Inflation antidotes

To combat inflation, policymakers should create more purchasing power, not reduce it. Subsidies are fine, social security is better but job creation is best.
When the Finance Minister, Mr P. Chidambaram, presented his first full budget in 2005, he could look forward to a bright future. The economy, growing at 6-7 per cent, was on song and the burden of high inflation — 8.7 per cent the previous August — had been lifted. With the ink on the Common Minimum Programme still wet and inflation down at 5 per cent, the Finance Minister promised innovative approaches to development and a congenial environment for investment. Three years later, Mr Chidambaram finds the present imperfect and the future tense. Barely has the RBI taken its finger off the repo rate button than a defiant inflation spurts from around 8 per cent to 11 per cent. Suddenly, the policymaker is faced with unwelcome records; no government would like to exit office with a legacy of such a price rise. At the very least, the current situation of rising prices and falling industrial output requires the kind of innovative approach the government promised when it assumed office four years ago.
There are signs of some half-hearted initiatives. Export curbs, import relaxation of food-grains, the recent fuel tax cut and attempts at austerity in government travel are insufficient. Most crucially the deprived should be empowered to cope more effectively with costlier energy, food and power. The most obvious way would be to smother the fire; the most obvious direction to seek help from would be Mint Street. That is what the Finance Minister did when he promised strong “demand and monetary measures”. But the RBI’s interest rate adjustments are putting out the wrong fires; manufacturing output is declining consistently on falling demand. This month’s repo rate cut and the strong possibility of another one will only goad banks to make credit more costly, with a greater impact on output down the road.
The more effective way to blunt the effects of rising prices would be to ensure that more goods are produced and then used more efficiently. Getting more mileage in the truck from that litre of diesel, reducing the quantity of steel and cement used per square metre of building are some obvious strategies for consumers, but for government it is time to get to the root of the supply constraints. If steel is in short supply it is because no new projects have been facilitated in recent years; if coal is expensive it is because production is constrained — long-pending amendments to legislations on mining and land acquisition need to be steered through Parliament to bring in new investment. Increasing employment opportunities is the best way of arming people most affected by inflation, and that is achieved only by clearing the roadblocks to investment. Policymakers need to create more purchasing power and not seek to reduce it. Subsidies are fine, social security is better but job creation is best. That is what can halt the creeping gloom now pervading the economy’s interstices.