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A new economics is needed to fight inflation

columns Updated: May 31, 2011 23:04 IST
Gautam Chikermane

If you were asked which of the evils you would choose - higher inflation or lower growth - it would put you in the league of finance minister Pranab Mukherjee and Reserve Bank of India governor D Subbarao. It would also put the political limelight on you and bring in various pressures - from your own party, from the opposition, from people at large. It is under such pressures that we need to examine the looming slowdown ahead.

I'll rephrase the choices. In an economy where 850 million people live on less than $2 a day, would you allow the prices of grain, vegetables, fruit, sugar and so on to keep rising? For how long and how high? At what point would you mediate and stop the rise? It would be within this broad political framework that you would need to answer this question.

On the other side, the slightest slowdown in economic growth would mean that the pace at which job creation is happening in the country would tone down. What would that do to the young people swarming out of our schools and universities? How would that change the texture of the "demographic dividend" that India is sitting on? One step removed, how will this slowdown in goods and services impact investments?

The short-term political choices are clear - tame inflation. And that's what the government has been doing through the rather blunt tool of monetary policy, that is by raising interest rates. It hasn't worked so far and how high Subbarao will take interest rates is anybody's guess. As a result, the millions of new homeowners who have built their dreams today in the anticipation of tomorrow's incomes will feel the pinch as their home loan rates increase and their EMIs begin to chew into their budgets.

But despite making the right choice - to control inflation - the government has not and probably will not be able to restrain runaway prices.

The local fruit vendor near my house sells mangoes at Rs 60 a kg; in Big Bazaar, they cost R35 a kg. Even in its limited reach, organised retail is delivering price benefits to people. Unfortunately, those economies of scale are restricted to the relatively well off.

Expanding retail chains will help a larger group of people - it is good politics - but the idea of increasing the retail footprint or allowing FDI in multi-brand retail has been captured by entrenched interests and are driving policies around it.

So what we have is a state where India as the world's seventh-largest economy and the second-populous nation is facing a high inflation crisis that nobody is being able to control. And I'm tired of hearing our leaders and bureaucrats tell us that inflation will fall "next month" or "soon" - we've been hearing that for more than a year now. It's time to end this false talking down of pain.

At a time when global food prices are at their all-time high, when fuel prices, even after easing, are higher than what economies can tolerate, and inflation is moving into manufacturing from where it becomes difficult to return, no government anywhere in the world can fight high prices. Desperately needed: a new economics - and a new way of seeing.