Chapter 038; verse

As long as Kaushik Basu is Chief Economic Advisor,two things will happen with the governments Economic Survey: it will have a classy cover for a sarkari document,and its heart will be Chapter 2. Last year,the 2009-10 Economic Survey used Chapter 2 to make a persuasive case for considering direct transfers as a method to reform Indias leaky subsidy regime; the 12 months since have seen them become very much part of Indias policy and political conversation,and the Centre has now set up a task force to consider the possibility of their implementation. This years Chapter 2 focuses,unsurprisingly,on inflation but not as some inflation-hawks would have it,because inflation is always bad. No,this is not an apolitical Economic Survey; it is very definitely a UPA policy document,and it makes the point that inflation is mainly a concern because the benefits of growth might well be unevenly distributed,and inflation therefore could technically make the excluded worse off.

The Survey repeats the point that,in the medium term,there are structural reasons why India might have to tolerate inflation higher than the earlier trend of 3 per cent or so. Inflation,the Survey argues,could be a consequence of desirable changes. For example,financial inclusion when poorer people enter the formal banking system raises the amount of money in circulation,raising the average inflation rate. There are some theoretical predictions,too,that the price of non-traded goods in a globalising economy increase. These are negative by-products of processes we cannot,and must not,stop.

Indeed,the Survey emphasises the very sensible point that not all price increases should be met with government intervention. Prices are crucial signals. They should be handled with the greatest of care. State action should always,where possible,support the market,and include the excluded through market-friendly methods. This is,again,an argument for reform of the public distribution system,and of our absurd,dangerous and counter-productive fuel subsidy regime. Such reforms require,the Survey points out,a clear-eyed assessment that if a mechanism has flaws,people could exploit it. The Survey,however,takes that sentiment and turns it around,ending the chapter on a hopeful note. Societies that value open and enforced contracts,it says,can grow to trust each other,opening up the scope of possible policy.