The Hindu Business Line : A spoke in the wheel

When the Union Budget for 2008-2009 was drawn up, its makers clearly had the next Lok Sabha elections in mind, one of the indications of this being the proposed Rs 60,000-crore loan-waiver scheme for farmers.

The other post-Budget announcement which can be similarly interpreted was the Central Pay Commission recommendations, which too can be said to have as its principal objective winning over of the voter before he casts his vote at the hustings round the corner, both at the State level and for the Lok Sabha.

Rising inflation

If this is true, it has to be said that the galloping pace of inflation in recent weeks has come as a sort of spoilsport, putting a spoke in the wheel as far as the strategic electoral plans of the Budget-makers are concerned.

The main point, however, is not that inflation has entered the picture with a bang but how the political mangers of the Congress Party are going to tackle it, the objective clearly being to keep its impact on the general electoral scenario to a minimum.

The basic inference here is that the Budget-makers knew all along that the inflation figures would rear their ugly head sooner rather than later and rock the boat severely for the UPA Government in an election year, which is the last thing they would want at this juncture of national politics.

Very clearly, rising inflation has been “factored” into the electoral calculations of the ruling party, one view holding that the loan waiver and the Pay Commission-recommendation bonanza were engineered in such a way that they would help to contain the adverse fallout of the anticipated inflation figures as much as possible.

Of course, only the election results will tell us whether the strategy actually adopted by the UPA Government to cushion the impact of the inflation figures has succeeded or not, but it is clear that the powers that be in New Delhi are currently on the horns of a dilemma regarding the timing of the dissolution of the present Lok Sabha. This is because if the figures do not reverse their direction in the next three months (that is, by the end of July) or thereabouts — specially in sectors which affect the aam aadmi — the political managers of the Congress Party know that the going for the party will be difficult at the polls. But if the figures cooperate, then the election dates can be settled for the end of the calendar year itself (or January), which would enable the party to extract the maximum advantage possible from the farm-loan waiver and the Pay Commission packet (this despite the fact that the latter seems to be getting into a rough patch with various Government-employee interests raising the banner of sectoral protection and enhancement).

In the normal course, the elections are due in May next year, but this could be a bit late in the day for the Congress Party to get the most out of the two measures cited above. Political common sense would suggest that the electorate be asked to cast its vote while the loan-waiver and the Pay Commission issues are still fresh in its mind, which means that the first opportunity afforded by the political climate to dissolve the present Lok Sabha and call for fresh elections should be utilised by the Congress Party.

Supply-side problem

But, as indicated above, will the inflation figures behave in the right way for such a step to be taken? At the moment, this is what is closely engaging the attention of the Congress Party, the anti-inflation campaign being complicated by the possibility that any monetary assault on rising prices through the interest rate route may lead to an economic slowdown, which would not go down to the credit of Dr Manmohan Singh’s Government. This is because the current spate of inflation is not demand-driven; had it been so, an increase in interest rates would have led to positive results.

It is likely that the cash reserve ratio may be jacked up, which would lead to a part of the excess liquidity in the system being sucked out without harming too much the basic production parameters. The current inflation scenario is being seen as a supply-side problem, which is why, as far as food items are concerned, the Government has taken a slew of measures to augment physical supplies in the hope that this would lead to a dampening of the price increase which is directly hurting the average citizen.

Thus, the import of edible oils has been encouraged by reducing and abolishing import duty on select items, and the export of rice has been discouraged by imposing a ban on, and withdrawing export sops for, different varieties of the commodity. Anti-hoarding steps generally have also been taken to release more supplies in the domestic market. All this may lead to a reduction of the inflation rate, but the chances are that the overall impact may be much weaker than if the effort was directed at the metals and minerals index, minerals in particular having taken the cake by registering a 42 per cent increase in the WPI on a year-to-year basis. Within the group, iron ore has been among the main culprits, the price rise nearly doubling over 2007. Steel prices have consequently gone up, in fact to such an extent that a special request has been to producers to reduce prices in the coming days.

Relief to the common man

The Congress-led Government is desperate to get the inflation rate down to “publicly manageable levels” as quickly as possible, so much so that a temporary return to the era of selective administrative price controls has also been spoken about — possibly with the objective of persuading those who are more interested in making a quick buck at the expense of the buying public to fall into line.

One hopes that all the steps taken together, and those in the pipeline, would bring some relief to the economy, not for the sake of early elections but for the sake of the common man, who is facing a reduction in his purchasing capacity. Dr Singh’s Government has made huge provisions for the implementation of the Pay Commission recommendations, not to speak of the farm loan-waiver scheme. Why cannot similar provisions be made for a reduction in duties on fuel, which would have an immediate impact on the cost-base of the economy, perhaps leading to an easing of the pressure on general prices?

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