Montek Singh Ahluwalia made a statement on Tuesday that may define UPA’s political economy for the rest of its term, as well as influence what happens in elections at the end of it.(High) GDP growth, the Planning Commission deputy chairperson said, has to be achieved with reasonable levels of inflation. Ergo, if that achievement proves impossible, high GDP growth shouldn’t be automatically considered a desideratum. Montek said a lot of other things, too. But that’s the key sentence. And it’s important first because of politics, then because of the kind of economics it implies and, last, because of the kind of politics that economics implies. The politics first. The government that has appointed Montek has made it clear that it considers current levels of inflation unreasonable. It has also demonstrated that it is prepared to be competitively unreasonable in response. Columnists on these pages have had to repeatedly engage with some of the more alarming examples of that unreasonableness. But the political spin spared the growth narrative. Even in his budget that was somewhat naively criticised for being reform-less — critics should have remembered the political context — P. Chidambaram had made a clear case for high growth as an anti-poverty prescription. What is different in Montek’s statement is that this is probably the first sophisticated re-emphasis on the part of a responsible, intelligent official interlocutor. This isn’t assorted UPA ministers telling TV that 9 per cent growth is bad politics. This is one of the three or four people in the government who are taken seriously on economic issues, indicating a probable and major political rethink.Now look at the economic implications of the Manmohan Singh government becoming actively growth-wary. In a commentary we had carried on the op-ed page (‘How to use a crisis’, March 17), Subhomoy Bhattacharjee, a senior editor in The Financial Express, had referred to a study that demonstrated a fascinating new dimension of inflation. An analysis by the India Development Foundation of consumer prices and agricultural labour had found that in states where the UPA’s rural jobs programme is working well, consumer prices inflation has been the sharpest. Where the jobs programme has been a non-starter, rural inflation has been lower. So Andhra Pradesh, currently a top performer in creating rural jobs, has seen higher consumer price inflation than Kerala, a non-performer as far as the job guarantee programme goes. (Why Kerala, now ruled by the fiercest defenders of the poor’s interest, should be making a mess of the jobs programme is a fascinating political-economic question by itself.)What does this mean? It means, simply, that when poor agricultural workers are benefiting from the UPA’s showpiece social welfare project, their purchasing power is increasing, and because higher spending by this class typically translates quickly into bigger demand for basic goods, inflation gets a boost if there is a temporary supply mismatch. One can argue of course that whether or not inflation is a byproduct of the jobs guarantee programme, it will still hurt the rural worker. Actually, that is not necessarily true. If the rate of increase of the rural worker’s wage is higher than the rate of price increase, he will still be better off. That is, inflation in the context of a welfare project that sufficiently increases the poor’s purchasing power is no bad thing.The lesson can be generalised. Every economist, economic commentator and policy analyst you meet will tell you, with little or no provocation, that India needs to spend huge amounts on infrastructure. They will also tell you that finding the money is not a problem, the crucial thing is getting the rules right — the proper regulatory environment, in policy jargon. Assume that happens, assume a lot of money is spent on creating new infrastructure. It will create more jobs, increase purchasing power, increase consumer and industry demand for many commodities and services, and in the short term, some supply bottlenecks will create inflationary pressure. In fact, as some economists have argued, there may be periodic inflationary bursts as India grows fast.How will a growth-wary government handle this? If it is monomaniacal about inflation, it won’t understand two crucial things. First, so far as inflation is a product of supply mismatch in the context of higher incomes for the poor, the important variable to track is real wage increases in the countryside. If inflation does erode wage increase, a smarter response — many liberal economists who can be creatively unorthodox have suggested this for similar conditions elsewhere — might be to put more money in the hands of the poor. Second, when a demand increase following an infrastructure boom puts pressure on prices, there has to be an appreciation that this is a temporary, as it were, price to be paid for progress. The key variable to track then would be supply schedules of commodities in short supply.If a growth-wary UPA does exhibit such a failure of understanding, it can produce the following consequences. First, it will completely misread the positive economic dynamic of its own signature welfare programme. In inflationary context, the response should be to increase the scope and efficiency of the rural jobs programme. Second, it will panic the moment higher infrastructure spending puts pressure on prices. Therefore, and third, it may decide that new infrastructure is not politically desirable.It is easy to see what kind of politics will follow from this kind of economics. The UPA will miss out on the real political potential of its own welfare plan — it will be looking at the village poor only as victims of higher food prices, not as beneficiaries of a government-mandated transformation. As for the transformation of urban infrastructure, something the urban constituency is desperate for, the UPA will have to point to, say, the price of cement and say controlling that, at whatever cost, was more important. This kind of stuff wins elections?
