NDA's Bermuda Triangle

Here’s a question for all those who are asking the government to spend even more than it is: Can inflation, the deadliest political foe, be avoided when almost all current efforts are more for ensuring subsistence than the revival of consumption demand for manufactured products?

The government, it should be noted, is giving free food grains to about 800 million people. Over the last year, it has also provided free cooking gas for 80 million families for several months, and cash directly to over 400 million people. This is just for subsistence.

Simultaneously, it is virtually handing out money to MSMEs through the collateral-free government-guaranteed loans to keep them afloat. About Rs 2.5 trillion of that has been either sanctioned or disbursed. That too is subsistence. None of this is being used to invest to grow; it is being used by small companies to survive.

Overall, in the financial year 2020-21 the government spent nearly 1.5 per cent of GDP. Problem is, it is causing higher prices. And the amount will only increase.

Put that another way: Can Keynesian solutions to revive industrial demand work when the problem is not a Keynesian one? For, let’s remember: Those who buy industrial goods have not suffered as huge a drop in incomes as those who live on daily wages.

True, a couple of million people in the formal sector may have suffered massive declines in income but compared to the couple of hundred million who subsist on more or less daily wages, their problems are minuscule. The latter, after all, are on zero or near-zero incomes.

They constitute primarily a political problem for any ruling party. The economic problem comes second.

The cleft stick

But let’s assume the ruling party is not yet worried about its votes. After all, those will not be needed for another three years.

In the meantime, who should the government target? The employees in the formal sector or the workers in the informal sector? Or, if both, can it afford it?

The answer to this question is important because it ties in directly with both fiscal and monetary policy. Sadly, there is no correct balance available between the politics and economics of it.

Huge deficits incurred to finance subsistence will necessarily lead to some inflation in food prices — food has a weighting of 54 in the consumer price index — while deficits incurred to finance the consumption of industrial products will have a bearing on monetary policy via the interest rate.

It is hard to believe that economists who are asking the government to do what the western economies are doing, namely, print notes as if there is no tomorrow, have not figured this out.

The US exports its inflation and will be fine. But the West Europeans? They could become a Chinese protectorate.

That aside, our government is indeed printing notes, even if it won’t call it that. But the truth is that the almost Rs 1 trillion surplus transferred by the Reserve Bank of India (RBI) to the Centre, given its provenance, is just that. The government has borrowed without borrowing and increased money supply.

So it and the RBI will have to cope with the resultant inflation, which is mostly in food items and is therefore hurting the entire population. It’s not going to abate in a hurry.

Indeed, it is not just an economic problem for the RBI, it is also a political problem for the government. And while the RBI has a fairly straightforward answer available to it, of raising interest rates, the government isn’t so lucky.

It has to fight 16 Assembly elections in the next two years. Of these seven are in 2022 and nine in 2023. Then in 2024 it has to fight the general election.

Fiscal prudence is therefore a distant dream even without the NRI economists heckling from the sidelines.

Unsolvable problem

The government has to generate a huge amount of employment without giving an upward push to inflation, while keeping subsistence spending intact. It’s the classic trade-off between inflation and growth, but this time it has a beard too — subsistence spending of unprecedented amounts. And like all beards it is growing all the time because more people are needing help.

It is because of this that the NDA government’s goose is just as nicely cooked as the UPA’s was in 2012 and 2013. Food inflation between 2010 and 2014 was 65 per cent. The fiscal deficit averaged 6 per cent.

That’s why in 2014 the opposition would have won even without Narendra Modi’s formidable oratory powers. This is the situation that the NDA — such as it is now with just one ally with one seat — finds itself in.