The ‘new normal’ is abnormal

The Times They Are a-Changin’ — Bob Dylan

Looking at the economic scene in the country and the policy options, one is filled with a sense of déjà vu . The only bright spot seems to be the annual rise in industrial production in October 2012 by 8.2 per cent, in contrast to a decline of 0.7 per cent in the previous month.

The Economic Scene

But if one looks at the trends in the year gone by, one can see that the index of industrial production has been on a roller-coaster ride.

Sceptics point to the low base of last year and the festival demand as possible explanatory factors for this time’s increase. So it does not necessarily mean that there are green shoots in the field that may bloom soon.

In my view, domestic demand is at a low ebb because of the high inflation over three years, raising prices to an unconscionably high level and making people buy less than the normal quantity of goods and services. Two hundred Udipi-type Grade III restaurants are reported to have closed in Mumbai in the last two years due to lack of patronage.

The situation on the inflation front is so bad that even a small fall in the first decimal point in the percentage calls for cheers! Thus, a decline in the rate of inflation to 7.24 per cent in November, as measured by the Wholesale Price Index, from 7.45 per cent in the previous month, is highlighted by some as the lowest recorded in 10 months, calling for a change in the monetary stance!

On the other hand, consumer price inflation stood at 9.90 per cent in November, rising from 9.75 per cent in October, with many essential food items registering double-digit rates.

The external sector continues to be a major source of worry, with exports declining by 4.2 per cent and imports rising by 6.4 per cent during November 2012 over the year. The trade deficit was high — only a little lower at $19.3 billion than the record $20.1 billion in October.

Changing Attitudes

There is thus not much difference in the economic situation between now and the last occasion, or even earlier, when the Reserve Bank of India (RBI) undertook a review of its monetary policy.

There is, however, one significant and dramatic difference in the thinking of the central bank to reveal that times are indeed changing.

Due perhaps to frustration, the central bank seems to be throwing in the towel instead of the gauntlet in its battle against inflation.

Speaking at a panel discussion recently, the RBI Governor is reported to have said that he was ready to revisit the ‘ideal’ inflation target of 4-5 per cent, which many feel is too low to attain in the current circumstances. He said: “I am not saying that we would definitely change the number, but we will certainly revisit our strategy.”

The psychological danger flowing from the change in the official view on inflation is the consequent damaging effect on the price expectations of the public.

While making the statement in the Annual Policy for 2012-13 on containing the ‘perception of inflation’ in the 4-4.5 per cent range, the RBI expected it at 6.5 per cent in the current year. That it would be the ‘New Normal’ for inflation was ‘prophesied’ in this column eight months ago. (“The New Normal for Inflation,” Business Line , April 18.)

New aberration

The ‘many’ who recommend a higher ‘New Normal’ belong to the affluent sections of society — a few politicians, economists, bankers, civil servants, industrialists, et al .

They are those who do not mind splurging Rs 150 on a cup of coffee.

To say that a little more inflation is acceptable is ridiculous.

The ‘New Normal’ has to be decided in Parliament where inflation was never discussed in depth, except for the sake of pro forma, because our legislators have other more important subjects to argue about.

Whenever I see a callous reference to inflation my mind immediately goes back to the miserable scene of a child in tattered clothes foraging for left-over items of food in a road-side bin competing with a stray dog. (Even among the dogs there are the privileged ones fed with imported food from the super-market!).

I also think of the lavish weddings arranged by the rich with considerable wastage of food. Have we lost our conscience and social consciousness?

Every wrong policy or action takes the nation one step further to a social revolution that will be more terrible in casualties than what has been recorded in the case of France or Russia simply because of the number of people involved.

The ‘New Normal’ is an abnormality and will not be accepted by the people.

The nation is sitting on an economic powder keg where the price of a single lowly drumstick has gone up from Rs 5 to Rs 10 in six months in Mumbai. And this is not an isolated instance.

The State Bank of India has been facing a problem of excess liquidity of Rs 60,000 crore. There is nothing in the trends in money supply, bank credit, call money rates, bid-cover ratios at the auctions of treasury bills, investments in mutual funds and SLR securities etc., that calls for a relaxation of vigilance on the monetary policy front.

(The author is a Mumbai-based economic consultant >blfeedback@thehindu.co.in )

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