T C A Srinivasa-Raghavan: Inflation - Whose fault is it?

LINE & LENGTH

The problem is directly attributable to the Communists, who are preventing all supply-side reforms.

Everyone is getting highly exercised over inflation, which is around 7 per cent now. I can't understand why. After all, this is not the first time that inflation has had to be controlled.

Every decade since 1950 has witnessed at least one such episode with the difference that, progressively, people's inflation tolerance has been coming down. In the 1980s, 9.9 per cent was ok, but not 10. In the 1970s, even 12 per cent inflation did not set the cat amongst the pigeons. Now 6 per cent sends shivers down the government's spine.

The remedy has always been the same. Partly, you make sure that the amount of money chasing goods comes down, and partly you increase supply by importing.

The amount of money is reduced by increasing the cost of money, impounding excess cash with the banks and reducing the rate of credit growth by rationing credit or by raising interest rates. Eventually, in the fullness of time, these measures start to bite and inflation ebbs--hopefully.

In the meantime, though, the patient needs a painkiller, which is provided by increasing the imports of things that are experiencing the highest inflation. The sudden and sharp increase in supply serves to dampen inflation, as also the greed of speculators, especially in the commodity markets, which in India are largely financed by black money.

This is it. There is no other way to deal with inflation in the short run. It always works, albeit at a cost, namely, lowering the rate of GDP growth. That, indeed, is the nature of the animal.

But then what? What about the medium and long run? If, as the inflation conqueror Paul Volcker has been saying price stability, and not just inflation-targeting, has to be the key policy objective, what do you have to do?

The answer to that is also known. You reform the supply side by creating conditions that allow more investment, remove monopolies and eliminate the "dead hand" of the bureaucracy.

So, a citizen may well ask, if the answers are so well-known, why in heaven aren't we doing it? The answer lies in recognising something that we are unwilling to recognise. Increasingly, India's economic problems have less to do with economic policy and more to do with politics and governance.

If politics doesn't come in the way, poor governance does. One way or the other, we are in trouble.

Where politics is concerned, if asked to rank the culprits in the descending order of culpability, I would say that the Communists come right on top. Their actions in the last 30 months have bordered on anti-national.

If there is any one agency that has prevented the emergence of conditions that will lead to an increase in supply, it is the Communists. It doesn't matter which sector you take. Wherever you see supply shortages, you can see a Communist hand behind it because they don't allow investment to come in, nor encourage higher productivity.

Conversely, and far more tellingly, wherever you see a comfortable supply situation, the Communists are missing. This cannot be an accident.

Ah, you will say, what about commodity prices? Why are wheat, pulses and edible oils so expensive? We know all the lazy answers to that, such as speculation, forward trading, hoarding, profiteering and so on.

But the real answer lies in the factors that are preventing the reform of agriculture. And guess who is behind it? To be sure, there are a variety of technical and institutional factors as well. But when it comes to preventing reform, it is the Communists who take the lead.

It should be made clear that I don't mean the Left when I say "the Communists". The Left has some very decent people in it. The Communists are a subset of it and it comprises some very ruthless and self-seeking politicians with no principles that would pass any reasonable moral test.

These politicians control the trade unions, especially the most important ones in the services sector. They know, for example, that the financial sector is the nation's jugular. Controlling it gives them disproportionate political power. This power is used to stymie reform even in unrelated sectors, like agriculture.

The question is: can the UPA, which presumably doesn't want to go the way of the NDA, wish to return to power in 2009? If so, it will have to face up to the question that everyone has been asking since May 2004, namely, when are you going to dump the Communists?

Now that the halfway mark of the UPA government has been passed, the Congress has more to gain by taking on the Communists. From now on, confrontation with them will pay richer dividends than cooperation, especially if such cooperation causes inflation.

But the Congress has just agreed to drop all reform Bills that the Communists have been opposing. This suggests that it is not just the courage but also the conviction that the party president lacks.

Pusillanimity may be good tactics but it is poor strategy. Besides, it always extracts a price. Wait till 2009 to see what it is.