Friedman in his book on inflation.
(The views expressed in this column are personal. The writer can be contacted at [email protected])