The Hindu Business Line : Tackling a mess of our making

Be it inflation, expanding expensive metro cities for housing, or global oil price rise, the government has itself to blame for making the wrong moves. Here are some suggestions to handle these problems the mature way, says P.V. INDIRESAN.

Definitely, inflation is upon us. The situation is probably worse; stagflation is upon us. We have got into difficulties partly because circumstances have been beyond our control; mainly, we have brought this malady on us ourselves.

Inflation can occur in two ways: Demand-pull — excessive paper money chasing far too few goods. Or it could be cost-push — too many supply constraints choking up production. Stagflation occurs differently, due to an external shock — foreigners, such as oil sheiks, demanding more money but not buying more from us.

In India today, we are suffering from all three ills. The government is in fire-fighting mode. Unfortunately, there is little point in dousing a fire when more and more fuel is being poured into it. Whatever steps the government may take in the short run will be futile if policy errors that fuelled inflation in the first instance are not corrected.

Salary hike, a free lunch

Consider, for instance, the proposal to increase salaries of government employees. This is a one-sided gift; no payment is expected in return. It is free lunch, which, unfortunately, does not exist: whether we like it or not, due payment will be extracted in some form or the other. Inflation is that payment.

Incidentally, since the time of Independence, salaries of Class D staff have gone up 150 times; that of senior officials nearly 50 times but their standard of living has not gone up more than four or three times. The rest of pay increase has been followed by inflation. In truth, barely 3-4 per cent of pay increase is real growth; rest is illusory.

Nobody is asking whether this kind of illusory increases in salaries is worth the trouble. In the case of government employees, most of their remuneration is in the form of perks, of which housing is most crucial. However, that perk lasts only so long as the official is in service and vanishes immediately on retirement.

Thirty years ago, senior officials in Delhi built spacious bungalows for themselves in Vasant Vihar. No longer can they do so. All those bungalows have been pulled down to make way for anywhere between six and eight flats. The current crop of senior officials who live within their honest earnings cannot afford even those flats, which now cost Rs 5 crore or more. Some of them may not be able to buy even cramped flats that were built 20 years ago to accommodate only those who could afford a two-wheeler.

On the other hand, in smaller cities such as Raipur and Mysore, senior government officials continue to live in spacious bungalows. Unfortunately, no lesson has been learnt from these facts: The government is not transferring its activities to cheaper cities. Instead, it continues to expand extremely expensive metros. As housing takes away a quarter or more of a family’s earnings, any reduction in housing costs will be a powerful deterrent against inflation. Yet, no one is asking the question whether or not inflation will decrease if the government halts further expansion of its offices (and staff too) in expensive cities.

I am citing faulty location policy as one example of artificial, unnecessary fuelling of inflation. Here is a deliberate, avoidable error. Instead of correcting such blatant errors, the government either wrings its hands professing helplessness or embarks on other adventures of doubtful merit.

Even now, suppose the government announces that its policy is going to be no increase in office space in expensive cities, and that it will start shifting crowded offices (and homeless staff) to smaller towns where there is more space available at much lower cost. Then, inflation pressure will come down dramatically.

Inflation is as much a matter of sentiment as it is a function of hard facts. Hence, a mere announcement of relocation policy will have effect on inflation immediately. People will not wait to cut prices till relocation actually occurs on the ground. Unfortunately, short-sighted vested interests will scuttle any move to rationalise location policy.

Smart moves make difference

Officers in armed services and in the police are unhappy with Pay Commission recommendations. They are fighting for an additional hundred rupees or so. They are not asking what that extra increase will buy. No doubt, immediately, there will be some benefit. After inflation takes its toll, those hundred rupees will be worth no more than a handful. If they were wise, they would demand continuation of perquisites even after retirement — say perquisites of one rank less in small towns and two or more ranks less in large cities. That will give them inflation-protected lifetime advantage worth a hundred times more than what they are quarrelling over.

The government itself can take the initiative. It might sequester the salary increase (at least arrears that fall due) and release it for any purchase of durable goods a year or two hence but at today’s prices. That will give time for suppliers to build up inventory. The twin demons of demand-pull and cost-push inflations will then be kept in check at least on this account.

Supply-side inflation is more difficult to handle than demand side ones: Provided there is political will, excess incomes can be mopped up here and now but no amount of will can increase the supply of any good instantaneously. It must also be said that on the supply side, the government has been culpable.

First, corruption and inefficiency are taking their toll. For the past several years we have been unable to increase power production. Expansion of highways was a pleasant story during the time General Khanduri was minister; it has become a sad one now. If only our roads had been built as planned and power generation had increased according to schedule we would not be suffering inflation as much as we are.

Oil price increase is different; it is an external shock outside our control. Arabs are taking more money; they are not buying more from us. A wise government would have started taking preventive steps long years ago.

For instance, the US, Germany and Spain have been experimenting with very large solar-thermal power stations. Several units with hundreds of megawatt capacity are already in operation. They are already talking of insulating themselves from fossil fuel. The technology is not complex; it is within the capacity of our engineers. Unfortunately, there seems to be little vision, drive or zest on the part of the Power Ministry to explore new avenues of generating energy.

Corruption, inefficiency

Infrastructure such as roads and power involves very large investments. Several of our politicians have fallen to temptation; corruption in large projects has become endemic. If only high-level corruption had been kept under check, we would have faced external threats much better than we can now. We could have warded off even threats of stagflation.

Food is a much more difficult problem. Unfortunately, the government has turned away from corporate farming, which was showing good promise. It is possible that there are operational problems with integrating farmers with corporates. Instead of solving those problems, the government has resorted to throwing away the baby along with the bathwater.

There is no doubt that government will take several conventional steps to check inflation. They are barking up the wrong tree.

(The author is a former Director, IIT Madras. Response may be sent to Indiresan@gmail.com)

(This is 224th in the Vision 2020 series. The previous article appeared on March 31.)

More Stories on : Economy | Economy | Human Resources | Vision 2020

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page