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Inflation Woes

The inflation is taking its toll on the UPA Government

Barely a month after the Finance Minister made a grand announcement of the government’s Rs 60,000 crore farm loan waiver scheme, the subject seems to have faded from public memory. On April 1, the coverage of the National Rural Employment Guarantee Act was extended to the entire country. Once again, nobody seems to be bothered any more about the “world’s largest social security programme”.

The India-US nuclear agreement appears to have been placed on the back-burner. As for the much-vaunted ‘India growth story’, the less said the better. What happened? The answer is simple: there is today only one important topic of discussion and that is, inflation. The annual rate of inflation as measured by the WPI has gone up to 7 per cent. But what is far more significant—and extremely damaging for the regime—is that this time round, inflation has been led by food prices. In 1979, Indira Gandhi used the price of onions as a potent slogan to return to power. A decade later, the high price of sugar became an issue that contributed to the defeat of the Congress led by Rajiv Gandhi.

Inflation is an issue that affects everyone. The poor are hurt the most by rising prices, especially by food inflation. And it is hardly a secret that the poor go out to vote in larger numbers than the well-off. Not surprisingly then, the recent spurt in inflation has sent jitters through the ruling UPA coalition government.

A defensive government is saying time and again that world food prices are at record levels, that wheat prices in international markets doubled over the last calendar year and that there have been food riots all over the world: not only in Namibia, Zimbabwe, Morocco, Mexico and Uzbekistan but in developed countries like Austria and Hungary. In Robert Mugabe’s Zimbabwe the official inflation rate last year was an incredible 1,16,000 per cent!

In the past, there has been triple digit inflation in countries like Argentina, Brazil, Russia and Israel. But tell this to the home-maker and it will have no impact on her. What matters much more is that her real income has shrunk rapidly. She certainly does not believe the government when it says headline inflation is at 7 per cent.

Another set of statistics - also put out by the government, but by a different agency - indicates that in the country’s capital, edible oil prices have gone up by as much as 40 per cent over a period of twelve months, rice prices are up by 20 per cent, dal by 18 per cent and milk by 11 per cent.

The measures that have been initiated by the government would dampen the rate of inflation as measured by the WPI in the coming months. But this would fail to impress the electorate. Why? Even if the inflation rate falls to, say, 4 per cent, it would not mean that prices have decreased; it would merely imply that the speed at which prices have been rising has decelerated or slowed down.

The intensity and the spread of the monsoon would determine the extent to which inflationary expectations get muted since 60 per cent of the total cropped area in the country is not irrigated. If Indra Bhagwan does not smile this summer, the ruling coalition will be in the throes of a major dilemma. Should it cut its losses and go for early elections ahead of schedule? Or should it wait for inflation to subside a bit?

The government is under attack from both the BJP and the Left for not having acted earlier. It is fighting with its back to the wall. As for an easing of interest rates, just forget about it for the time being—it just will not happen now.