Year-end columns typically write themselves; one has the luxury of looking back over the year and reflecting on a few issues that demanded the most attention and thinking about what they mean for the year ahead. Everybody will have both their own list and their own twist, of course; here is mine.
In the "intractable" category, I pick food prices as the most significant issue. First, let's not lose sight of the fact that food inflation has been unprecedentedly persistent, clocking a 10 per cent-plus year-on-year rate for almost six years. This brings back memories of patterns last seen during the 1960s and the first half of the 1970s, when 10 per cent-plus runs were regular occurrences. These six years have seen good, bad and indifferent monsoons, so that old excuse has clearly outlived its usefulness.
More importantly and worryingly, it has become almost like a relay race, in which the contribution has shifted from one set of food products to another. For much of the first five years, proteins and then vegetables were the primary contributors, but over the past year - apart from the massive surge in vegetable prices, particularly of onions - rice has become a significant factor. In other words, the entire thali is now playing a role.
Explanations are relatively easy to find. Such persistence can only be due to some major structural imbalances. These are aggravated by policy-induced distortions, which incentivise farmers to grow more of what consumers are demanding relatively less of. Of course, reasonable explanations should lead to reasonable solutions, which is where the story becomes complicated. We have simply not seen enough being done to address the structural barriers to increased output that is really the only solution in the case of most food items. This is what served to get the economy out of a food scarcity trap in the 1960s and 1970s; the same kind of comprehensive and co-ordinated approach is needed now.
When it comes to rice, however, the story becomes puzzling. It is one commodity whose prices the government can directly influence in the immediate term because of the abundant stocks that it possesses. Open market operations, or the sale of some of the accumulated rice, would almost certainly bring the rate of price increase down - an outcome that is both economically and politically imperative. But there appears to be no inclination to do this. Meanwhile, the room to manoeuvre on monetary policy is becoming more and more constrained by food prices.
In the "vulnerable" category, I put the current account deficit at the top of my list. Yes, it has come down quite sharply in the past few months. This, in turn, has made the economy far less vulnerable to external shocks, compared to the turbulence and disruption we saw during May-September 2013. Part of the reason why the current account deficit shrank so much is welcome; exports accelerated and imports decelerated in response to the depreciated rupee. Another part is questionable; gold imports through formal channels have declined significantly, but imports through informal channels are widely perceived to have increased.
The bottom line here, though, is that a smaller current account deficit will allow the economy to deal with any further shocks with far more stability. The virtual absence of any impact on the rupee when the US Federal Reserve Board announced the beginning of its taper from next month validates this perception.
However, even as this picture is relatively reassuring, we should not forget what brought us to the edge of the current account deficit abyss. In a nutshell, we stopped exporting iron ore and we started importing non-coking coal. Over a two-year period, these developments imparted an adverse shock of about $13 billion to the current account - more, if some indirect effects are taken into account. The recent decline in the current account deficit has occurred even as these two sources of pressure remain intense, which puts an enormous burden on other sectors in sustaining a safe level of deficit. It is particularly galling that these two minerals should be the proximate cause of the economy's vulnerability, given that the country has such large reserves of both. But that's the way the story has unfolded.
Finally, in the "contestable" category, the formation of the government in Delhi by the Aam Aadmi Party (AAP) tops my list. Whether the minority government survives and whether it will deliver on its campaign promises and so on are all questions that will presumably be answered over time. None of those answers, even if they turn out to be negative, will detract from the significance of the fact of the party forming a government after its first appearance in an election.
Mass movements being voted into office soon after they are initiated are not an unknown phenomenon in Indian politics. But, generally speaking, their predominant motivations have been regional, linguistic and caste. These have obviously been limiting factors in terms of the entry channels that they provide into organised politics; even if they succeeded in bringing in new people, these individuals would have to belong to specific groups in order to qualify. The AAP is, to my mind, the first post-Independence political manifestation of an Indian mass movement in my memory to have no qualifying criteria for entry, other than adherence to a value system.
The great strength that comes with this characteristic is that it opens up the possibility of political participation to virtually anybody. The weakness, as many people have pointed out, is the risk that such a value system - as powerful a binding force as it may be - is a "necessary but not sufficient" condition to consolidate a political breakthrough. But that is a longer-term issue. Even if differences on economic and social policy issues result in new formations, the elimination of entry barriers into politics has the potential to dramatically change the governance and accountability framework in the years ahead.
To deal with the intractability problem, we have to look back at our past. Forty years ago, the green revolution took us out of a food scarcity trap. To deal with the vulnerability problem, we have to look forward. How do we balance the exploitation of mineral resources with environmental and social sustainability? Perhaps, to these and other problems, contestability is part of the solution!
The writer is director of research, Brookings India, and former deputy governor of the Reserve Bank of India.
Views are personal
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