Yesterday, one of my students wanted to know why I am blaming the Government for inflation when it is considered to be a global phenomenon.
Here is my answer,
Inflation is a global phenomenon alright, but the quantum of inflation is not. Wrong government policies over the past decade has led to the current high 11.91% of inflation.
We need to make a honest appraisal of the reform process. On the one hand, the country has benefitted by integration with global markets, but there is a worrying aspect to this. People have started wondering whether this has been at a high cost. The benefits of the refoms have not percolated down the rural sector, that constitute 60% of the population and there is another 20% urban poor who are also suffering. Any development that does not embrace 80% of the population cannot be construed to be development. We have also allowed indiscriminate inflow of FDI, increasing the money in circulation, which obviously has led to inflation. With developed countries following a low interest regime, money obviously finds the level by flowing to high interest regimes like India. Interest rate hike has been a pure government decision.
Secondly, it is a known fact that the parallel economy comprising of black money, counterfeit notes, hawala transactions constitute 26% of the economy. Successive governments have not done anything to arrest this anti national inflationary activities.
Goverment has followed a principle of interest rate management/credit squeeze route for managing inflation. This has not worked and is not likely to work. Maybe in the short run, we may see inflation coming down, but the price the economy has to pay for this financial adventurism is huge. The growth is stagnating and in some sectors have started reversing. The economy is sluggish and is in recessionary mode. Government has never bothered to explain why it has not adopted the foreign exchange management route to tackle the inflation. Everyone and his aunt knows that the Rupee is not allowed to float against the dollar and kept at a low exchange rate. This only helps two people- Amercians and the Exporters. The exporter lobby is so powerful and cry hoarse every time rupee starts appreciating. Government obliges them by stepping in and buying dollars from the market. This is ridiculous. It is time export lobby shipped up or shaped out. You can't have it both ways. You cant get both reforms and protectionism. Either the export lobby becomes efficient or they take a hit like everyone else. If Rupee had been allowed to float against dollar, it would mean that imports become cheaper and dollar based purchases like petroleum products very attractive. Will it not bring the inflation down?
How many of you know that last year was one of the best as far as food production is concerned? And still the food prices hit the roof? It is not as if the demand has gone up substantially overnight. Nearly 33% of the grains produced in India goes to waste through pilferage, theft, rains, and eaten by rats and rodents. The storage facilities are a relic from another era. Nothing has been done on the procurement, storage and distribution front for nearly 3 decades. One of the reason why the prices of essential commodities were low was due to the success of the Pubilc Distribution System (Ration shops). Admitted the quality was bad, but people still had access to it and prices were low. This government has systemmatically destroyed the PDS through wilful neglect. Result? Common man is at the mercy of the open market and has to pay more.
I have written about it in previous posts. The impact of energy crisis could have been avoided if the government has speeded up the Highways program started by the Vajpayee government. There is more that 30% of fuel savings if we can do away with traffic jams, bumper to bumper traffic, unwanted checkposts (well! all check posts are unwanted) and free flow of traffic. It is a national crime not to invest in infrastructure.
Same is the case with electricity sector. The transmission loss is a whopping 40%. Add to this free power to farmers. Tell me which country can afford this. And absolutely no initiative has been made in this critical area. It is possible to bring down the transmission loss to <>
Finally, the inflation is a direct result of the huge subsidies the government is paying to various sections of the people. The intended beneficieries get only 15% of the money meant for them. The balance is leakage, which turns up as black money and again harming the prices.
We should not blame the world and others for not going to the root of the problems and tackling them. It is quite within our abilities. But for that the rulers should love the nation, care for the people, show leadership qualities, have a vision and the strength of mind to carry out long term plans. In the current political scenario, it is unlikely. It also has to do with the apathy shown by you and me. Why blame the goverment? We get the government we deserve.
