On February 16, speaking more as a politician than an economist, the Prime Minister, Dr Manmohan Singh, told Editors of the Electronic Media that, though “in recent months inflation and food inflation in particular had been a problem, we want to deal (with) it in a manner that the growth rhythm is not disturbed.
“If we were concerned with only curbing inflation I think we could have done it by pursuing tighter monetary policies, we could have brought about a situation where price rise could be moderated. But if in the process, growth process gets hurt I think that would not do our country any good”.
This suggestion, that inflation was the price one had to pay for growth, like that other nugget about food inflation being merely a reflection of rising incomes, was faithfully endorsed by the Finance Minister.
Thankfully, on the inflation-growth issue at least, his Chief Economic Advisor, Dr Kaushik Basu, has gone public with his rebuttal.
“The standard growth-inflation trade-off theory is misleading. It is often suggested that if we bring down growth, this will douse inflation. There is no evidence for this. On the contrary, if inflation continues to remain high for too long, this has a negative impact on growth”.
But far as this statement takes us, it does not take us far enough. For it fails to take note of another serious problem, namely that if one resorts to demand compressing tight money policies in a mistaken effort to check what is in fact a supply side problem, we could end up quixotically slowing growth rather than inflation.
One of the best places to look for signs of potential overheating is the trend in prices of manufactured goods, which account for about 65 per cent of the wholesale price index.
And, on this the facts are clear. Notwithstanding ominous remarks to the contrary by senior RBI officials, prices of manufactured goods went up just 5.44 per cent during FY 2010-11, which is in line with their average performance between 2006 and 2009.
Furthermore, this figure would have been even smaller but for the unusually low base (prices of manufactured goods went up just 1.18 per cent in FY 2009-10).
Be that as it may, manufactured products contributed a disproportionately low 37.5 per cent of the 9.41 per cent increase in the wholesale price index during FY 2010-11.
The real culprits are, rather, the disproportionately large contributions of primary food articles (24 per cent), fuel and power (19.5 per cent), and primary non-food articles and minerals (approximately 15 per cent).
That said, we can now wrap up this story with another gem offered by Dr Singh for the contemplation of Editors at the February 16 conference, namely, “we are trying to deal with inflation at a time when we don't have all instruments at our command in the sense that we do not have control over international events. We are now increasingly an open economy and the oil prices are rising, the food prices are rising, commodity prices are rising”.
To attribute high food prices to the “international situation” is clearly absurd, when, as a matter of policy, we import so little food.
And so far as crude oil is concerned, Dr Singh's lament would have carried more conviction if it had been made after the Assembly elections, after substantial hikes in the price of petrol and, particularly high speed diesel.
The wholesale price index allots only a misleadingly small weight for crude oil (0.9 per cent).
So its rising cost only shows up when (and if) retail prices for petrol, high speed diesel, aviation turbine fuel, LPG, kerosene etc are revised upwards.
Till then, inflation on this count remains “suppressed”.