‘Misguided' guide to inflation

At a time when inflation seems to be the Indian economy's burning issue (hardly anyone's talking anything else), it was most interesting to read the Government's Chief Economic Adviser, Dr Kaushik Basu's, lectures on the subject (excerpts of which were published in two parts in Business Line , August 5 and 6).

Dr Basu's credentials are impeccable — Professor in a prestigious American university before deciding to serve his country (at probably a pittance of what he earned in his professorship) and several books and articles in leading economic journals.

Inflationary expectations

The first part dealt with ‘inflation expectations'. Says Dr Basu: ‘Greater inflationary expectations' (one would have preferred using ‘inflation') ‘leads to greater actual inflation' and ‘one class of analysts has argued that widespread expectations of inflation lead the Government to behave in ways — such as running large deficits — that in fact help fulfil those expectations'.

One must confess one's lost in the argument. Why should ‘inflation expectations' drive up government spending? The prescription is predictable and time and print worn —‘Government… (must) make a commitment to maintaining lower deficits in the foreseeable future'. Admirable, simple advice. And far easier said than done.

Interestingly, apart from the rarefied world of economists and financial seers, there is no vocal political or other constituency in India for reining in the fisc. A very different situation from the grassroots movements (however vested or ignorant they may be) in the US threatening to standstill the government.

One's guess is India has performed much better on inflation than is made out to be. For, it's very likely official GDP estimates significantly understate growth which possibly is over 10 per cent. (The recent 0.3 per cent downward growth projection revision of the Economic Advisory Council mistakes the woods for the trees). In which case, inflation staying in single digits is extremely reassuring.

Rising salaries

The reality is that salaries and wages, both in the organised and unorganised sectors, are rising sharply, thanks to the profusion of jobs (barring pockets). It wouldn't surprise if nominal incomes have doubled for many even in the lowest rungs of society.

The rising tide has indeed lifted all boats. What price then (figuratively speaking) for food inflation of 10 per cent or thereabouts? Policy tightening can be justified only for fear of an unknown future. But policymakers could be as wrong as right. Intellectual honesty demands confessing we don't know for sure. It's this quality that's sadly missing in the powers that be.

About ‘the dynamics of poverty and inflation' in the second part, the less said the better. Why shy away from the fact of increase in food consumption among the poor amidst rising incomes? As is bound to have happened among the better-off too. If prices have risen as a result, so be it.

Who do we listen to? At the first cut, not economists! The top echelons in Government and the RBI need do no better than talk to their cooks, maids and drivers whose deeper concerns are not food prices but the spiralling costs of housing, education and healthcare. Try finding these in our price indices.

One thing is certain. They wouldn't know the first thing about ‘inflation expectations' leave alone ‘inflation expectations' driving their financial behaviour.

(The author is Chennai-based financial consultant.)

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