One of the most telling descriptions of the bureaucracy in the 70s went thus: "if you can, don't move; if you must, move slowly; if pushed, move in circles; if cornered, appoint a committee!" One can say this most certainly of our economic policy. Despite years of evidence, governments in India hung on to an anachronistic Nehruvian model, mouthing hollow garibi-hatao type slogans, till being forced off our backs two decades ago. Few know this better than our venerable PM. As key apparatichik in the estwhile growth-sapping regime (something Congress propogandists wantonly gloss over) he wilfully fashioned policies that eventually had us staring down the barrel of a gun in 1991.
Should it, therefore, surprise us that, when the bottom falls off the Rupee, or GDP growth plummets to its lowest in almost a decade as it has today, the GoI is a deer caught in the headlights? Dr Singh would have us believe this is all thanks to the global economic slowdown or Eurozone woes (external locus of control; not leadership). Notably he calls out RBI's tight-fisted monetary stance even though structural problems need a fiscal and not monetary response. Indeed, the central bank has little elbow room in the face of oil price risks or current account gap (widest since 1980). I would argue, on the other hand, that the RBI is doing its damnedest to keep inflation in check.
In context, it is important to peel the onion (!) on our inflation problem. Food is a structural shortage story. Agricultural growth at 4-5% is simply inadequate to meet the demands of a burgeoning 1.2B population with real incomes rising 5%. Next, MNREGA pushes up rural wages (10% YOY in Jan 2010, accelerated to 14% now) to unprecedented levels as GoI continues to dole out money with low to no link to productive use. Then the government raises MSP adding further fuel to the fire. Consequent rise in rural wages soon translates to urban wage inflation (via construction and informal workers).
This cycle of food and wage inflation combining to increase input costs for goods has turned our inflation into a structural one. It can, of course, be tackled. The path lies through supply chain efficiency and productivity. These, however, need a strong policy response, not status-quoist bias that is happier with incremental versus exponential change. Likewise, the GoI cannot print its way out of the quagmire, continuing to push populist policies in the run up to elections in 2014. With fiscal deficit spiralling out of control, there is only so much the RBI can do. If he is half the economic genius he is touted to be, then Dr Manmohan Singh knows this. Point is will he act; bell the cat?
Should it, therefore, surprise us that, when the bottom falls off the Rupee, or GDP growth plummets to its lowest in almost a decade as it has today, the GoI is a deer caught in the headlights? Dr Singh would have us believe this is all thanks to the global economic slowdown or Eurozone woes (external locus of control; not leadership). Notably he calls out RBI's tight-fisted monetary stance even though structural problems need a fiscal and not monetary response. Indeed, the central bank has little elbow room in the face of oil price risks or current account gap (widest since 1980). I would argue, on the other hand, that the RBI is doing its damnedest to keep inflation in check.
In context, it is important to peel the onion (!) on our inflation problem. Food is a structural shortage story. Agricultural growth at 4-5% is simply inadequate to meet the demands of a burgeoning 1.2B population with real incomes rising 5%. Next, MNREGA pushes up rural wages (10% YOY in Jan 2010, accelerated to 14% now) to unprecedented levels as GoI continues to dole out money with low to no link to productive use. Then the government raises MSP adding further fuel to the fire. Consequent rise in rural wages soon translates to urban wage inflation (via construction and informal workers).
This cycle of food and wage inflation combining to increase input costs for goods has turned our inflation into a structural one. It can, of course, be tackled. The path lies through supply chain efficiency and productivity. These, however, need a strong policy response, not status-quoist bias that is happier with incremental versus exponential change. Likewise, the GoI cannot print its way out of the quagmire, continuing to push populist policies in the run up to elections in 2014. With fiscal deficit spiralling out of control, there is only so much the RBI can do. If he is half the economic genius he is touted to be, then Dr Manmohan Singh knows this. Point is will he act; bell the cat?
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