4 038; 4 questions

For the week ending 1 September, inflation rate is 3.52 per cent. RBI8217;s target is 5 per cent this fiscal year. So with three successive weeks of inflation below 4 per cent, RBI and the government will be in self-congratulatory mode. The government more so since early elections are a possibility. But four questions arise. First, even under the umbrella of the wholesale price index, this is not annualised inflation, but inflation of the point-to-point variety and is thus subject to the base effect of what the index was one year ago. Second, RBI claims reduced inflation rates represent success of monetary policy. To the extent expectations are involved, this has a very small grain of truth. But, as has repeatedly been argued in these columns, monetary policy was an inappropriate instrument and reduced inflation rates have little to do with hardening interest rates. Incidentally, this secular hardening coincides with the advent of the UPA government. However, with elections looming, any further hardening seems unlikely, though rates won8217;t possibly decline.

Third, fighting the devil has pushed government into the deep sea. The six core infrastructure sectors cement, steel, coal, power, crude oil, petroleum refining constitute more than 25 per cent of industrial output and April-July figures show a dip in their growth to 6.1 per cent from 8.7 per cent last year. This is reinforced by industrial production data, which shows a slowdown for the same period from 11.1 per cent to 9.6 per cent. One should also flag consumer goods, which show higher declines and are often an indicator of a general sense of well-being. Spliced with the slowdown in export growth, a GDP growth slowdown in 2007-08 is inevitable, notwithstanding good performance in Q1. Economists will rightly argue this is an inevitable outcome of higher interest rates and this should have anticipated before opting for knee-jerk reactions to a transient inflation problem. Interest rate hikes have hurt the small-scale more, since they have access to neither the global capital nor the equity route.

Fourth, there is an additional problem with higher crude oil prices, the Indian basket having touched 75.30 a barrel. Political compulsions and inflation fears prevent increase in domestic oil prices. This is a problem that8217;s being transferred to the next government.