Unending Good News

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The present government has had the practice of having at least one performer on inflation. When P. Chidambaram was its finance minister and whenever inflation went up, he was wont to announce that it would come down. When he did not manage to bring it down and was taken out of the ministry, the vice-chairman of the Planning Commission assumed the duty. Now their mantle has devolved upon the new economic advisor, Kaushik Basu. He, however, gives some attention to statistics before he makes pronouncements. His latest is that inflation is going to come down, but that core inflation is going to go up. This is a nice spin on an old story. Those who had ceased to take his predecessors seriously may wonder if he really knows something.

Core inflation is a curious term; it means inflation in commodities other than food and fuel. One would have thought food and fuel were at the core of the housewife’s budget; but they are not important to economists. They want to distinguish between elements in inflation that might endure and those that are accidental. Food prices are subject to seasonal fluctuations as crops are harvested at discrete points. Fuel prices are in the hands of the government, which raises them at opportune times; opportunism has no calendar. So the chief economic adviser is right in talking about core inflation.

If he thinks that inflation is going to come down and core inflation will rise, he must think that non-core inflation is going to fall. Maybe he knows something about the government’s plans to reduce oil prices, but that is unlikely: the government is known for delaying price increases, but reducing prices would be out of its character. So it is likely that the CEA expects a bumper harvest to bring down agricultural prices. If so, he is being naïve. His government is notorious for buying up all foodgrains that are for sale, and driving prices up. It is true that it is sitting on 42 million tonnes of stocks, and is letting them rot in the open in the monsoon. But its appetite for hoarding is insatiable.

The CEA is known to have held the opinion that the procurement and distribution policy could be improved. He had then thought that the government hoarded too much and released too little, and was thus an important factor behind chronic food inflation. Perhaps he is now confident that he will be able to have his way, and that the government will become less greedy and more rational. If he is, more power to him.

But it is more likely that he can influence the weather gods than the government, and that he has negotiated a good monsoon with them. If so, they have been rather late in delivering on their promise; the monsoon till date has been mildly deficient. But the season is far from over; there is still time for him to lobby the gods and make sure that his prognostications are backed up by their action.

Although his predecessors never realised it, forecasting inflation is a mug’s game. India’s is an economy with unduly low inventories. High interest rates make stockholding expensive; and the government has no compunction about unleashing its police on traders if it disapproves of their holding inventories. India’s foreign trade is small, and its ports and airports congested; it cannot import commodities quickly in the event of shortage. So prices in this country are bound to be unstable and unpredictable. The only prediction that can be confidently made is that prices will go up inexorably, because the government makes sure they do. It keeps raising procurement prices, it ensures that the market does not hold large stocks, and it runs enormous fiscal deficits.

But while their direction is predictable, the timing of government actions is not. However much he may wish to follow in the footsteps of the former finance minister and the vice-chairman of the Planning Commission, there is no glory in predicting inflation; unless he is infallible, he can only lose reputation.

But, perhaps, that is too pessimistic. Maybe he has a direct line to the weather gods; and if they are amongst his close friends, other gods cannot be ruled out either. More likely, he has his own tools for economic forecasting that beat all previous models. Just because his worthy predecessors made fools of themselves does not mean that he does not know his business. If he thinks he does, he should by all means continue to make forecasts. For the test of a forecasting model is in its making true predictions. If he launches a series of perfect forecasts, he will win a widening circle of admirers — at least until he goes wrong.