The central government has set the stage for a further tightening of monetary policy by the central bank and has, very correctly, reached out to state governments to become active partners in the battle against inflation. New Delhi believes the economy is over-heating and views the renewed surge in food prices as a symptom of that process. It is now clear that next week the Reserve Bank of India will be expected to raise policy rates and hike cash reserve ratio (CRR).
The RBI’s already stated view that the economy faced the danger of commodity specific inflation becoming generalised inflation is now the accepted view of all macroeconomic authorities. By creating three working groups focused on supply side management of the price situation, with two of those chaired by state chief ministers, the government has also signalled that it intends to address the price problem from both the demand and supply side. Getting prices right is vital to the sustainability of the growth process. It is also clear that apart from getting monetary policy right, the government is also focused on getting the fiscal policy right. The decision to move ahead with public sector disinvestment and 3G auctions shows urgency in garnering fiscal resources for the government. The Delhi government has also given a lead to other state governments by hiking state levies to show the way towards fiscal adjustment by all governments.
At a time when many commentators were beginning to lose hope, assuming that the United Progressive Alliance government was going down the slippery slope of populism and needlessly spending its way out of a heightened sense of public dissatisfaction with the government, these resolute steps give the impression of renewed seriousness in governance. This ought to be welcomed. This newspaper has repeatedly made the point that 2010 is the year of fiscal consolidation and economic turnaround for India. This is the year for some tough decisions on improved economic governance and forward-looking economic reforms. Even though three precious months of the calendar year have been wasted, it is still not too late to get economic policy right, so that the country is better prepared for the future.
Along with this renewed attention to economic policy, the government must also pay equal attention to internal security and governance reform. The prime minister and Union home minister should work with a group of experienced chief ministers to initiate reform of the police and paramilitary forces and of state and district administrations. There has been far too much focus in the recent past on giving ‘rights’ (like the right to information, the right to employment and the right to education) and not enough attention being paid to ‘duties’ (duty to govern honestly, efficiently and transparently). Even if people are empowered to assert their rights, governments cannot deliver if they are not reformed, re-engineered and re-empowered to perform their duties. Governments are duty-bound to provide good governance that in turn can help address the economic and social needs of the people.