Rahul-flation soars as Indias elections loom

Written by The Financial Times | Updated: Oct 29 2011, 08:06am hrs
Why is the scandal-hit Indian government seemingly doing so little about inflation Because its so busy worrying about elections, writes Neil Munshi.

Thats the view of many commentators, among them blogger R Jagannathan, on Firstpost.com, who has even coined a phrase to describe Indias persistently high level of price increases. Rahul-flation, he calls it, after Rahul Gandhi, the scion to Indias Gandhi family political dynasty. It could catch on.

Mr Jagannathan argues that the Congress party that dominates the coalition government is probably aiming to put Mr Gandhi forward as its candidate for prime minister in the next federal elections, which must be held by 2014. He says Indias inflation is driven by populist spending and wrong economic choices - both dictated by the need to create an entitlement-based economy, presumably to help elect Mr Gandhi as the next prime minister in 2014.

In short, he says, what we are seeing now is Rahul-flation, not conventional inflation.

This leaves the entire burden of fighting inflation resting on Indias central bank. Even as interest rates in other big emerging markets are being slashed, the Reserve Bank of India on Tuesday raised rates for the 13th time since March 2010 in its fight against inflation.

With the government distracted by scandals and electioneering, the central bank cannot rely on New Delhi to cut public spending and borrowing.

Monetary policy, say economists, is simply the only tool India has to fight persistently high inflation, which reached 9.72 per cent in September, while fiscal policy paralysis keeps the Congress Party-led coalition governments reform agenda stagnant. In the absence of government action, the central bank is responding with monetary policy to a host of challenges: the eurozone crisis driving demand for US dollars, a steadily weakening rupee, a mushrooming fiscal deficit, supply side constraints, market volatility and a drop in foreign financial inflows. Indias trade deficit continues to climb, despite the weakening currency.

The RBI downgraded Indias growth forecast for the fiscal year ending March 2012, from 8 per cent down to 7.6 per cent - most economists see it as somewhere between 7 per cent and 7.5 per cent - well below the governments original 9 per cent forecasts.

Yet, even in the face of mounting economic problems, New Delhi remains mostly silent. It faces a daily barrage

of negative news about corruption scandals - and the anti-corruption backlash the scandals have spawned. Then there are regional elections in Indias most populous state, Uttar Pradesh, after that the national elections of 2014, and then Rahul. No wonder the central bank feels isolated.

The Financial Times Limited 2011