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On A Boil

There is a growing disquiet within the Congress about its economic policies failing to curb inflation

A recent meeting with a Union Cabinet minister convinced this columnist that the ideological rift within the Manmohan Singh government has deepened and widened. The provocation for this person’s diatribe against the Prime Minister was his statement on November 4 on the sidelines of the G-20 meeting in Cannes, France: “We must move in the direction of decontrolling more prices. I have no hesitation in saying markets must find their own levels, except for those commodities which are semi-public goods.”

Dr Singh’s remarks came in the wake of the decision of oil companies to increase the prices of petrol (that were decontrolled in June 2010). It is evident that it is not just the constituents of the UPA like the Trinamool Congress that are upset about the government’s inability to control inflation. Within the Congress as well, there is growing disquiet about the implications of the government’s economic policies that are aimed largely at increasing growth and containing the fiscal deficit and not on curbing inflationary expectations. Food inflation has sharply eroded the real incomes of the poor, sharpened inequalities and made the ruling coalition unpopular.

An ideological debate within the Congress is hardly new. There was a major internal discord within India’s “grand old party” on economic ideology after the Congress lost power in May 1996. After completing five years as finance minister in the P V Narasimha Rao government and after he was hailed as the architect of economic liberalization, Dr Singh was attacked by his colleagues for allegedly alienating traditional Congress voters by his so-called pro-rich policies. Among his detractors at that time were the late Arjun Singh and the late Rajesh Pilot.

The “left-wing” in the Congress is wondering why the “neo-liberal” coterie led by the prime minister is not perturbed by the anti-capitalism agitations taking place across the globe. One senior cabinet minister, speaking to this writer on the condition that his identity would not be disclosed, claimed that Dr Singh’s was “obsessed” with containing the fiscal deficit, even if in the process subsidies on food, fertilizers and petroleum products were cut.

“This is a form of market fundamentalism that is almost rejecting the reality of what is going on in economies in different parts of the globe where governments are spending more and more to get out of recession,” this person cribbed. He added that there was “nothing sacrosanct” about the Budget target of keeping fiscal deficit at 4.6 per cent of GDP. This minister said “India is not Greece” and is no danger of falling into a debt trap. He felt the government should not be bothered if the fiscal deficit rose by, say, one percentage point above the Budget target. What was more important, he argued, was that the government should ensure that the prices of diesel, cooking gas and kerosene did not go up. This was possible, he said, by increasing subsidies while foregoing taxes like excise and customs duties.

The minister pointed out that the government’s credibility had been considerably eroded because of repeated claims to the effect that inflation would be coming down soon when nothing of the sort was happening or was likely to take place. He contended that the government had put pressure on the Reserve Bank of India (RBI) to harden interest rates. “The government wants to convey an impression that it is acting to contain inflation but what is actually happening on account of the RBI’s decisions is that investments are slowing down without any impact on inflation. They are trying to convince us that things would have been worse if the RBI had not acted, but I for one am not convinced by this economic logic.”

The vehemence of this Minister’s outburst took me by surprise but what became amply clear is that the UPA is a house divided on the direction of economic policies.