False trade-off

The Reserve Bank of India Governor, D Subbarao, has a point when he says that people worried about economic growth and clamouring for interest rate cuts “are typically quite articulate”. There is little doubt that industry associations have much better platforms for expressing themselves than ordinary savers, who see inflation eroding the value of their money invested in bank or post office deposits. At the same time, it would be wrong to believe that the “silent majority”, especially the poor, is indifferent to a growth slowdown. Indeed, it is fair to say that their stakes on the growth momentum in the economy being sustained are far greater than those espousing such a cause from the podiums of the chambers of commerce. After all, the high growth rates recorded during the last decade did have a significant trickle-down effect. The best evidence of it is average farm wages, which rose by nearly a third in real terms in the country between 2001-02 and 2011-12. The fact that landless agricultural labourers — traditionally occupying the bottom-most rung of Indian society — managed to wrest wage increases in excess of inflation is no small feat.

This improved bargaining power couldn’t have come only from MGNREGA. While it may have helped, the real reason for wages going up, however, had more to do with the acceleration in growth and urbanisation that took place in the wider economy. It opened up new employment avenues outside of agriculture, enabling the farm worker to discover, perhaps for the first time, an “opportunity cost” of transplanting paddy or picking cotton. It also partly explains why even with high inflation, not many took to the streets. So long as the economy was growing, businesses could absorb increased costs through higher volumes and improved efficiencies, whereas ordinary workers simply demanded and got wage raises to compensate for inflation. Today, the growth engine has stalled, though consumer price inflation is still at almost 11 per cent. The latter is hurting the “silent majority” all the more now because the ability to pass on higher living costs is less with a relatively depressed job market. In the event, the daily labourer finds himself in the same boat as those experiencing negative real returns on their savings because of inflation.

All this only points to the limited utility of viewing growth concerns as being inimical to that of inflation. Inflation definitely needs to be reduced. But the best way to do it is by inducing entrepreneurs to put up fresh capacities in the belief that policymaking is oriented towards growth and creating competition. That will automatically force them to think long term – which means adding capacities and not raising prices to make a quick buck. We saw this in airlines, where fares soared only when Kingfisher went bust and the earlier excess capacity in the industry disappeared. For emerging economies such as India, the interests of the poor are best served by policies that help augment supply than those aimed at curbing demand. Once that is clear, there shouldn’t be any conflict between growth and inflation.

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