In January, in my monthly column for this publication, I had written: “The Reserve Bank of India will gradually tighten liquidity but not to an extent that it results in a perceptible hardening of interest rates. In any case, the ability of the country's central bank and apex monetary authority to signal interest rates has diminished over the years.”
On this count, I have been inaccurate. Interest rates on loans for purchasing real estate, automobiles and education have hardened. I would have been delighted if I had been proved wrong on some other issues as well. But, regretfully, the government continues to be a passive spectator as the monster of inflation continues to gobble up much of the real gains that are being made on the economic front.
Eight months ago, I had written: “The RBI also realises that a tight money policy may have little or no impact on skyrocketing food prices that are a consequence of supply-side factors that include mismanagement of imports and exports, poor anticipation of the impact of production shortfalls and governance failures, importantly, the inability to curb hoarding and speculation… Cases in point are the way in which the prices of sugar, pulses, edible oils, fruits, vegetables and dairy products have risen in recent months while government agencies have watched helplessly.”
On January 13, Union Agriculture Minister Sharad Pawar had made an astounding claim that food prices would be coming down in the next “four to eight days”. Did the Minister assume that the people of the country are utterly gullible? He certainly did not fool too many people. And who does not know about the Minister's influence among the sugar co-operative barons of Maharashtra?
The facts tell a story of utter apathy, if not incompetence and worse -- a story of collusion that benefited a few at the expense of the many. In late-2008 and early-2009, an estimated 4.8 million tonnes of sugar were exported out of India at a price that varied between Rs 12 and Rs 15 a kilogramme. The country thereafter imported over 7 million tonnes of sugar at twice the price at which exports had taken place. Who was responsible, the Minister or the entire Cabinet?
From a peak of 21 per cent in December, food inflation has abated and come down below double digits. But the overall wholesale price index remains at an uncomfortably high level. When government spokespersons claim that the index will come down to around 6 per cent towards the end of the year, we don't know whether it is the calendar year or the financial year they are talking about. Yes, the inflation rate will come down in the future, if for nothing else but on account of a statistical “base effect” since the index had been relatively high during the last quarter of 2009. When this happens, the government will surely claim credit for having lowered the inflation rate.
But a lowering of the inflation rate will not mean that prices will decline - it would merely signify a slowing-down or a deceleration in the pace at which prices are going up. There is no doubt that its inability to control inflation has been one of the biggest failures of the government. What is worse is that the decision to hike the prices of petrol, diesel and even (politically-sensitive items) like kerosene and cooking gas has literally added fuel to inflationary fires.
If there is one economic phenomenon that affects the lives of the majority, it is inflation. All economists agree that inflation is like a tax on the poor. Inflation shrinks the real incomes of the underprivileged while the incomes and profits of the affluent often rise. When inflation is driven by high food prices, it becomes a double tax on the poor because the poor spend a relatively much higher proportion of their total incomes on food unlike the rich. Still, the powers-that-be shed crocodile tears for the aam admi.
This article was originally published on September 10, 2010.
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