India is faced with a huge supply-side problem, which is causing prices to rise quickly. It produces much less than what it needs.
There is a famous line from an early 20 th century opera by Gilbert and Sullivan in which the character sings “a policeman's lot is an un'appy one”. Something like this can be said about the Finance Ministry's chief economic advisor, also because he (so far there has been no she) has to defend the Government, rain or shine, recession or asset bubbles, and, more contextually, inflation or deflation. Prof Kaushik Basu, who was roped in by the Prime Minister last December to give him some good ideas on delivering services to the poor, had been content till then to theorise and analyse the entrails of policies — successful ones as well as goof-ups. But now he has to tell the country “all is well” with inflation. Briefing the Press on Friday on the new Wholesale Price Index, which has 2004-05 as its base year, he said: “There has been no attempt to construct these indexes in such a way that they look better. Unlike some countries, there is no dodging over here. You are not changing the index for figures to do better.” Well, one should hope so. In fact, he is completely right because even as the WPI for August 2010 stood at 8.5 per cent under the new index against 9.5 per cent in the old index, the opposite happened with food inflation, which shot up to 14.6 per cent.
That said, it is reasonable to query his conclusion that overall inflation will be down to 6 per cent by December. It might and, on the other hand, it might not. And even if it does, all it will mean is that prices are increasing at a slower rate but over a much higher base. So, for the common man, it means very little and for the not-so-common people, it means their investments are now eroding less rapidly. In the meantime, the Reserve Bank of India has increased its policy rates, thus inviting a gush of foreign money because of the arbitrage opportunity. This will increase money supply — the RBI has stopped intervening in the forex market to mop the surplus dollars — and therefore some amount of inflationary pressure. Net-net, therefore, there is only so much comfort to be had from the slowing down of the rate at which prices are rising because of a new and improved index. India is faced with a huge supply-side problem, which is causing prices to rise quickly. It produces much less than what it needs — witness the expected record trade deficit for this year, which it can ill afford.
This means that moderate to high inflation is now structural and until it comes down to about 3 per cent, because of hugely enhanced supply, only economists will throw their hats up in the air and let out whoops of joy. The rest of us will merely feel their wallets thinning...
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