On one hand, Government is gloating over the 8% GDP growth, during a period of Global recession, or make it more like Developed Country Recession.
(Have you noticed that it is a global ercession only when the US and Europe is involved? The BRIC countries are doing well, so are the GCC countries, whole of Africa and most of SE Asia. We unashamedly call the two wars which were fought in Europe mainly, the World Wars. When Australia, Africa, Latin America, Most of North America, Antarctica and half of Asia were not involved in the war, how could it be termed World War?).
But, the inflation has gone out of control, with the government clueless as to what action to resort to. They tried tightening the monetary policy - the inflation didnt ease. They hoped a good rabi crop would ease inflation - it actually spurred the inflation as the Government fell flat in procuring and storing the food grains. 20% of the food grains rotted, a crime against humanity. Now, they are pinning hopes on a good kharif season - but they are yet to do ANYTHING about augmenting the storage facility. The supply side weakness, coupled with hoarding my big retail chains and the middlemen is artificially pushing the prices up, as the demand has not grown to justify double digit inflation overall and the near 17% inflation in food items.
The Government, at least some quarter of it, is blaming the National Rural Employment Guarantee Scheme (NREGS) for the inflation. Their specious argument is that the NREGS has spurred rural demand as it has put money in the hands of the rural folks. This is ridiculous. The audit by CAG of India has shown massive diversion of funds and poor delivery of the funds through NREGS, barring couple of States. The NREGS is a well intentioned disaster, but no one would say it openly as that would mean antagonising Sonia Gandhi. For the ruling party, this is a wonderful way of greasing the palms of its party cadre across the country. Since it is a win situation for all politicians monetarily, everyone is closing their eyes towards this national looting.
But, personally, I suspect the root cause of the inflation is the fiscal indiscipline of the Government. The Government over the past 6 years have been spending much more than it can afford to. The fiscal deficit has soared. The target to contain the fiscal deficit to 2-4% of GDP has been consigned to the dustbin. The fiscal deficit is close to 16%. The Government has no option but to borrow from RBI to cover its deficit, which means priniting more notes. This is precisely what the Government has been doing over the past couple of years. And as any economic student knows, more money chasing same goods will result in inflation.
The future on this front looks grim. With government toying with the idea of increasing the petrol and diesel prices by Rs 3.50, inflation is expected to go northward. Despite all their faked injured stance, Governments are happy when the Petrol/Diesel prices goes up, as it means substantial increase to the Excise duty and Sales tax collections. It is a Win-Win situation for the Oil PSU and the Government, but a lose-lose for the poor and the middle class. But hey! this is not an election year. So it is alright to squeeze them.
