The 9 argument

The growth/inflation debate, given a fresh impetus by two respected policymakers, Montek Singh Ahluwalia and C. Rangarajan, desperately needs some recent historical perspective. The UPA needs to be reminded that it came to power convinced, on the basis of a widely circulating falsity, that the previous coalition lost because it had championed growth. Inflation, instructively, was relatively low as the NDA fought elections, while growth was picking up, from around 2003. The UPA didn8217;t think pro-actively pushing for growth, via major reforms, was politically sensible. So the growth we have seen recently may not have come despite this government but it hasn8217;t come because of it either. But surely inflation, which had started creeping up, should have been tracked obsessively? Isn8217;t it the holy grail of aam aadmi politics? Why then, until very recently, was aam aadmi politics equated with reform-blocking politics? Blocking bank reform doesn8217;t hold food prices.

The UPA should also answer why it is not fiercely arguing that the rupee be allowed to appreciate. A rigid policy of holding the rupee8217;s value against the dollar 8212; this makes exports cheap 8212; is killing an effective anti-inflation solution 8212; if the rupee rises, domestic goods will be cheaper. Using the kind of rhetoric politicians love, it can be asked of the UPA why it considers protecting exporters8217; foreign exchange earnings to be more important now than protecting the aam aadmi8217;s real wage.

A slightly more distant history is needed to ask the most vital question: what should be the inflation/growth trade-off now? When India8217;s growth rate was 8216;Hindu8217;, in the 1960s and 1970s, inflation used be in the 8-9 per cent range. When growth picked up, beginning early-middle 1980s and averaging between 5-6 per cent till late 1990s, inflation was still 8-9 per cent. So 6.5 per cent inflation as a political killer is a recent invention, made possible by the low 8216;starting8217; point of around 4 per cent in late 1990s. RBI contraction played a role in that 8212; Narasimha Rao had also panicked about inflation after the Congress lost some states 8212; so did a global economic crunch. There is no doubt that there will be pressure on prices if India maintains a 9 per cent growth rate. But, as has been repeatedly argued in these pages and by others elsewhere, the key question should be, what benefits does higher growth bring, even when accompanied by relatively high rates, by recent standards, of inflation? History is a guide again. During proto-reforms and the first real reforms 8212; the 1980s and 90s 8212; although inflation was higher than now, rural worker8217;s real wages rose. High growth can raise real incomes. The UPA is free to forget that. But it should know who to blame for the political fallout of a pro-active contraction policy.