Nice price

With RBI doing what analysts and markets were expecting it to 8212; keep key rates unchanged and remove the frankly silly cap on one class of inter-bank transactions 8212; there will be relief. There may even be, given conditioned reflexes to institutional 8216;wisdom8217;, talk of the central bank8217;s sagacity. Few will point out, as our columnist does today, that RBI called it so wrong on inflation and interest rates that a North Block economy review points this out clearly between the lines that8217;s about as much by way of criticism you can expect from North Block reports. Fewer still will subject these rituals of policy grandstanding to cold logic. But most important of all is this question: what have we learnt?

It is vital to recall the poor were mentioned many times by those arguing for strong anti-inflation policies. Inflation sensitivity of voters most of whom are poor was mentioned as well. A couple of Congress electoral defeats were cavalierly explained by inflation. This mix of economic and political folklore ignored several relevant policy insights: RBI8217;s foreign exchange policy was contradictory to its interest rate policy, such inflationary forces as were visible were mostly supply side constraints and therefore not in RBI8217;s domain, there was a statistical mirage about the WPI figures. They were also blind to a key political-economic reality: India is growing, it will grow more, there will be supply mismatches and some amount of inflation will be inevitable. Put bluntly, if there is a high growth/moderate inflation vs moderate growth/low inflation choice, the intelligent vote will go for the former.

As for voters, recall that states that were successfully implementing the rural jobs programme showed higher inflationary tendencies measured in terms of rural labour8217;s consumer prices8217; index than those that were shoddy implementers. Well-executed welfare programmes were increasing the purchasing power of the poor, whose higher demand for basic goods was putting pressure on prices. Is that a reason to panic? There will be bouts of inflation again. India can8217;t afford anti-inflation fundamentalism every time.