JOIN USLack of clarity has led to policy paralysis: Expert
“I don’t think the aggregate inflation in India is going to come down by February 2012,” as forecast by economic policy makers in the UPA Government, including Planning Commission Deputy Chairman Montek Singh Ahluwalia, Srinivasan said here on Monday in a dispassionate assessment.
Taking a swipe at the explanations proffered by the top influential policy makers. including Kaushik Basu, Chief Economic Adviser to the UPA Government and RBI Governor Subba Rao, he said unfortunately they do not throw much light on inflation in India. “We are still in that inflation which started way back in March 2005,” he said.
Delivering the third endowment lecture in memory of former President R Venkatraman at the Madras School of Economics, Srinivasan said, “In the 79 months between April 2005 and October 2011, inflation rates were 7 per cent or higher in as many as 44 months.”
“Clearly, the seeming persistence of inflation near 7 per cent or higher a year over such a long period calls for an indepth analysis of its determinants that goes beyond ad hoc explanations,” Srinivasan said, expressing profound dissatisfaction with the approach of top economic policy makers.
Regretting that too much emphasis was being given to tightening the monetary policy by the RBI without fiscal policy corrections to rein in inflation, Srinivasan argued with elaborate data to show that in the last two years since March 2009, the RBI “had changed the Repo rates 15 times, effectively tightening liquidity by 475 basis points.” Yet, there has been no perceptible impact on inflation in the country, he emphasised.
Srinivasan saw a basic shortcoming in India neither publishing the “aggregate consumer price index (CPI)” nor the “producer price index.” India was going by the “wholesale price index (WPI)” for commodities and till 2010 CPI was not even available, he noted.
India also did not have a systematic mechanism to incorporate “new goods” and “qualitative improvement in old goods” in the pricing mechanism, Srinivasan said. After the Indian economy was opened up in 1991, the quality and range of goods have increased substantially, but none of these “are reflected in the WPI,” the Yale don rued.
Calling for a satisfactory “integrated framework” that linked solid economic theory to the real world in tackling inflation, Srinivasan said that it was not possible to return to the 9 per cent GDP growth of the economy, witnessed during 2005-08, without solving the structural issues and infrastructure problems. Unfortunately, the RBI was pushing too much on the monetary side, he observed. Its monetary policy and the government’s fiscal policy were pulling in precisely opposite directions.
Expressing deep concern at the “Euro zone” debt crisis and its implications for other countries, including India, Srinivasan expressed shock that the RBI so far had not even laid out a policy paper on what needs to be done for the resolution of the “Euro crisis from an Indian perspective.”
While the other aspects of the “Reform Agenda,” including fiscal consolidation, reform of the tax code and the like have not been completed, Srinivasan said Prime Minister Manmohan Singh and some of his Cabinet Ministers talking in different voices added to the uncertainty.
For instance, Manmohan Singh in his speeches at G-20 summits has been supportive of “completing the Doha round of multilateral trade negotiations, said Srinivasan. But Commerce Minister Anand Sharma “wants to go back to India’s 2008 position which together with the US contributed to the stalling of the Doha Round,” he alleged.
One ray of hope Srinivasan sees is in the latest approach of Finance Minister Pranab Mukherjee, whose statement in Parliament on steps to check inflation had sought to adopt the same policies which the late R Venkataraman as Finance Minister in the Indira Gandhi Cabinet in early 1980s’ had pursued to reduce a huge 20 per cent inflation then.
Pranab Mukherjee said “in effect the same things” that R Venkataraman had said and acted upon with foresight to reign in inflation, by coordinating the supply side management on a daily basis, augmenting private investments and savings, improving agricultural productivity and manufacturing sector capacities, Srinivasan added.