It is a well accepted economic principle that with greater economic activity which means greater generation of wealth - of the kind of economic boom that our country is happily passing through - could lead to rise in prices of commodities which are in short supply. With the Indian economy growing at 9%, all categories of income groups had greater amount of expendable income. With the income of the middle and lower middle class on the rise they naturally could spend more money on essential items, particularly pulses, cereals and vegetables. The supply of these items did not increase in the same proportion as the rise in the income of the middle and lower middle classes. Therefore, there happened to be a rise in prices of these essential commodities. The rise in prices of food items hurts the poor and the same needs to be addressed to. But not in the way the government and particularly the RBI has reacted to it. In the name of curtailing inflation, the RBI has increased the cash reserve ratio to soak the so-called excess money in circulation. And many banks reacted to it by enhancing the interest rate on loans including housing loans. The RBI should have tackled the shortage of food items like wheat, pulses, etc., by facilitating import even by lifting the artificial under valuation of Rupee which makes import of food items expensive. If that is not done, we will be repeating the mistakes which Indira Gandhi did for long years. During her regime, inflation was at two digits and the GDP was growing at the Hindu rate of 2-3%. Industries could not survive because banks were offering interest at the rate of 20% on NRI Account deposits and the prime lending rates fluctuated between 18-23%.
Rise in prices on vegetables, cereals and other food items is not a monster as it is generally made out to be. The farmer is the immediate and primary beneficiary of rise in prices of fruits, vegetables and other agricultural products. In economics, somebody's loss is somebody else's gain. Inflation, here, is a blessing in disguise for the farmer. The terminologies like "overheating" are mere humbug. When economy grows there is greater money in circulation and there could be passing phases of rise in prices of certain commodities and goods. And there is nothing extraordinary about it. I can only conceive of unhealthy inflation when such inflation is caused by government printing out currencies to support deficit finance which is not the case now.
Inflation may be an undesirable monster but the measures which the government has taken to curtail it are even more monstrous. . If interest rates are raised as has been done repeatedly by the RBI in the recent weeks that will have a cascading effect on prices across the board of commodities and services. It will fuel further inflation. It is not because the Prime Minister does not know what the sound economic policies to be followed are. We must credit him and his mentor Narasimha Rao for ushering in economic liberalization. But unlike Rao, to whom sadly, in my view, even today we as a nation are ungrateful; Manmohan Singh lacks the political manoeuvring. Mr. Singh lacks the courage to stand by what he thinks is the right course of action. He fails to assert himself and tell the country that the steps that he takes are the best for the country. He does not argue his case with conviction and courage though he stands on a strong footing. This, sadly, is in spite of his advantage that none in the political hierarchy has the learning to stand upto him in economic matters. Privately even those oppose him acknowledge his credentials as an economist. Yet sadly he is not marketing himself or his government's economic policies and achievements. On the contrary, he is admitting shortcomings where there is none and is unduly apologetic about the liberalization policies which in the last 15 years has re-shaped the destiny of India and has done enormous wonders.
The Finance Minister too reacts as if all governance is about keeping the Left happy. The option before the Prime Minister is either to stand boldly by what the liberalization policies which he considers good for the country and to challenge his opponents within and outside and to carry the people along with him or to follow the smart footsteps of Lalu Prasad and to finish the opposition by sheer wit. While presenting the Railway Budget, Laluji won the support of the Left and all and the sundry by declaring that he is not cozy about privatization. And he said he will go for private public partnership where 1 plus 1 is not 2 but 11. The sheen of Laluji's tactic is that while adopting sound economic policies including privatization, he does not declare from the rooftop that privatization is good and he is pursuing it. He knows it is not politically correct to say so and outwardly declares that he is not in favor of it. He is clever, he says one thing which is in tune with UPA's 'aam aadmi' mantra and does exactly the opposite which is good economics. My kudos for Lalu!
The Prime Minister can also take a leaf from the diplomacy of Narasimha Rao in tiding over the present confusion he seems to be badly caught up with in ushering in further economic liberalization. When Rao was the Prime Minister, hardly anyone gave any credit to him and all the credits of liberalization during his tenure from 1991 to 1996. However, Mr. Singh is unable to pursue the long overdue second phase of liberalization in spite of the fact that unlike in 1991, when he assumed office in 2004, liberalization had received the acceptance of the public at large and all spectrum of political opinion except, may be, the Left. All expected Mr. Singh to proceed with greater determination and confidence as the fruits of 15 years of liberalization ushered by him is there to be seen everywhere. However, tragically, we find the very same Manmohan Singh wanting in confidence and confused by the furore over price rise, loss in elections, Nandigram, etal, which are mere passing phases.
(Mathew Nedumpara is a corporate lawyer and lives his life shuttling between Mumbai, New Delhi and Cochin) About the AuthorMathews J Nedumpara He is a lawyer...Read Morefirst published:April 05, 2007, 10:03 ISTlast updated:April 05, 2007, 10:03 IST
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I am not an economist but a mere Lawyer. All that I know about economics is what little I had studied for my B.Com. And the little bit learnt thereafter from books, newspapers and periodicals. However, the alarm raised by the Central Government, the RBI and the political parties of all colors over an inflation that touched 6.5% just before the elections in the States baffles me; may be because of my ignorance. I still remember vividly what our economic professor asked while teaching us about inflation, it causes, benefits and evils. He asked us, when the economy is on the boom, there is money everywhere. The manufacturers, businessmen, working class, bankers, self-employed and the treasury, all are flushed with cash. On the contrary, when there is a recession nobody has money. Neither the industrialists, businessmen, bankers, self-employed, working class nor the government. His question was, where all the monies had gone all of a sudden? None of us had the answer. We offered answers like that the monies could have been hoarded somewhere. Then our professor told us that economic boom means nothing but greater economic activity. More and more people involving in more and more productive activity. That is to say, creation of greater wealth and greater volume of money in circulation. And recession means vice-versa. He explained that money in circulation is nothing to do with physical cash. Unlike 30 years before when I was in college, this economic principle is much more easily understandable today even to a common man as, now, transactions online and by 'plastic cards' are common.
It is a well accepted economic principle that with greater economic activity which means greater generation of wealth - of the kind of economic boom that our country is happily passing through - could lead to rise in prices of commodities which are in short supply. With the Indian economy growing at 9%, all categories of income groups had greater amount of expendable income. With the income of the middle and lower middle class on the rise they naturally could spend more money on essential items, particularly pulses, cereals and vegetables. The supply of these items did not increase in the same proportion as the rise in the income of the middle and lower middle classes. Therefore, there happened to be a rise in prices of these essential commodities. The rise in prices of food items hurts the poor and the same needs to be addressed to. But not in the way the government and particularly the RBI has reacted to it. In the name of curtailing inflation, the RBI has increased the cash reserve ratio to soak the so-called excess money in circulation. And many banks reacted to it by enhancing the interest rate on loans including housing loans. The RBI should have tackled the shortage of food items like wheat, pulses, etc., by facilitating import even by lifting the artificial under valuation of Rupee which makes import of food items expensive. If that is not done, we will be repeating the mistakes which Indira Gandhi did for long years. During her regime, inflation was at two digits and the GDP was growing at the Hindu rate of 2-3%. Industries could not survive because banks were offering interest at the rate of 20% on NRI Account deposits and the prime lending rates fluctuated between 18-23%.
Rise in prices on vegetables, cereals and other food items is not a monster as it is generally made out to be. The farmer is the immediate and primary beneficiary of rise in prices of fruits, vegetables and other agricultural products. In economics, somebody's loss is somebody else's gain. Inflation, here, is a blessing in disguise for the farmer. The terminologies like "overheating" are mere humbug. When economy grows there is greater money in circulation and there could be passing phases of rise in prices of certain commodities and goods. And there is nothing extraordinary about it. I can only conceive of unhealthy inflation when such inflation is caused by government printing out currencies to support deficit finance which is not the case now.
Inflation may be an undesirable monster but the measures which the government has taken to curtail it are even more monstrous. . If interest rates are raised as has been done repeatedly by the RBI in the recent weeks that will have a cascading effect on prices across the board of commodities and services. It will fuel further inflation. It is not because the Prime Minister does not know what the sound economic policies to be followed are. We must credit him and his mentor Narasimha Rao for ushering in economic liberalization. But unlike Rao, to whom sadly, in my view, even today we as a nation are ungrateful; Manmohan Singh lacks the political manoeuvring. Mr. Singh lacks the courage to stand by what he thinks is the right course of action. He fails to assert himself and tell the country that the steps that he takes are the best for the country. He does not argue his case with conviction and courage though he stands on a strong footing. This, sadly, is in spite of his advantage that none in the political hierarchy has the learning to stand upto him in economic matters. Privately even those oppose him acknowledge his credentials as an economist. Yet sadly he is not marketing himself or his government's economic policies and achievements. On the contrary, he is admitting shortcomings where there is none and is unduly apologetic about the liberalization policies which in the last 15 years has re-shaped the destiny of India and has done enormous wonders.
The Finance Minister too reacts as if all governance is about keeping the Left happy. The option before the Prime Minister is either to stand boldly by what the liberalization policies which he considers good for the country and to challenge his opponents within and outside and to carry the people along with him or to follow the smart footsteps of Lalu Prasad and to finish the opposition by sheer wit. While presenting the Railway Budget, Laluji won the support of the Left and all and the sundry by declaring that he is not cozy about privatization. And he said he will go for private public partnership where 1 plus 1 is not 2 but 11. The sheen of Laluji's tactic is that while adopting sound economic policies including privatization, he does not declare from the rooftop that privatization is good and he is pursuing it. He knows it is not politically correct to say so and outwardly declares that he is not in favor of it. He is clever, he says one thing which is in tune with UPA's 'aam aadmi' mantra and does exactly the opposite which is good economics. My kudos for Lalu!
The Prime Minister can also take a leaf from the diplomacy of Narasimha Rao in tiding over the present confusion he seems to be badly caught up with in ushering in further economic liberalization. When Rao was the Prime Minister, hardly anyone gave any credit to him and all the credits of liberalization during his tenure from 1991 to 1996. However, Mr. Singh is unable to pursue the long overdue second phase of liberalization in spite of the fact that unlike in 1991, when he assumed office in 2004, liberalization had received the acceptance of the public at large and all spectrum of political opinion except, may be, the Left. All expected Mr. Singh to proceed with greater determination and confidence as the fruits of 15 years of liberalization ushered by him is there to be seen everywhere. However, tragically, we find the very same Manmohan Singh wanting in confidence and confused by the furore over price rise, loss in elections, Nandigram, etal, which are mere passing phases.
(Mathew Nedumpara is a corporate lawyer and lives his life shuttling between Mumbai, New Delhi and Cochin)
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