Govt reaction to inflation driving away foreign capital
When the heads of the largest companies in India emerged from their meeting with prime minister Manmohan Singh some days ago, they had received an assurance that interest rates would almost certainly be brought down and other complaints attended to.
They therefore, professed that it had been a good meeting. That was before the prime minister’s office took the unprecedented step of issuing a press note that was designed to express his displeasure with them. By blaming government policies for the drastic slowdown in the economy, he said, India inc. was spreading uncertainty about India’s future. It is this, he said, and not mismanagement of the economy that has caused the sudden loss of confidence in the country’s future which is responsible for exodus of foreign investors and the fall in the value of the rupee.
But Singh’s own next remarks revealed that his criticism was not justified and that it is indeed the government’s ruinous management of the economy that has brought Indian growth to an end. For even while assuring them that interest rates would be brought down he made it clear that he was not doing this because the exchange rate was in a tailspin, industry was contracting, enterprises were closing and millions of workers, especially in the unprotected unorganised sector were losing their livelihoods, but because “food inflation was tapering (off).” With that one sentence, Singh made it clear that, to him, inflation was still the only thing that mattered, and that the government would fight it through restrictions of money supply (and increases in interest rate) whenever it reard its head once more.
Had inflation been generated by domestic demand, or commodity price speculation, his remark would have reassured the global investors’ community. But it has done the opposite because, as his finance minister, and chief economic adviser, and the Reserve Bank governor have admitted, the inflation of the last two years has been driven by global and in a few areas local, supply shortages. Cutting back money supply at home cannot, and has not, made even the smallest difference to it. As a result, the message that the prime minister has managed to send is ‘stay away from India and stay away from the equity markets in particular because you never know when the RBI will raise interest rates once more.’ It is no surprise that industrialists are grumbling all the way to their banks.
Why is the government so spooked by an inflation that is not of its making? The answer is its loss of control over large parts of economic policy to 10 Janpath, and its consequent over-reliance on the instruments that still remain in its hands.
Inclusive growth
The struggle that the government has lost is over how best to assure ‘inclusive growth’ –i.e reconcile rapid economic growth with social justice. No one in his senses would deny the need to do so. Writing in the 1930s, John Maynard Keynes, the greatest economist of his time and architect of the Bretton-Woods system of international economic management, had written in one of his essays that had it not been for the trade unions, capitalism would have destroyed itself long ago. Trade unions saved capitalism by forcing the owners of capital to share the fruits of growth with their workers more or less equitably.
From the very first days of the UPA, Sonia Gandhi and her advisory council have been acutely conscious of this need to reconcile growth with equity. Under its direction the government has passed the Mahatma Gandhi National Rural Employment guarantee programme (MGNREGS), opened eight Bharat Nirman programmes, and enacted a host of rights for the poor – the Right to Education, employment, health and to food, but without sparing a single thought to the resources required or the consequences.
But if wishes are horses then beggars would ride. The enactments passed by the government are no more than a wish list till they have the money and the administrative capability to implement them . The government has neither. But this has not deterred the social inclusionists from racing ahead and making fresh promises without making sure they can be fulfilled. As a result these ‘social inclusion’ outlays have ballooned till they now make up 38 per cent of the Centre’s planned expenditure. When the Right to Food bill is implemented it will rise well above 40 per cent.
To its credit, the government has tried to curb the populist surge in spending. In 2007-8 it knew that at Rs 60 per day in the burning heat of summer there would be few takers for the MGNREGS outside the poorest parts of the country. Forcing panchayats and local administrations in the rest to meet pre-set targets for employment generation would only lead to large scale falsification of muster rolls and an embezzlement of funds – a game at which local governments and their political mentors were already adept.
So it dragged its feet till, faced with another general election, Rahul Gandhi jumped into the fray and demanded that MGNREGS be extended to the remaining three parts of the country straightaway. The prime minister was left to choose between confronting Janpath and falling in line. With little political support base of his own in the party he had no option but to do the latter. Not surprisingly MGNREGS outlays quadrupled to Rs 45,000 crore in five years.
The MGNREGS, however, was only the tip of the iceberg. Under the UPA, the annual expenditure on rural development rose in the 11th plan to Rs 60,000 crore from Rs 24,000 crore in the tenth Plan. There were similar increases in the health and education outlays.
