Inflation: How Chidu and MMS have got it wrong - again

The high consumer price index (CPI) number for November (11.24 percent) and the contraction in the index of industrial production (down 1.8 percent in October 2013) are further pointers that we are into serious stagflation - and the problems are largely self-created. There are no short-term fixes, and the UPA's soothsayers have been so consistently wrong on economic forecasting that they really ought to stop making any further claims on the health of the economy.

UPA-2 has been a graveyard for good economists and alleged reformers - from Manmohan Singh to P Chidambaram to C Rangarajan to Montek Singh Ahluwalia - largely because the Sonia-Rahul political spending agenda continues unabated despite warning signals on the economic front for several years now. It is not as if Manmohan Singh and Chidambaram do not know about the damage inflicted by the policies they are willy-nilly implementing, but they continue to do so. (I say willy-nilly because I assume they are closet reformers, who are being forced by the Dynasty to do things they would rather not).

 Inflation: How Chidu and MMS have got it wrong - again


They thus have no excuses left. If, after all this, they can still pretend they are working for the good of the economy, one can only say they have mortgaged their brains to 10 Janpath for reasons of political opportunism and the narrow pleasure of holding high office.

Let's start with Chidambaram first. Last October, he sulked when the then Reserve Bank Governor D Subbarao refused to oblige him with an interest rate cut even though he had drawn up a fiscal consolidation roadmap. He made this famous statement then: "Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone."

Subbarao turned out to be right, for he has seen governments draw up fiscal roadmaps just to fool the rating agencies and the Reserve Bank - without any intent of honouring them.

November's inflation figures tell us that Subbarao was not only damn right, but Chidambaram was horribly wrong in presuming that inflation was dying. In fact, Subbarao's successor Raghuram Rajan said yesterday (12 December): "We are uncomfortable with the current inflation level when it is at 11.24 percent. CPI data has surprised us on the upside and the IIP (the Index of Industrial Production) data has surprised us on the downside. Some more data are still to come. We have to look at the details and frame policy accordingly."

What this means is that Rajan will again have to raise rates - prolonging the downturn.

Moreover, Chidambaram has not even made good on his promise of "walking alone". There is no sign that his fiscal deficit - a major cause for sustained inflation - is under any kind of control, with more than 84 percent of the budgeted deficit figure for 2013-14 eaten up by October. And the high-spending election seasons is still up ahead. Not only that, the biggest reason for the fiscal deficit - high fuel subsidies - are exactly where they are when Chidambaram resumed as Finance Minister in August last year - at Rs 10 per litre of diesel.

Chidambaram talked of drawing a "red line" on the fiscal deficit at 4.8 percent of GDP this year, but he may have to backtrack, given current trends. MC Govardhana Rangan, writing in The Economic Times, suspects that he may be quietly changing his goalposts. Talking about Chidambaram's recent speech at the ET awards, Rangan writes that the finance minister made no mention of the red line, and instead merely claimed that "there will be no compromise on the decision to walk on the path of fiscal prudence, and contain fiscal deficit, step by step, year by year, until we reach the goal of 3 percent of GDP in 2016-17."

Has the red line this year been quietly replaced once again with a longer-term target that he will not have to meet? It is unlikely that he will be finance minister after May 2014, unless there is a UPA-3, but few people are betting on that.

It is worth recalling that Chidambaram discarded the Fiscal Responsibility and Budget Management Act's pre-limits deficit in 2008 when elections loomed. There is no reason he won't walk down that path again, since he does not have to around to pick up the pieces in 2014.

As for Manmohan Singh, the less said the better. His explanation for high inflation was that it is a sign of growing prosperity. He said in 2011: "What prices are going up are prices of vegetables, prices of eggs, prices of fish, that is the secondary and tertiary food items. That is a reflection of the demand for these commodities exceeding supplies....That in turn, to some extent at least, is a sign of growing prosperity of our country. If our national income increases by 8 percent per annum and our population is increasing at 1.6 percent per annum, the per capita income is growing at 6-6.5 percent....It is bound to lead to a demand for a more diversified type of food basket. I am not saying this is a foolproof way of describing this complex reality, but in analysing food inflation, I think, this is an aspect that should not be lost sign of."

Now that national income if not growing at the same rate, and inflation is, if anything getting worse, and since per capita income cannot growth when national income growth is falling, perhaps Manmohan Singh will have to change his tune - never mind that his logic was always faulty in this subject.

It is highly unlikely that anyone will buy Chidambaram's promises or Manmohan Singh's explanations on where the economy is headed anymore.

Updated Date: Dec 21, 2014 02:18:38 IST