Editorial

Little wriggle room in 2011

| Updated on January 07, 2011 Published on January 07, 2011

Merely curbing credit growth will not be enough; supply will also have to be increased, and quickly, as food inflation is what hurts most politically.

The Government which, like the proverbial ostrich, had buried its head in the sand, has suddenly discovered that this is a foolish move when the prospect of danger looms. No better proof of this is required than the Prime Minister refusing the UPA Chairperson, Ms Sonia Gandhi's ‘request' that NREGA be brought under the Minimum Wages Act. For a long time Dr Manmohan Singh's Government has pretended that it can sustain 9 per cent growth without setting fire to prices. Its spokespersons kept saying that by December 2010, inflation would be down to 6 per cent, as if that was an acceptable rate. But now in January, it has pulled its head out and finds that not only has inflation not gone away, it is here to stay. The Home Minister, who was Finance Minister till December 2008, says the Government has no tools at its disposal to fight off inflation. Most laypersons would tend to agree with him but economists and those in the Government who understand economics will point out that there is indeed a solution available — tested, tried and boringly humdrum: clamp down on monetary expansion and increase supply via imports. Which of these must be done first can be debated but, given that there has been massive expansion in currency with the public, the first salvo has to be fired by the Reserve Bank of India. For the last 12-25 months it has been pandering to the Government's desire to get to double-digit growth, even if only for a few seconds. But now, after the defeat in Bihar and with elections in Tamil Nadu and West Bengal coming soon, inflation can no longer be ignored by the politicians. Ergo, look out for some strong monetary action in the form of higher interest rates and other methods to dampen demand.

It is arguable, however, that merely curbing growth will not be enough; supply will also have to be increased, and quickly. Since food inflation is what hurts most politically, and since wage inflation at the bottom end of the service sector is driven by it, it is on food inflation that the Government will have to concentrate. But that is easier said than done, not least because imports are not much of an option, unless undertaken on a scale comparable to China. With the current account deficit having crossed 4 per cent, things have become very tight, especially in view of the RBI's warning that most of the foreign exchange could go out as quickly as it has come in for a whole lot of unforeseeable reasons. In any case, it is doubtful that the Government would agree to annoy the farm lobby with large-scale imports. This may not have mattered very much had the last five years been spent on improving farm productivity. But the focus on prices for raising rural incomes has merely increased demand without increasing supply.

All this, and other related things, leave India between a rock and hard place while the options to wriggle out of it are severely limited. At this point, only one thing is certain: 2011 is going to be a most difficult year.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on January 07, 2011
This article is closed for comments.
Please Email the Editor