Inflation, the losing battle

For the last so many years the Centre has been making tall claims about combating inflation, but it has become an unending phenomenon.

After the worst ever defeat in elections from Aam Aadmi Party and the BJP in the recent round of elections, the Congress had recently called a meeting of its chief ministers from the party-ruled states to combat inflation in their respective states. It looked  strange that a common problem which is national in nature could be discussed at a group level. Though inflation is not a new phenomenon in India, the new aspect is that, in the last 3-4 years, the rate of inflation has been at a very high level.
Since 2010 the prices have increased by nearly 40 per cent. During this period the food inflation has been even higher at 48 per cent. This implies that a poor man, spending Rs100 on food, now has to shell out Rs 148 for the same food. This also means that if he does not have sufficient money, then he is forced to cut down on his consumption of food items, especially vegetables, fruits, eggs and milk.

Popularity graph of the Central government has constantly been going down, as proved by the humiliating defeat of the Congress in Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh. In such circumstances the party is naturally nervous. The main question is how can the inflation be stopped? For the last so many years the government has been making tall claims about combating inflation, but it  has become an unending phenomenon. Last year the government claimed that foreign direct investment in multi brand retailing would help in controlling inflation. Sometimes, the government told the people to wait for good monsoons. Our prime minister, deputy chairman of the Planning Commission and the finance minister all are known to be experts in economics; why is the government trying to beat around the bush, is beyond anybody’s imagination.

In economic theory there are two factors responsible for inflation. One is the increase in demand and the second is increase in cost. Policy measures being adopted by government, as mentioned above cannot do any good on both these fronts. Government has to make efforts to address reasons for increase in demand and the cost of production.

As per the data published by the government about its spending till November 2013, the fiscal deficit has reached Rs 5.09 lakh crore in the first eight months of this fiscal year. It is notable that the proposed fiscal deficit for the whole year is Rs 5.42  lakh crore. If the same speed continues, the fiscal deficit may reach Rs 7 lakh crore by the end of the year. While presenting the Budget 2013-14, the finance minister promised to keep the fiscal deficit within 4.8 per cent of GDP and that it would not be allowed to cross the ‘red lines.’ However, the data coming in puts a big question mark on government’s commitment towards this.

Fiscal deficit

Recent indications about possibilities of more populist measures like increase in the limit of subsidised LPG cylinders to 12 may further raise this subsidy and thus fiscal deficit. Government can adopt two ways to fill the gap arising out of fiscal deficit: one by borrowing from public, including banks, and two, by borrowing from RBI, which in turn would be filled up by printing of additional currency notes. It may be underlined that in March, 2009 the currency held by the public was only Rs 6,55,450 crore, which increased to Rs 11,89,780 crore by October 18, 2013 (that is, 78 per cent increase in nearly 4 and half years). Money supply which includes bank deposits apart from currency, increased by 52 per cent during this period. It is known that as money supply increases prices increase by the same proportion. And increase in prices would be less, if there is growth in GDP. And it is no mere coincidence that prices have increased almost in the same proportion, as suggested by economic theory. Why our learned prime minister is not able to see the writing on the wall is beyond comprehension.

Our economic growth has been declining in the last couple of years. We find a high (9.3 per cent) rate of growth of GDP during 2009-10, which declined to 6.2 per cent and 5 per cent during 2011-12 and 2012-13 respectively. In 2013-14, it may go further down to 4.5 per cent only. The main reason for decline in growth is believed to be poor performance of manufacturing sector. It is notable that manufacturing growth which was 15.6 per cent in 2007-08 has come down steeply in the last eight months to (-)0.2 per cent.

It means that manufacturing has nearly come to a standstill. Major loser is the capital goods sector, where growth has become negative. Due to neglect on the part of the government, agricultural production also could not increase as per targets. Now the responsibility for growth it seems has fallen on the services sector, which again has its own limitations. Under these circumstances, poor manufacturing and agricultural growth on the one hand and increasing money supply on the other are fuelling inflation.

What should the government do? It will have to take concrete measures to combat inflation like cutting down wasteful expenditures to stem the fiscal deficit. Instead of slashing expenditure on social services like education and health it must curb populism. To somehow garner votes the government has made many populist declarations apart from enacting the food security legislation in a hurry in its last leg in power. They need to be rationalised. Concessions being given to the corporates in the name of improving investment environment need to be withdrawn. Government will help to make all out efforts to improve its tax revenue collections including tightening the noose on companies like Vodafone.

We need to keep the rate of interest low at any cost, so that industrial and infrastructural development gets a boost. We need to control the import of industrial products especially consumer and engineering products to save our industry; only then the industry reeling under recession could be helped.