What is it about Manmohan Singh and inflation?! There seems to be some karmic connection between the prime minister and the price index.
As a young economist of 41, Dr Singh earned his spurs slaying the dragon of hyperinflation under the admiring gaze of the prime minister of the day, Indira Gandhi. The spectre of inflation had come to haunt India in 1972-74. The fiscal consequences of a war with Pakistan and the creation of Bangladesh, of a post-War election and the spending compulsions of the time and, finally, the first oil shock combined to send prices spiralling.
The opening line of the annual Economic Survey of the Union Ministry of Finance for 1974-75, published in February 1975, ironically four months before Emergency was declared, read as follows: “By all accounts, 1974-75 was a year of unprecedented economic strains in the history of independent India. However, it was also a year of determined action on the part of the government, demonstrating vividly the basic resilience of our democratic polity in grappling with crisis situations.”
The Survey’s author, the Government of India’s chief economic adviser Manmohan Singh, had reasons to be pleased. A year earlier, he had been summoned by Prime Minister Gandhi and told that neither the Reserve Bank of India (RBI), nor the ministry of finance, nor any other economic policy-making institution was able to get a grip on the price problem. Did he have any ideas?
Dr Singh’s crafting of the anti-inflation strategy of 1974-75 earned him Mrs Gandhi’s respect and admiration. The rest, as they say, is history. He was made secretary, economic affairs, in the Union finance ministry at 44, and RBI governor at 50, the second youngest after C D Deshmukh (who became governor in 1943 at the age of 47).
But the spectre of inflation returned to haunt Dr Singh in1992. The combined effect of the 1991 devaluation and a sharp rise in commodity prices contributed to the “stagflation” of 1992. A year later, he was once again claiming credit for restoring to the economy its growth momentum of the 1980s, but with a lower fiscal deficit, higher foreign exchange reserves and a lower rate of inflation.
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But Dr Singh and the price index did not live happily ever after. In his six years as prime minister, he has had two major episodes of inflation. The first, in 2006, was triggered mainly by the global hike in commodity prices. The sharp increase in oil, minerals and food prices the world over got imported into India.
Dr Singh tried to educate public opinion at home that this “imported” inflation was a global phenomenon. It was a view that found endorsement from two very different quarters. On the one hand, The Economist (UK) said so editorially. On the other, Cuba’s supremo Fidel Castro told Dr Singh, when he called on him in his hospital room in Havana in September 2006, that developing country inflation was being caused by the diversion of land from food crops to biofuels. Rising oil prices had contributed to inflation, and so did rising commodity prices, a consequence of such land diversion to biofuels.
In India, the government of the day was attacked and even the Congress Party kept blaming it for not doing enough to control prices. So much so, in February 2007 a senior spokesperson for the party, now a Union minister, attributed the party’s defeat in the state assembly elections in Punjab to the government’s mismanagement of inflation!
Last week, as the Parliament’s monsoon session kept getting disrupted on the issue of inflation, nobody from the Congress party or the central government made the point that the Centre alone cannot be held responsible for food price inflation in India. It is as much, if not more, the responsibility of state governments. Why stall a debate? Why not take the battle into the enemy’s camp?
The Congress party is in office on its own in less than half a dozen states. The Bharatiya Janata Party is in office in as many, the Left rules its bastions and UPA allies run state governments too. If the Centre has been remiss in not managing the food economy well, and perhaps that is a fair charge (given that the food and agriculture minister has been busy playing cricket!), what have the states done to increase food production, ensure better procurement and better functioning of the public distribution system?
The political economy of inflation management does not make the Centre alone the villain of the piece. Acts of omission and commission by state governments are as much to blame for inflationary pressures building up in the economy. Rather than be defensive on inflation, the Congress party must come forward with a reasoned defence of its actions, stating clearly where states, many administered by national opposition parties, have failed as well.
As so often in the past three decades, in the past six years also mismanagement of the food and agricultural economy and populism in providing fertiliser and energy subsidies have all contributed to the resurgence of inflation. All political parties are equally responsible for these pressures and state governments must deliver too on better management of the food economy.
Indeed, the Congress party would only be mocking the people and making a mockery of governance if, on the one hand, it legislates a Right to Food Bill, and, on the other, pays no attention to the policies and the infrastructure required at the state level that would ensure both adequate production of food and its proper distribution.