The Government has been unable to control the spiralling inflation and appears to have no clue as to what is causing it.
The root cause is not one but many.
One has to go back to the year before the General Elections in 2009. During the last couple of years of UPA 1, the Government had artificially reigned in the inflation by controlling the petroleum prices with a view to the elections. Also, P Chidambaram, in his avatar as Finance Minister, had allocated a whopping Rs 60,000 crores to write off the farmers loans. The sting in the tail was that much of this money was to have been paid in 2010 and 2011. PC thought UPA will never be reelected and wanted to get the credit, but pass on the burden to the next Government. But UPA got elected again and was caught holding the baby.
Just prior to the election, the Government announced the pay revision for government employees. Any pay revision normally triggers inflation, as there is more disposable income, and in addition, the employee gets a bulk amount as arrears.
The NREGA has seen lot of money being allocated. But the implementation is so tardy that nearly 80% is siphoned off. This has resulted in black money getting accumulated, which adds to inflationery pressure.
Government totally mismanaged the agriculture sector as any investment in that sector wont result in the kind of marginal GDP growth that MMS wanted. Hence, he went in for investments in the Industry sector, which sent a wrong message to the farmers - that it doesnt pay to farm in India. The labourers started moving away to the much more lucrative industry sector, adding to increased input cost of labour in the agriculture sector. Also, while the retail prices have gone up, most of it have been gobbled up by middlemen, with the farmer hardly benefitting. These disincentives over a period of time has created supply side constraints leading to higher food prices.
The Government, to cover these expenses, printed more notes. Add to it, the black money finding its way back to the market and you have far too much money chasing too few goods.
The structural problems in the economy has to be rectified to tackle the root causes. How is for another post.
