Inflation heresy

Such figures don’t immediately register unless linked to personal experiences. I was initially puzzled when the hotel room, menus in restaurants and price lists in shops displayed “today’s rate” in cruzados. If you think about it, the reason is obvious. With that kind of inflation, prices expressed in cruzados changed on daily basis. My shock was greater when I went to a Japanese bank to convert dollars into cruzados. There was shock on the teller’s face. She confabulated with other tellers and I kept being asked whether I really wanted to change these travellers cheques.

Then I was taken to the manager’s office and the Japanese manager bowed at me and I bowed back, several times. I kept being asked if I really wanted to change these TCs, as if I was somewhat insane. I was offered a cup of tea and asked to cool down. When I persisted in my lunacy, these TCs were converted at the rate of 35 cruzados to a dollar. However, right outside the bank, or anywhere for that matter, you could convert them at a rate of 70 cruzados to a dollar, which explains the bank’s bewilderment. As a current example, one can do no better (or do I mean no worse?) than Zimbabwe. In June, the inflation rate of the Zimbabwean dollar was 1,000,000 per cent. This translates into 2,700 per cent a day, 100 per cent an hour and 2 per cent per minute. Again, these are just numbers; one doesn’t appreciate what these mean unless one personalises the numbers. For instance, if I receive a Zimbabwean thousand-dollar note at 2 pm and spend it at 3 pm, it is worth only half of what it was worth when I received it.

A small packet of coffee in Harare now costs a billion dollars. Ten years ago, that would have enabled one to purchase 60 cars. A $50 note issued 10 years ago is today worth much less than the ink originally required to print it. One is forced to think in billions; notes have expiry dates on them (often five months). Indeed, Zimbabwe no longer publishes any official inflation figures.

In comparison with such hyperinflation in many developing countries, inflation in India has historically been low. Consider WPI-based inflation: annual inflation rates were around 20 per cent during the OPEC oil shocks of the ’70s, but otherwise crossed 10 per cent only in the years during which India first began to liberalise. Use of any of the consumer price indices (CPIs) does not change this trend remarkably.

In particular, compared to many countries that have reformed, India’s inflation rates have been muted. (China belongs to a different category and no one has quite figured out price determination there.) Why do we then get paranoid and politicise anti-inflationary policy every time the rate crosses 10 per cent? This is inexplicable, as there is no obvious answer as to whether it is better to have 10 per cent growth and 9 per cent inflation or 8 per cent growth with 7 per cent inflation. My intention is not to revisit the ineffectiveness of monetary policy debate. There is certainly a quote from Keynes: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Just as there is one from Milton Friedman: “Inflation is the one form of taxation that can be imposed without legislation.”

But the fact remains that while everyone agrees Zimbabwe-style hyperinflation is bad, most economists agree that “moderate” inflation is good for growth, though it is impossible to pin down what “moderate” means in terms of a number. Given this, why do we think 10 per cent growth and 9 per cent inflation is bad? In the aggregate, 10 per cent growth and 9 per cent inflation represent 1 per cent real growth. Again, people as a whole are not worse off, though 2 per cent real growth would have been better, had that been possible.

The inevitable retort is that this doesn’t consider the redistribution and inequity of inflation as a regressive tax that hurts the poor more, since their incomes tend to be fixed and not indexed to price increases. That argument is bolstered by the point that CPI-based inflation rates are higher for agricultural workers and rural labour than for urban non-manual employees and industrial workers. There are several components in the redistributive impact — across rural/urban, across regions, across generations, across debtors/lenders and across income categories. Of these, the one across income categories is the most emotive and here is a quote from a recent speech by the PM: “Inflation is an iniquitous tax. It is essential that we ensure that the poor are not adversely affected by high inflation.”

This may well be true. But all I am questioning is this generalisation across all categories of poor. Do all poor not have 8 per cent nominal growth in incomes? With skill shortages in parts of the country (all poor don’t have employer-employee relationships and fixed incomes), do we have a robust empirical basis for the assertion or is it just a mindset? Some (not all) poor also have opportunities for income growth. Otherwise, that other crucial political number, the poverty rate, would not have dropped.

The writer is a noted economist

bdebroy@gmail.com