Nothing To Smile About

The spectre of inflation has come to haunt those who had been crowing about how fast the Indian economy is growing.
There have been knee-jerk reactions from the UPA government that claims its economic policies are for the aam aadmi.
What is currently taking place is the worst possible form of inflation, driven by sharp increases in prices of food products.This, in turn, is eroding the real incomes of the poor the most.
All the economic gains that the government had been tom-tomming about stand negated by this single setback. Inflation is certain to erode the popularity of the ruling coalition all over the country, particularly in states where elections are expected.
The Congress party is on the defensive - internal criticism of the stewardship of the economy by prime minister Manmohan Singh and finance minister P Chidambaram has mounted with the government being attacked by both the BJP and the Left.
The move to cut retail prices of petrol and diesel, the Reserve Bank's decision to increase the cash reserve ratio of banks, the stopping of forward trading in certain pulses and steps to ban exports of particular food products and reduce import duties on others have all come rather late in the day.
The impact of these decisions would be felt on the price level only after a few weeks, if not months. Meanwhile, the government would be vulnerable to more strident attacks from its critics for mismanaging supplies of essential articles.
As the rate of inflation measured by the wholesale price index edges towards the 7 per cent mark, no homemaker worth her salt believes that prices have gone up only by this proportion over a year.
It is not just the reality of the marketplace but the fine print in government reports that tell a different story.
RBI has pointed out that over the last year or so, the wholesale prices of pulses are up by more than 25 per cent, wheat prices have increased by 15 per cent, fruits by 12 per cent and milk by over 6 per cent. If anything, these are underestimates - consumer prices are much higher.
The WPI is compiled by the ministry of statistics and programme implementation. Figures put together by the ministry of labour paint a different picture.
In December, when the WPI was up by 5.6 per cent, various consumer price indices (CPIs) were registering a far faster rate of inflation - the CPI for agricultural labourers had risen by nearly 9 per cent while the CPI for urban non- manual employees had increased by nearly 7 per cent.
Since the CPIs have been consistently higher than the WPI since November 2005, the short point is that even if one goes by government statistics (inaccurate as they can be) the current rate of inflation is at double-digit levels.
This is pretty bad news for those in power. Inflation is one economic phenomenon that politicians understand rather well - the prices of onions or sugar have been the subject matter of powerful slogans that have contributed to electoral losses.
To repeat the evocative phrase recently used by the RBI's deputy governor Rakesh Mohan, inflation is "a tax on the poor against which no hedges are available".
Who does not know that food comprises a much larger portion of the expenditure of the poor than the well-off?
Inflation, in fact, indirectly transfers incomes from the poor to the rich (whose profits go up faster than the rate at which prices rise) and hence needs to be curbed as soon as possible, particularly in highly unequal and stratified societies such as ours.
A combination of two broad sets of factors, demand-pull and cost-push, contribute to inflation. Till the end of August, 2006, inflation was largely cost-push and driven by high oil prices.
International prices of crude oil crashed from over $75 a barrel in early-August to just over $50 a barrel by December.
But domestic retail prices did not go down commensurately. The government wanted to protect its tax revenues and the bottom lines of oil companies.
It is now paying a stiff price for this delay in rolling back prices of petrol and diesel. RBI could have upped the CRR earlier. It did not.
Industrialist friends of the powers-that-be did not want interest rates to harden. In keeping corporate captains happy, the government ended up antagonising the person on the street (not Dalal Street).
There is little that Chidambaram can hope to do in the coming Budget that could tame the inflation monster. A reduction in peak customs tariffs is on the anvil. Clearly, different ministries (including agriculture, commerce and finance) need to work in closer coordination with one another to better manage food supplies.
In the first press conference Manmohan Singh had addressed as finance minister in June 1991, he had scoffed at Rajiv Gandhi's pre-election promise to roll back prices of various products if his party returned to power.
The Congress party was wild with what the economist and technocrat had innocently remarked, because he knew better than others how difficult it is to bring prices down. He had to eat his words.
The prime minister has hopefully become more politically savvy since then. His government has no choice but to pull out all stops to douse the inflationary fires.
The writer is director, School of Convergence.