Opinion

The fine art of doing nothing

Ashoak Upadhyay | Updated on March 21, 2011

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The UPA Government cheers the RBI for its anti-inflationary moves, while doing precious little to address the problem.

Most commentators and analysts have tended to view the Reserve Bank of India's mid-quarter monetary policy review of March 17 as a statement of the central bank's intentions and views on the economy. But the review, like many previous such reviews, can also be read as an indictment of public policy's failure to do anything meaningful to combat the problems faced by the nation — be it inflation, the lacklustre growth of capital goods and, of course, the pitiful state of our infrastructure and agriculture.

One way of ‘reading' the abysmal passivity of New Delhi policy planners is to cast an eye over the string of endorsements of the RBI's actions from the chairman of the Prime Minister's Economic Advisory Council to the ever-articulate Deputy Chief of Planning Commission and, of course, Finance Minister, Mr Pranab Mukherjee himself. According to the latter, the RBI's repo rate hikes of 25 basis points would moderate prices, though inflation could be “marginally” higher than earlier projections for the end of the fiscal.

What the Finance Minister meant by this mind-bending logic is unclear, but what is not is the sorry state of the projections themselves that have emanated from New Delhi with unceasing regularity since last June.

RESPONDING TO INFLATION

On first consideration, one might blame higher inflation projections on the unforeseen civil war in Libya. But last June, the Prime Minister himself had promised a drop in inflation by December: That month prices rose the highest.

The mid-quarter review itself does not take quite as blasé a view as the Prime Minister did or the Finance Minister does, because it pegs inflation at around 8 per cent by March end and then rests in silence. Given the mismatch between projection and reality, 8 per cent may be a conservative estimate but at least the central bank takes a more realistic view than policy planners in New Delhi, who continue to claim that everything is going to be alright because the RBI has done what it is meant to do.

While monetary policy instruments are the RBI's only weapons, they ought not to be the policy planner's sole line of attack against inflation.

Since New Delhi has the power to act on a wider scale to tackle what has been generally recognised as “supply constraints” it is only natural for a mildly curious Indian to ask what North Block or the other economic ministries manned by extremely articulate politicians have done to check prices.

The answer to that is plain: Nothing except defend their inaction.

More than any other emerging market economy facing inflationary pressures — and the number is growing — India's primary source of inflation has been food, and lately raw materials and inputs that have forced up prices of manufactured goods. No other country in the world is as dependent on oil imports as India. China has reduced its oil imports and, more importantly, it has diversified its imports moving into West African countries, Latin America even to our neighbour, Myanmar.

As for ensuring that a nation growing for the last seven years at the highest rate in post-Independent history does not face shortages of those goods needed to sustain it, be it eggs or power, New Delhi has done precious little.

In fact, the UPA Government cannot be faulted for bad policies because it has not initiated many to start with.

The only one that it initiated with any degree of decisiveness was the Special Economic Zone Act of 2005, and that has proved to be a disaster because its perverse incentives of tax breaks annoyed North Block and the Commerce Ministry had no inkling of the extent of opposition to acquisition of lands by private developers.

POLICY INITIATIVES

At the Ministry of Agriculture, the venerable Mr Sharad Pawar, his feet firmly on the ground, simply washed his hands of the mess he knew would emerge by casually pronouncing a view, quietly accepted by the government, that land acquisition should be a strictly private affair between farmer and developer.

In North Block, Mr Chidambaram publicly opposed the loss of revenues and now Mr. Pranab Mukherjee has followed up on that sentiment by imposing Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on SEZ developers in his latest Budget.

What the UPA Government has been good at is cheering from the stands. It waved along the organised economy on its way to 9 per cent growth in its first term and now cheers the RBI for doing a job the apex bank is not equipped to handle by itself. And gets back to doing what it does best: Nothing.

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Published on March 21, 2011
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