The Hindu Business Line : Problems of scalability

When the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, suggested recently that the economy was overheating and that a 9 per cent growth was not sustainable in the long term, one could not but take that view seriously. A few days later he seemed to modify that harsh view with somewhat obvious homilies that government had enough anti-inflationary measures in place, that inflation-bashing was a drawn process and that expanding capacity would foster growth — the best antidote to inflation. This followed a statement by the Prime Minster downplaying Mr Ahluwalia's earlier fears of overheating. It was a somewhat clumsy damage-control exercise to deny that metaphor of an economy boiling over, but the harsh reality is plainly evident. Supply constraints have taken a toll, allowing prices to gallop past the Reserve Bank of India's tolerance level of 5.5 per cent. The economy is undergoing a "scalability problem" that has resulted in the supply of most essential services and goods falling far behind their demand.

At this stage, most official pronouncements on the price rise and supply constraints appear self-evident truths and, therefore, bereft of concrete solutions, barring the RBI's monetary measures that have a clear and narrow objective. From the viewpoint of macro-economic management, the Government is defining supply shortages far too narrowly. Worse, it is looking at the problem from the wrong end of the telescope. For the policymaker concerned about inflation, the only goods in short supply appear to be essential commodities — foodgrains, fuel and edible oils, cement, steel and the like — whose prices have been escalating. But the economy has been facing more endemic shortages for a longer time — power and roads or, in short, the physical and social infrastructure the lack of which costs a growing economy dear. Budgets since 2004 have, of course, set sights on these shortages. But, typically, they have tended to focus on fund allocations as if resources were the only problem. Almost every policymaker has ignored the first condition necessary for investment in an economy still regulated in core areas — an encouraging environment.

The current inflation is not the result of demand growing too rapidly but of supply failing to keep pace, and too for decades. Multiple legislation, unclear regulations — land acquisition, for instance — and a slothful officialdom ill-equipped for speedy and decisive resolutions that a racing economy needs, create supply constraints and send demand boiling over. The first place to start then is to clear the deck of those trip-wires that delay, if not put off, investments in infrastructure. This self-evident solution requires political will, a form of capital harder to come by than hard cash.