Inflationary recession actually began a couple of years ago. With primary articles shortages, the hike in their prices spread to other sectors; subsequently, the overdue oil price deregulation started raising fuel prices, entering most manufactured goods inflation. MGNREGA outlay was raised, raising rural folks purchasing power. With inflation quickly spreading to all sectors, RBI started raising rates and costlier finances put upward pressure on all prices. Monetary tightening did not help reduce inflation because inflation-indexation of wages ensured wage hikes in excess of inflation, and price-inelastic demand did not budge, nor market-supply improved. But the monetary tightening threw a wet blanket on producers, thereby dampening investments, hence output and job creation, putting India into recession.
Macroeconomic policymaking is a tightrope walk with trade-offs between various policy objectives. For instance, output and employment are usually sacrificed by fiscal and monetary tightening used in combating high inflation. Assumption here is: at least inflation will fall thereafter. If it doesnt, then something is wrong somewhere. Quantity theory of money indicating that inflation is always a monetary phenomenon is true in advanced economies wherein beyond full employment level any incremental money supply only enters demand and prices spike up. But in less developed nations, far below full employment levels, the additional money supply can be routed into investments to generate output, thereby reducing inflation! How can shooting prices of onions, tomatoes and milk be reduced by raising repo rate Its high time we accepted that inflation is not always a monetary phenomenon in India and hence monetary measures can evidently prove counter-productive. The solution lies elsewhere.
The policy paralysis must end and bureaucratic logjam removed, fast-tracking single-window clearances to important investment projects suffocating in the pipeline. State-level reforms must happen in tandem with the Centre. Governments must crack down heavily on hoarders and speculators and release huge piles of foodgrains rotting in godowns. Inter-state rivalry causing ever-higher minimum support prices must be stopped. Distortions in market signal given by various subsidies must be removed by opting for direct cash transfers. Agriculture must be made profitable by providing economic and social infrastructure. Tax evaders must be penalised heavily while rationalising and simplifying the tax structure and procedure. The present government has nothing left to lose in giving us a parting gift of reforms. Creating investment-friendly ambiance is the States job, not RBIs.
Since the formation of RBI in 1935 when its objectives were laid down, a major one being defending the value of the currency by checking prices as quoted by the new RBI Governor, things have changed a lot. Today, RBI cannot afford to single-mindedly run after prices, oblivious to other important issues like output growth, development, employment. Nor can it single-handedly solve any of these problems. Given the nexus between fiscal, monetary and other policies, the present complexity of problem requires a concerted effort by all policymakers and some regulators together. Given the lack of political will and the ability to calm down inflation, one wonders if the Indian political leaders were looking for a scapegoat to push the responsibility of adamant inflation, which they found in RBI. And who can be a better candidate than someone trained at MIT/Harvard, IMF/WB to head RBI with the belief that inflation can be resolved by monetary tightening, thus readily taking the onus on himself and media helping with limelight Very shrewd polity indeed.
Thus, in pursuit of defending internal and external value of the rupee, RBI took a slew of measures that raise some questions. Must we depend so much on foreign money that even at the cost of domestic deprivation we must earn dollars to expand FX reserves Must we attract hot money, mindlessly exposing the financial economy to global uncertainties and crises In spite of white revolution and ample milk production, must we deprive our millions of milk and milk products just because we want to convert it into powder and then into dollars by exporting it so that we can then import some luxuries Extraordinary situations warrant extraordinary measures. Can we not go slow on exports during domestic shortages For that, can we not further restrict imports even at the cost of losing credibility with our importers If advanced countries circumvent the WTO agreement even in good times, can we not do it at least in bad times
Our education system must sensitise the youth, which is poised to run the country, towards larger problems. Management education imparts micro skills whereby managers run companies properly, but they lack the understanding of the macroeconomy. Excessive focus on soft skills, placements, too many subjects and tasks reduces depth, rendering their thought-process shallow. India has made several sacrifices in achieving laurels. But these sacrifices are always forced on the middle class and below. Its these pains the gen-Y must learn to reduce. In the successful new political parties, I would like to see NGO heads joining hands besides industrialists and intellectuals so that India actually prospers.
The author is faculty of economics at SIMS, Symbiosis International University, Pune. Views are personal. [email protected]