Dr Ashwani Mahajan
After worst ever defeat in elections from ‘Aam Admi Party’ and BJP, Congress Party has recently called meeting of its chief ministers from congress ruled states to combat inflation in their respective states. It looks highly strange that, how come a problem which is national in nature could be solved at local level. Though inflation is not a new phenomenon in India, but the new aspect is that, in the last 3-4 years, rate of inflation has been at a very high level. Since 2010 price level has increased by nearly 40 percent. During this period food inflation has been even higher at 48 percent. This implies that a poor man, who was spending 100 rupees on food, now has to shed 146 rupees for the same food. This also means that if he does not have sufficient money, then he is forced to cut down on his consumption of food items, especially vegetables, fruits, eggs and milk.
Popularity graph of the central government has constantly been going down, as proved from humiliating defeat of congress in Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh. In such circumstances congress party is naturally nervous. Main question is how inflation could be stopped? For the last so many years government has been making tall claims about combating inflation, however, inflation has become an unending phenomenon. A couple of years back the government made a series of raids on traders’ godowns, to prove as if inflation is due to hoarding by small traders; and last year government claimed that foreign investment in multi brand retailing would help controlling inflation. Sometimes government tells countrymen to wait for good monsoons and now is calling chief ministers of congress ruled states; to somehow get rid of this blot on the goodwill of this government. Our prime minister, deputy chairman of the planning commission and the finance minister all are known to be experts in economic; why government is trying to beat around the bush, is beyond the imagination of the people.
Causes of Inflation
In economic theory there are two factors responsible for inflation. One is increase in demand and second is increase in cost. Policy measures being adopted by government, as mentioned above cannot do any good on both these fronts. Government has to make efforts to address reasons for increase in demand and the cost of production.
Rising Fiscal Deficit is the Main Culprit
As per the data published by the government about its spending till November, 2013, the fiscal deficit has reached Rupees 5.09 lakh crores of rupees in the first eight months of this fiscal year. It is notable that the proposed fiscal deficit for the whole year is Rupees 5.42 lakh crores. If the same speed continues, fiscal deficit may reach Rupees 7 lakh crores by the end of the year. While presenting the Budget 2013-14, the Finance Minister promised to keep fiscal deficit within 4.8 percent of GDP and that it would not be allowed to cross the ‘red lines’. However, the data coming in puts a big question mark on government’s commitment. Recent indications about possibilities of more populist measures like increase in limit of subsidised LPG cylinders to twelve may further raise this subsidy and thus fiscal deficit.
Government can adopt two ways to fill the gap arising out of fiscal deficit; one by borrowing from public, including banks and second by borrowing from RBI, which in turn would be filled up by printing of additional currency notes. It may be underlined that is, March, 2009 currency held by the public was only rupees 6,55,450 crores, which increased to 11,89,780 crores by October 18, 2013 (that is, 78 percent increase in nearly 4 and half years). Money supply which includes bank deposits apart from currency, increased by 52 percent during this period.
According to economic theory, as money supply increases prices increase by the same proportion. And increase in prices would be less, if there is growth in GDP. And it is no mere coincidence that prices have increased almost in the same proportion, as suggested by economic theory. Why our learned prime minister is not able to see the writing on the wall is beyond comprehension!
Our economic growth has been declining in the last couple of years. We find a high (9.3 percent) rate of growth of GDP during 2009-10, which declined to 6.2 percent and 5 percent during 2011-12 and 2012-13 respectively. In 2013-14, it may go even down to 4.5 percent only. Major reason for decline in growth is believed to be poor performance of manufacturing sector. It is notable that manufacturing growth which was 15.6 percent in 2007-08 has come down successively in the last eight months to (-)0.2 percent.
It means that manufacturing has nearly come to a standstill. Major loses is the capital goods sector, where growth has gone negative.
Due to neglect on the part of the government, agricultural production also could not increase as per targets. Now the responsibility of growth it seems has fallen on the services sector, which again has its own limitation. Under these circumstances, standstill manufacturing and agriculture on the one hand and increasing money supply on the other are fuelling inflation.
What Government
Should Do?
Government will have to take concrete measures to combat inflation. On the one hand it will have to cut down its wasteful expenditures to stem fiscal deficit. Instead of cutting down expenditure on social services like, education and health it must have to curb populism. To somehow garner votes the government had made many populist declarations apart from enacting food security legislation in a hurry in its last leg in power.
They are needed to be rationalised. Concessions being given to the corporates in the name of improving investment environment need to be withdrawn. Government will help to make all out efforts to improve its tax revenue collections including tightening the noose on companies like Vodafone.
We need to keep rate of interest low at any cost, so that industrial and infrastructural development gets a boost. We need to control the import of industrial products especially consumer and engineering products to save our industry; only then the industry reeling under recession could be helped.
(The author is Associate Professor, PGDAV College, University of Delhi)
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