Choices and dilemmas are a part of life. And this is the time for mandarins in North Block to think of the tale of Markandeya, a sage from Hindu mythology. The myth goes that the sage’s father was blessed by Shiva, who asked him if he preferred a virtuous son who would live only 16 years or a boy without virtues who would grow up to be a hundred years old. The sage chose to have a blessed son who was ordained to live for only 16 years.
The tale makes sense as the Finance Ministry ponders over a classic economic dilemma, often linked to the Phillips Curve, named after New Zealand-born economist A.W. Phillips, whose work suggested that policy-makers sometimes have to choose between high inflation and high employment. This is because growth creates jobs and fans demand in the economy, which sometimes causes “overheating” that results in inflation.
Inflation is not considered a good thing because it can hurt the poor while the rich are helped by the higher value of the assets they own. High prices also fan expectations of higher profits and poorer lifestyles, causing disruptions. However, within acceptable limits, it is natural that prices go up with growth.
With the current rate of inflation based on wholesale prices hovering at well over six per cent, the government has more worry over prices than about growth. With nine per cent growth in gross domestic product (GDP) estimated in the fiscal year that ends this month, India seemed almost on the verge of China-style growth when the Inflation Monster reared its ugly head. Worse, it refuses to go away despite efforts to control money supply, a cut in taxes on some commodities and awkward diktats or subtle warnings from the finance minister to some industries.
The dilemma is real. What can the government do? “I would be happier with an eight per cent rate of growth and five per cent rate of inflation rather than a growth rate of nine per cent and inflation rate of more than 6.5 per cent,” former Reserve Bank governor Bimal Jalan told Hindustan Times this week.
His quote would become a memorable one, because it openly spells out the fact that policy-makers need to bite the bullet on the Phillips Curve that maps choices between inflation and unemployment, which in the Indian context could be read as slower growth in employment because the economy is fundamentally on a strong growth path.
Low inflation is a virtue that policy-makers would prefer, much like Markandeya’s father preferred a virtuous son. The myth has it that Markandeya worshipped Lord Shiva with such dedication in the 16 years he had, that the god helped him ward off Yama, the Lord of Death. Shiva, they say, was only testing his devotees. It could just be that for India, a wise strategy for growth combined with low inflation may take the economy to a virtuous cycle of high growth and employment. Maybe we are not ready to match China – yet!