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The future lies in history

It’s going to take some time for India’s politics to come to terms with the fact that high inflation is here to stay, writes Gautam Chikermane.
Hindustan Times | By Gautam Chikermane
UPDATED ON JUN 04, 2008 10:03 PM IST

By raising the prices of diesel and petrol by Rs 3 and 5 per litre respectively and that of LPG by Rs 50 per cylinder, the UPA administration has shown rare courage. This is especially brave in these ominous times of political economy constraints. But beyond the petty politics of power-seeking and power-sharing lies one fact: the price Indians pay for petrol has no relationship with the usual demand-supply equilibrium under which any free economy operates. All developed economies pay more, few emerging economies pay less. Inflation, say political parties, will rise and wreak havoc on the household economics of the common man. There will be strikes by the Left; then by other parties; and, of course, criticism from the BJP.

It is coincidental that the price rise follows the the BJP’s electoral victory in Karnataka last week. Among the many reasons being cobbled up for the Congress loss is the rising inflation rate, which after yesterday’s oil price hike will go up by 0.5 percentage points. How much of this is a cause-effect relationship and which half is the effect leading up to ‘cause-seeking’, I’m not so sure. For, to stay afloat in this Age of the Sound-bite is not easy unless you have a short, snappy and easy-to-digest ‘analysis’ to offer. Hence the popular misconception that inflation was the prime reason for voters turning away from the Congress — and that this ‘morning’ will show the ‘day’ in other states like Madhya Pradesh, Chhatisgarh and Rajasthan.

Unfortunately, straw can’t hold the weight of bias for too long and in the sea of Antarctic-cold economic history, the ‘inflation argument’ sinks like the Titanic. The disappointment visible on many commentators’ faces with the BJP coming to power is part of the same bias pretending to be analysis. And as they mourn the rise of BJP in the South, they blame the Congress for its own defeat, with inflation as the No 1 votebank-eater.

Across the world, this animal called inflation has been eating one government after another, leaving a trail of hungry mouths, political pressures and riot tracts. Neither vote-seeking politicians nor favour-mongering bureaucrats have been able to tame this beast. Meanwhile, even as the Congress has gone on the backfoot and put reformist policymaking to sleep, the BJP is busy stoking the fire of oil-driven inflation, building an electoral face that says: “The Congress has got it wrong, vote for us, we’ll fix inflation.” They forget history.

Just how high is an inflation rate of 8.1 per cent? In the short term, given an average inflation rate of 6.4 per cent over the past six decades, the number seems high — and it is, particularly for the poor, who spend over half their incomes on food. But when we see inflation rates through the prism of history, the political economy discussion around Karnataka in particular and inflation in general throws up an entirely new colour of conscious forgetfulness.

As a result, the Congress as well as the BJP fail to remember Atal Bihari Vajpayee’s 7.2 per cent inflation rate that led to the politicisation of the onion during the dot-com boom year of 2000-01. During that period, I remember households in Delhi rushing to government-managed onion sales depots where the humble vegetable had turned into a glamorous curve that attracted Congress leaders who said this price rise would mark the end of the BJP. Vajpayee lasted till May 2004.

On the other side of conscious forgetfulness on inflation politics stands the BJP, which can’t seem to remember the entire five-year run of PV Narasimha Rao’s years as Prime Minister (and Manmohan Singh’s as Finance Minister) when the inflation rate was above 8 per cent, touching 12.6 per cent in 1994-95 and 13.7 per cent in 1991-92. (The last was probably lost in the celebratory din of Singh’s liberal Budget, as the country’s spirit of enterprise was freed.) Equally lost to the BJP are Indira Gandhi’s three inflationary years — 1979-80, when she inherited an inflation rate of 17.1 per cent, 1980-81 when it shot up to 18.2 per cent, and the next year when it fell to 9.3 per cent.

Read economic history through inflation rates — not entirely an apple-to-apple comparison, as the wholesale price index over the past 90 years since it was constructed in August 1939 around the geometric mean of 23 commodities and single price quotation, has changed in the number of commodities (435) as well as price quotations (1,918) — and the conclusions are clear. Rising prices are politics-neutral; they don’t recognise political parties or even Prime Ministers.

Over the past six decades, every five to 11 years, the phantom of high inflation has raised its hood and stung the economy with double digit rates. Neither the Congress nor the BJP — nor any other short-lived party — has been able to control it. It was 13.6 per cent in Jawaharlal Nehru’s 1956-57. Lal Bahadur Shastri’s 1964-65 saw it at 11.5 per cent. It touched an all-time high of 24.9 per cent in Indira Gandhi’s 1974-75. Charan Singh’s 1979-80 struggled with it at 17.3 per cent. During the seven long months of Chandra Shekhar (November 1990 and June 1991), it stood at 10.2 per cent. It ranged between 8.0 and 13.8 per cent during the Narasimha Rao’s years (1991-96).

From decades to centuries, between 1800 and 2006, India had 7.3 years when the inflation rate exceeded 20 per cent and 18 months when it was more than 40 per cent (it was 53.8 per cent in 1943), according to Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University in a March 2008 paper titled ‘This Time is Different: A Panoramic View of Eight Centuries of Financial Crises’. “No emerging market country in history, including the United States (whose inflation rate exceeded 20 percent during the country’s 1860s civil war) has managed to escape bouts of high inflation,” the authors conclude.

That the country’s entire policy population has been taken over by overreactions to inflation is banging too many thoughtful heads against the hard wall of rising prices. Against a fact that in the short- to medium-term inflation is unlikely to come down, the policy-defining environment from Raisina Hill seems to be to somehow talk down, analyse down, reason down… just about do anything to pull inflation down. If coercive measures on industry or throwing moral arguments at it and pushing the burden of managing the economy on businesses that are supposed to manage their profits don’t work — as they won’t — bring in the bans, the ‘administrative measures’, the regressive policies of the past.

It’s going to take some time for India’s politics to come to terms with the fact that high inflation is here to stay. In the context of rising oil prices, Manmohan Singh sought support from industry to control prices, impressed upon the nation that he is not in favour of “blind controls”, while creating the fiscal means to protect the poor. Someone is facing the facts. Someone is also brave, taking hard, painful but necessary decisions. And as the BJP and the Left pounce on him and try to draw political blood, I have only one question to ask them: what would you do to control inflation?

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