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BW Businessworld

From The Horse’s Mouth

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Ever since he came to power four years ago, the finance minister has adopted the role of the principal actor in the price drama. Whenever inflation went up, he would console the public and say that he would bring it down. Whenever it went down, he would attribute the fall to his own prowess. As late as on 2 May, when inflation went up to 7.57 per cent, he declared, “We will tame inflation; we will control food prices soon.”
The more he promised to bring it down, the higher did inflation go. The current bout of inflation tore Mr Chidambaram’s credibility to shreds. So it was a shock to hear his advisor, Shubhashis Gangopadhyay, say that inflation will remain above 10 per cent throughout this year. How could he so airily sweep aside the finance minister’s serious promises? How could he exhibit such impotence when his minister consistently showed overweening omnipotence? And when the advisor contradicts his minister, whom is one to believe?
The difference between the minister and his advisor is the difference between power and knowledge. The minister has power to order prices to climb down; or at least he thinks he has. To this end, he has reduced import duties and excise duties, and banned exports and forward trading. If he were judged by his efforts, he would come out with flying colours. Unfortunately, his efforts have to be judged against a single figure — the wholesale price index. And it has trumped him hands down. The more he struggled to curb inflation, the more it went up. Never has a minister huffed and puffed so hard with so little to show for it. One wonders whether inflation might not have been lower if he had left it alone. On the face of it, that sounds absurd. But by talking constantly about it, he kept it in the public eye; it could be argued that he helped build up inflationary expectations, and gave ammunition to those speculators whom he blames.
Dr Gangopadhyay must know his minister; after all, he occupies a room just down the corridor, and sees Mr Chidambaram perform far more frequently than the public would. Maybe he is resigned to the fact that his minister will, no doubt inadvertently, keep fanning inflation; maybe his pessimism about inflation only reflects his reading of Mr Chidamaram’s ill directed prowess. If that is so, the question arises: why did he stick his neck out and say inflation will be in double digits during this year? How can he be so sure that it will come down next year? That would perhaps be an incorrect reading of what he said. He was making a prediction only for this year; maybe he did not mean to imply anything for next year. Or maybe he was banking on the fact that a price rise raises inflation immediately and reduces it exactly a year later. For then the higher price enters the base, inflation is measured from a higher base, and all things being equal, it goes down. All things are seldom the same, so it would be rash to predict lower inflation solely on the basis of base effect. A minister can afford such rashness. His advisor, however, has his reputation as economist to protect, so he should be more cautious.
Predictions are a mug’s game, and economists generally keep away from them. What would be worth knowing from them is, why inflation went up so suddenly, why economists had no inkling of it, what are the factors behind it, and how they are likely to play out in the future. That is what one would expect from Dr Gangopadhyay. Perhaps, he is too much of an economist to stick his neck out. But someone in the finance ministry — someone other than the finance minister — should do a serious analysis and give the public an authoritative view of the current inflationary episode. The advisors are probably being asked for an explanation every time inflation goes up. Whatever they tell the minister, they should tell the public. At the least that will take some of the heat off the minister; with some luck, it may also contribute to a better understanding of the macroeconomic mechanism behind the inflation, and help in the formation of more realistic expectations.
If the minister’s advisors were in a mood to make a serious analysis and participate in a public discourse, one could put to them questions that might be beyond the minister’s understanding. For example, why does the finance ministry not use fiscal disinflation to reduce inflationary pressure? What impact can the Reserve Bank’s increases of 25 basis points in indicative rates have when the rates are 300 basis points below inflation? Why does the government not resort to market sales of foodgrains to bring down prices? The government should stop acting and start asking some questions.
(Businessworld Issue 15-21 July 2008)


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