Duvvuri Subbarao is battling an existential question. “Twenty years ago when I had a thick mop of hair, I used to pay Rs 25 for a haircut. Ten years ago, after my hair sta-rted thinning, I was paying Rs 50 for a haircut. And now, when I have virtually no hair left, I am paying Rs 150 for a hair cut. I struggle to determine how much of that is inflation and how much is the premium I pay the barber for the privilege of cutting the governor’s non-existent hair,” the central banker lamented this week in a speech on the sixth annual statistics day conference of the Reserve Bank of India.
We’ve all had our moments of epiphany on prices. Mine was in the office canteen when the fourth piece of mutton disappeared from the curry. Prices are on a tear in most things the middle class spends on — school and college fees, doctor’s bills, eating out and watching movies — but we don’t know how fast they are rising overall. We do, in a way, when the maid threatens to quit if her pay isn’t raised by 25% or the postman sneers at a R50 Diwali baksheesh. But there must be a better way to track the cost of living than look up the money the father of the rich girl in a Boll-ywood film, over the decades, offers the poor hero to stay away from his daughter.
As it turns out, Subbarao, whose KRA is controlling prices, doesn’t know what he doesn’t know about inflation. Then, maybe his boss does? Well, our finance ministry isn’t any wiser on this score. A committee of economists and statisticians has tried to capture prices in over half the economy that escapes our wholesale and retail inflation indices, but it’s diabolically difficult to keep an eye out for every time someone somewhere calls the plumber to fix a leaky tap.
There’s another way to get a handle on the price of services. Tax them. From July 1, all service providers, except a small exempted list, will have to give the government of India its 12.36%. Banks, airlines and hotels will cough up, but there’s still an army of masons, carpenters and cabbies who will remain out of the tax net. And if Mamata Banerjee has her way, so will India’s largest employer, the Indian Railways.
It pays to keep the people guessing on inflation. Rulers have been doing it for centuries. A little bit of lead in gold helped kings borrow more than they could. With paper money, all an enterprising sovereign needed to do was run the presses. In the digital age Ben Bernanke can create trillions of dollars with the push of a button. Call it debasing the currency, monetising the deficit or quantitative easing, governments are wont to pay off their debt in a lesser coin. The degree depends on what a regime thinks it can get away with till the citizenry cottons on.
Our government borrows 50 paise of every rupee you and I save in our banks. It helps the debtor if prices are higher than what the creditor thinks they are when the debt is due for payment. And when the big debtor also controls the supply of money that raises prices overall, the temptation to flood the economy with rupees can be irresistible. We have rules on how much money can be printed. There are no rules about getting a true picture of the price line. Without data on price moveme-nts in services, the government can keep borrowing at 8% even if actual inflation is several percentage points higher, and nobody is the wiser.
But we have been on to this forever. Indians have devised a simple and effective way to insulate their savings from sovereign avarice. Gold. If the evidence on the ground is contrary to what the government tells you about inflation, buy gold. If the evidence on the ground is in accordance with what the government tells you about inflation, buy gold. Buy gold to protect your standard of living. No one can splice your hoard with lead or salt away shavings. And governments can print as much money they want, gold will retain its value. Indians bought just under 1,000 ton-nes of the metal last year, nearly half of what was mined anywhere in the world.
Manmohan Singh despairs of the nation’s obsession with gold. He can’t possibly be oblivious to the deep cynicism that stokes it. The government has to build credibility around inflation before Indians can be weaned off gold. Subbarao’s dilemma is a national affliction the government must address. Clarity on inflation will go a long way in freeing up household savings trapped in physical assets the government, or other borrowers, can’t lay their hands on. India’s affinity for gold is part of its culture. It’s a culture of distrust. It must change.