Expert Zone

Straight from the Specialists

The inflation scandal in India

By Derek Scissors
April 25, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

It has cost and continues to cost the economy tens of billions of dollars. It has immiserated the poor. It should come as a surprise to no one yet, with each revelation, senior officials express consternation. Federal ministries, at best, have been incompetent and, at worst, offered up a series of falsehoods. Critical agencies refuse to take the necessary action.

The telecom auction? Another corruption saga? No, all this refers to the ostensible fight against inflation, which is by far the biggest failure of the current government.

Food inflation warnings began in the summer of 2009. It may be hard to believe but the most senior of officials promised that inflation would be under control by March 2010. Both consumer and wholesale price inflation were in fact in double digits in March a year ago. By itself, that should have been grounds for someone’s resignation.

Showing no shame, another round of predictions were made for the end of the last fiscal year in March 2011. These featured the Prime Minister himself forecasting inflation would be at 5.5% by the end of last month, and falling.

As that became utterly unreasonable, the figure became 6 percent, then 6.5 percent. Instead, wholesale inflation stood at 9 percent at the end of March, on top of the previous year’s double-digit increase.

The consequences have been grave. Though energy is now coming to the fore, inflation to this point has been led by food, thus hitting the poor hardest. So much for the mantra of inclusive growth.

Nor has the middle class been spared. Salary increases have been considerable the past two years but they have been slower than inflation. In other words, despite strong growth, those who are salaried have become effectively poorer.

These effects should be the government’s prime concern. But the response has been abysmal. Eighteen months of wishful thinking have not been enough; the Prime Minister’s Economic Advisory Council is again anticipating 6 percent inflation by the end of the new fiscal year. Someday, they will be right.

Officials make vague references to the monsoon, “supply bottlenecks,” and other forces for which no one can be held responsible. Even statistics are subject to obfuscation. Revisions of initial estimates invariably show inflation as worse than the government initially announced. An inflation peak of 18 percent last summer was evident to the aam aadmi but officially reported only well after the fact.

The Central Statistical Organisation has also chosen this time to roll out new inflation measures, which are long overdue but now serve to muddy the trend. The new consumer price index will not be usable until next year.

Interest rates should be the chief tool to fight inflation but the Reserve Bank has failed miserably to do so. Rate increases have been far too little, far too late. In an environment of high inflation, India has maintained sizable negative real interest rates (the formal interest rate subtracting inflation), which only encourages more inflation.

Corruption incidents receive headlines but consistently bad policy is much more harmful. The obsession in New Delhi with high GDP growth has damaged the entire economy. Nine percent GDP growth and sustained nine percent inflation is no major accomplishment. It does not show India’s “rise,” but rather fundamental weaknesses.

RBI policy-making shows either lack of independence or abject failure to confront soaring prices. While the poor and middle class suffer from this failure, the biggest beneficiary is the federal government, whose debt payments become smaller in real terms as the value of each rupee declines.

Inflation is the true scandal.

Comments

Nice article.

The problem is if the RBI increases interest rates yet again, the financial sector and the industrial sector will cry out for blood as already the interest rates are so prohibitively high most large indian corporations are getting loans from China and other countries. Also, with increasing interest rates, the ability to finance infrastructure projects become much harder and for that matter makes it much harder on the common man to buy a car, get a mortagage etc.
The RBI needs to curtail money supply yet being overzelous in its efforts will hurt the GDP growth rates that are an important political benchmark they can peddle during the elections. However, should inflation continue this trend, high GDP numbers may not be good enough to sway voters.

Posted by IAF101 | Report as abusive
 

For the time being leave tax payers who fail to pay taxes. What about the collected taxes? Are they getting used the way it has to be used? The burden falls again on the common man.

Posted by AHandz | Report as abusive
 

If the inflation is being driven by food items, interest rates may not even be effective in fighting inflation. The only way it would work is by curtailing expansion and investment and thus increasing unemployment. That doesn’t seem to be a sensible way of dealing with inflation, even more so if it is caused mainly due to food items.

Posted by RahulMenon | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  • Editors & Key Contributors