There must be a good reason why an economy that was quite inflation conscious till the early 2000s has become so blasé about high prices since
India now runs the highest consumer inflation rate among all the major countries of the world,save some of the basket case economies. Not just compared with the Euro area,or the Americas,but also Asia,Africa and most important the Latin American countries. Worse,as the OECD or any global chart of say The Economist,will show,India has been at the top for quite some years now.
Brazil,Mexico,Chile or Colombia has all battled out of this price spiral. Through most of the nineties and even later,Indian economists and public policy experts had pointed out that the counterbalance to the high federal fiscal deficit was the low domestic inflation which kept a check on the monetary spiral whizzing out of control. This was Indias not so secret sauce that kept its fisc solvent and the current account deficit manageable.
Last week as an RBI official demonstrated,India is out of that comfort zone for keeps. Even next door Pakistan is running lower food price inflation at 5.8 per cent compared with 9.4 per cent in India.
High consumer inflation makes the population restive and sets in a wage price correction mechanism which accepts that prices will remain high and so everyone from the employer to the poorest housewife begins to make adjustments accordingly. The first impact is the country starts paying a higher price for its labour despite being surplus in it,which gradually prices itself out of global competition. Higher food inflation means the demand for retaining subsidies does not ebb and more government money is locked away to feed it.
There must be a good reason why an economy that was quite inflation conscious till the early 2000s has become so blasé about high prices since. This has taken place despite a period where the world has gone through a massive recession and we ourselves are in the second year of our downturn in growth.
The answer has to lie in the massive expansion of government expenditure in non-economic pursuits that was pumped in aggressively in the last few years. As a former top government official said,former finance minister Pranab Mukherjee loved to announce spending plans as his three-budget show. But he wasnt alone. The danger had spread even earlier and all of it happened under the watch of Prime Minister Manmohan Singh.
The economy is now in an election year and what are the chances that this chain of expenditure expansion will ease up? Cutting food inflation now means unpopular steps and with thin majority in each constituency no party will be reckless. So the crown of highest CPI in the world will be ours for at least one more year.
Subhomoy is a Deputy Editor based in New Delhi.
subhomoy.bhattacharjee@expressindia.com
