In “Some inflation is good” (July 2), A V Rajwade sounds like the right-leaning economist that he accuses The Wall Street Journal and The Economist of being. The article advocates laissez-faire more than The Economist has ever done. Let us look at some of the holes in the argument.
One, while India’s growth slowed down after the 1995-96 tightening, it is this contraction that brought about stability in prices for almost a decade-and-a-half thereafter. And it is this stability that laid the ground for strong economic growth, and, more important, job growth in the early years of this millennium. Similarly, the tightening in the US might have led to some recession, but the then Federal Reserve Chairman, Paul Volker, is widely credited with preventing hyperinflation and laying the ground for nearly two decades of growth thereafter.
The second fallacy is to assume that higher food prices mean better income for farmers. Why then do the suicides in Vidarbha continue unabated? In fact, the higher prices are due to crop failures, bad storage infrastructure and increase in fuel (i.e. transportation) prices. The first two reasons actually mean loss of value to the economy. The third has enriched ONGC. None of the higher monies we have shelled out for food over the past year have landed up in the farmer’s bank account. In fact, if agriculture productivity and farm output are increasing, we should be having deflation in food prices (similar to the chronic deflation we see in computer hardware, for instance).
The third mistake is to assume that growth leads to better employment. Time and again, studies have proven that though growth is necessary, it is not a sufficient condition for employment. Indeed, focusing on the extra percentage point or two of growth is futile in terms of its marginal utility in providing employment. Even in the worst of circumstances, India has a 5-6 per cent growth, and that should be fine if inflation is under control. In fact, the uncertainty around inflation makes several companies defer their investment and hiring plans. Low and stable inflation, with a prompt RBI intervention to kill any slippage on this, allows for a stable atmosphere that promotes hiring and investment.
Finally, the author should realise that most poor people are not in formal jobs. They are often self-employed — the farmer, the small trader, the hawker and the taxi driver. They would rather prefer stability in prices, especially on the food front. After all, they can’t raise the prices of their wares every time the headline inflation hits double digits.
Ramganesh Iyer, on email
