Monetarists convinced the world that inflation everywhere was the result of too much money chasing too few goods. It seemed to them that the too much money part was controllable since the monetary authorities were in charge. All one had to do was to stop the printing presses as Milton Friedman taught us (For all his love of freedom, Milton Friedman was a firm believer in Central Bank action which Hayek never condoned). But as in all laws of economics, there are ceteris paribus caveats. For one thing the money supply eluded a precise definition as we went from M0 to M1, and finally to M4. Elementary distinctions between money and credit had to be relearned.
But even so, there is the other blade of the scissors, as Alfred Marshall would say. Why not ask if there are
too few goods being chased by too much money Is Indias inflation a supply-side problem as I have argued for sometime now After all, it is the
UPAs policy of constantly enhancing procurement prices despite overstocked warehouses and rotting grain dumps (farmers are a big vote bank). Plus, the tightening of rural labour markets by NREGA and other activities have pushed up costs and prices. Even after 66 years of Independence, India does not have a fully integrated market for food grains as there are some arcane restrictions of movements of food grains which would do justice to 18th century Francelaissez faire, laissez passez was about letting food grains move without obstacles in the first place.
Away from food grains, the non-agricultural economy has been in doldrums. That, too, is more due to uncertainty than any structural issue. We will only know the true state of the economy perhaps three months after the general elections in 2014. If there is a change of party in power, there is a scope for a fundamental reordering of the Indian economy. The immediate logjam in infrastructure projects can be sorted early on. Narendra Modi, most likely to become the next prime minister, has a reputation for getting things done. His profile is that of an implementer. That should get the economy moving again.
But there will be an opportunity to re-examine much deeper issues about how the economy can be made to perform better. The Nehruvian legacy of social-democratic economics has not gone. There is a suspicion of the private sector, a distrust of the market, and an eagerness to resort to fiats and restrictions whenever a problem crops up which the government has not anticipated. There was far too much knee-jerk nationalisation during Indira Gandhis rule. This has led to inefficiency as in the cases of Coal India, Food Corporation of India and many PSU banks. It has also afforded great scope for crony capitalism as the many scams and scandals show. A new dispensation should be willing to think radically about massive denationalisation of the many activities which form no part of any commanding heights. Even the latter should not be left under state ownership except under the proof that they are efficient. But that can wait.
There is a fallacy about that state ownership and control protects the poor. This conventional wisdom needs to be challenged root-and-branch. The experience of poverty eradication, throughout history, has come more from the poor taking initiative to get out of poverty once discrimination is removed from their paths. Poverty has come down in India since 1991 (though hotly contested by the social democrats of all parties) when growth has been rapid. Subsidies which pretend to deliver inclusive growth are inefficient at removing poverty as they merely seek to make poverty tolerable. While NREGA restricts labour mobility, direct cash transfer would enable the poor to move and seek work wherever they can.
The emphasis should be on incentive-compatible inclusion rather than debilitating subsidies. Of course, the subsidies to the farmerson fertilisers, water and powerhave to go as rapidly as is feasible. In this, as in many other matters, the sooner this is achieved the lesser would be the electoral impact when elections come around again in five years time. These policies will have to be urgent if the fiscal problem is to be brought under control. There is no reason why a new government should not lay down a clear path to zero-deficit within the tenure of the government.
That will bring down inflation for the long run.
The author is a prominent economist and Labour peer