Open Forum

New Delhi, 25 October 2011

Dodgy Inflation

STOP BEATING AROUND BUSH

By Dharmendra Nath

‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose’ said John Maynard Keynes in the years between the two World Wars. With his masterly understanding of the world economy, we can be sure that he knew what he was talking about.

In view of our high inflation levels of the last over two years, the statement highlights for us the dangers and challenges we face. This, notwithstanding Panning Commission Deputy Chairman Montek Singh Ahluwalia’s recent assertion: “Inflation is going to be brought under control by the end of the year (March 2012). You will see inflation lower than 8 per cent then."

Inflation has been the butt of many jokes. Like when ordering beer in a bar you should order two instead of one for who knows by the time you finish the first one the price of the second may go up. Or when traveling you should prefer a bus to a taxi since it is better to pay upfront rather than to wait to complete the journey in a taxi for by then the fare can go up. Jokes apart, inflation is not merely a question of costly bread and other necessities, it is an invitation to a social upheaval through changing relationships within the society.

We used inflation in the past against the feudal order to impoverish them, so much so that when Privy Purses were abolished in 1971 there was really no need of that. Even without it, the feudal order was fast losing its financial strength under the persistent pressure of inflation. Besides its other implications, inflation was a silent attack on private wealth of people who could challenge the supremacy of the State. What are a few crores or tens of crores today against mind-boggling lakhs of crores being bandied about currently?

But what social upheaval do we want now? It is clear that inflation today is upsetting the existing relationships within the society. It may be contributing to the expansion of the middle class, whose incomes are going up and that may have a beneficial fallout effect on growth. However, it is also widening vast contrasts within the society. The distance between the haves and the have-nots is widening by the day. A look at corporate – or by extension organized sector – salaries and the so-called Poverty Line cut off of Rs 32/26 a day is deeply disconcerting. Undermining a currency gives rise to such artificialities because bargaining powers of different sections of the society are uneven.

As social scientists we can imagine what the Rs 32/26 per day man feels when he hears of legal and illegal lakhs of crores and sees these rupees being flaunted in the legislature. The irony of it is that all this has happened while we were supposed to be implementing the Directive Principles of State Policy which require us to prevent concentration of wealth and means of production in the society!

The point is that this kind of inflation is creating unrest. It is contributing to social alienation and bad blood which can have far-reaching adverse consequences for the stability of the society.

Mild inflation of one or two per cent, as in the developed world, protects profits and thus encourages entrepreneurs and other productive sections of the society thereby creating favourable conditions for growth and economic expansion. Goods in process do not lose value and these will fetch tomorrow more than today. That acts as some kind of insurance against loss.

High inflation, on the other hand, destroys purchasing power and thus hits the poor the hardest. It also upsets the relations of the factors of production in the society. The turbulence thus created is disruptive and anti-growth. Outer limit of any acceptable inflation has to be within the rate of increase in per capita income of the people. Any thing beyond that is also beyond the comfort zone, a harbinger of difficult days ahead.

Let us now see what we are doing about it? For one, we are waiting for a favourable monsoon to improve supply side economics. That is precious little and amounts to wait and see. Prayer mode. In the meantime, as a palliative we are allowing for indexation of costs and prices in our calculations to relieve current hardship. But that clearly is only a relief measure.

For the rest, our chief reliance is on credit control measures. The Reserve Bank of India has been vigorously doing that for over the past one year with minimal results. It has been squeezing repo and reverse repo rates in an effort to immobilize some of the created money. The point is why not control creation of money itself rather than try to control credit after having created the money? Why not prevent the horse from bolting instead of trying to control it after it has bolted?

Creation of less money means reduction of Government borrowing from the Central bank which prints money and makes it available to it. That is what deficit financing means. If that is avoided then money supply gets reduced at the source.

To tackle inflation action is required squarely from the Government. It is required that it stays within its means, a prospect which apparently is not palatable to it. Specifically, it would require the Government to do three things: One, ensure far better tax-compliance so that it has solid money to bank upon. Two, do something about its burgeoning debt and debt-servicing burdens, which constitute a considerable outflow. Three, reduce the bulging subsidy expenditure which though popular only postpones the evil day (Subsidies financed by printed money feed on themselves, the more the subsidy, the more the inflation and the greater the demand for enhanced subsidy and so on.) and propagate in the society an expectation of a free for all. All these are government failures which need to be addressed.

The selection of investment options will also have to be far more rigorous to ensure that the projects taken up out of public funds really pay up. The overall more paying projects, rather than politically patronized projects, would have to receive priority so that benefits against the expenditure made start flowing in optimally. Also, we will have to ensure prompt completion of projects. Not only that, there has to be a continuous monitoring of the supply side in the economy and economic reforms are a must.

So instead of beating about the bush it is high time that we go in for these more direct ways of tackling inflation. For besides its economic costs its social costs are equally disturbing and we are beginning to see evidence of it.  ---INFA

(Copyright, India News and Feature Alliance)