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We can't just bank on it

india Updated: Aug 04, 2011 23:35 IST

Hindustan Times
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Inflation is testing its politically acceptable threshold in India. Economists have been warning a spendthrift government to clamp down on runaway prices, but the response has been to treat it as a monetary phenomenon best left to the ministration of the central bank. Now that politicians have joined the chorus against inflation in Parliament, the government of the second fastest growing economy in the world may have to revisit one of its core assumptions about social welfare. By excluding people from the benefits of economic growth, inflation has the potential to undermine a rising list of entitlements that should in due course form the nation's social safety net. The government is right in its assessment that without adequate security, the next phase of reforms involving markets for labour and land cannot be undertaken. Hence revenue-generating growth is its principal concern.

This shows up in how it manages its finances. Spending in April and May-June 2011 is 13.22% of the budgeted expenditure for the year, on a par with the 13.25% spent in the same months of 2010. Revenues are 2.83% of the full year's projections, a third less than the 4.15% in April and May 2010. Without going into the scheduling of its income and expenditure, the government has in two months run up a fiscal deficit nearly a third of that budgeted for this year. Last year, it appeared less profligate, having gone through a quarter of the deficit in April and May 2010. Eventually, however, it ended up spending nearly a fifth more than it did in 2009-10. All of this happened while the Reserve Bank of India (RBI) was persistently tightening interest rates.

Voices within the administration have argued against using monetary and fiscal policies at cross-purposes. C Rangarajan, the prime minister's economic adviser, sees a lost opportunity in India's economic management over the past two years. A stable government that had successfully negotiated the most catastrophic global bust in living memory could have seized the opportunity to roll out infrastructure, push reforms and improve its welfare spending. Announcing his latest rate hike, Governor Duvvuri Subbarao said the RBI wanted to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required". This is wise counsel. Administered prices of food and fuel are shaping the price line. Excessive government borrowing is crowding out productive investment by companies and households. Bottlenecks in agriculture and infrastructure are raising costs across the board. Wake up and smell the coffee.