All146;s well now?

So it8217;s fallen 8212; point-to-point inflation using the wholesale price index has dropped to 5.74 per cent for the week week ending March 31. The government will claim this reflects the success of its anti-inflationary policies. The government will be wrong, as it was wrong in hiking interest rates. Point-to-point indicators are a function of last year8217;s base and as the base increases from end-March, inflation will automatically decline. There will be further declines in April, and that would have nothing to do with monetary policy. Indeed, given the nature of inflation, fiscal policy government expenditure, RBI purchase of dollars RBI seems to be easing on this and rural-cum-agro reforms can have greater impact. But inspired perhaps in part by the PM8217;s Economic Advisory Council, the RBI was in no mood to listen. Hence the hikes in repo rates and CRR, with interest rates going up by at least 50 basis points. It may be pure coincidence that the chairman of PM8217;s Advisory Council now was RBI governor when a similar mistake was committed in 1997.

If the offficial call on inflation was indeed wrong, what are the costs? Through adverse effects on both consumption and expenditure, the growth rate can decline. If manufacturing growth responds sharply to interest rate hikes 8212; the latest industrial production data suggests output is holding up in this sector 8212; reduction in GDP growth can be as much as 1.5 per cent. This paper has also made the point that this policy is distributionally perverse. Through global access, the capital market and internal generation, large-scale industry has access to relatively cheaper sources of capital. This is denied to small entrepreneurs.

A government that swears in the name of the poor may not set much store by the Sensex, which has already factored in lower growth and profitability expectations, even though this too reflects erosion in national wealth. However, reduction in GDP growth by 1.5 per cent also means decline in national income by Rs 60,000 crore. Other than tax revenue lost, this is also loss in income and employment of the poor. Courtesy a series of miscalculations, with perhaps worse to come in end-April with RBI8217;s annual policy, UPA has thrown a spanner in the growth cycle.