No, Mr Chidambaram, there’s no such thing as ‘good inflation’

With a ‘to let’ sign hanging outside the office of the Finance Minister, a succession of UPA leaders and technocrats have injected themselves into the public domain with their prescriptions on economic policymaking. From Manmohan Singh to Jairam Ramesh to Anand Sharma to Montek Singh Ahluwalia to C Rangarajan, everyone appears to have suddenly woken up to the precise policy action that is necessary to revive the economy.

To that chorus, Home Minister P Chidambaram, who has signalled often enough that he longs to be back in the Finance Ministry, has now added his voice. Speculation abounds that Chidambaram may, in fact, return to the job he evidently covets, although the list of potential candidates for that post so recently vacated by Pranab Mukherjee is long – even after Ahluwalia effectively ruled himself out.

Perhaps getting a multiplicity of voices in is the government’s way of signalling that it is, contrary to accusations that it has long been asleep at the wheel, seized of the gravity of the economic slowdown. Perhaps having Ministers like Chidambaram, who are perceived as being market-friendly, weigh in is on economic policymaking is intended to calm foreign investors’ nerves that have in recent times been shot to pieces.

But almost as soon as he opened his mouth, Chidambaram has inflamed middle class feelings by claiming that they were perhaps protesting a little too much about inflation.

“When the urban middle class can buy a bottle of mineral water for Rs 15 and icecream for Rs 20, why do they make so much noise about rise of Re 1 in the price of wheat and rice?” Chidambaram wondered.

He also suggested that the chattering classes should not complain about inflation because, in any case, the “poor farmers” were benefiting from higher foodgrain procurement prices.

“The rise has directly benefited farmers. There needn’t be any complaint for price rise when things are on the side of poor farmers,” Chidambaram said.

Chidambaram has since said that he was disgusted that his “matter-of-fact statement” had been “distorted” to make it appear that he had “chided” the middle class. That came after the Opposition parties pounced on his remarks and suggested that he was making light of middle class angst over soaring inflation.

That is a polemical argument best left to political parties, but even if one doesn’t attach a value bias to  Chidambaram’s comments – and take him at his word that he didn’t intend to criticise anyone – they are off-base on other grounds as well.

Chidambaram’s remarks reek of ‘false economics’ insofar as he fails to make the distinction between rise in prices of discretionary purchases such as “mineral water and ice cream” – where a family can always cut back on when it feels the pinch – and non-discretionary spending – such as those on wheat and rice. Additionally, spending on rice and wheat is of a recurrent nature, unlike one-time or occasional purchases like those on the presumed ‘luxury goods’ that Chidambaram cites.

Chidambaram’s suggestion that the middle class should be more accepting of price rise of foodgrains because they benefit the “poor farmer” is also self-serving. He appears to suggest that this is ‘good inflation’ because it redistributes wealth from the ‘urban middle class’ to the bottom of the pyramid. But there’s no such thing as ‘good inflation’, and in fact, there’s compelling evidence to suggest that raising procurement prices of foodgrains sky-high (in the way that the UPA government recently did) only stokes high inflation – which, like the quality of mercy, is not strained: it hurts the poor as much (and perhaps more).

Hiking procurement prices excessively sets off a chain reaction, which works its way through the economy and pushes up all other prices. Food prices go up, which leads to an increase in wages, which in turn pushes up in costs – and output prices. In that sense, inflation is truly “secular”: it hurts everyone, but it hurts the poor rather more.

Even the alibi that Chidambaram trots out in defence of price rise – that it benefits the “poor farmer” – is disingenuous. As economist Surjit S Bhalla points out, “politicians… often cite statistics on hunger and poverty in rural India as justification for hiking procurement prices. But it really is kulak favouritism of the worst kind. In 2009, there were approximately 107 million farmers, and an equal amount of poor, landless, rural workers. The former benefit hugely from price rises, and the latter lose equally hugely. And the latter, being poorer, lose more from inflation. But the weight of their votes is less.”

The UPA government has frequently cited international commodity prices, and even money supply growth in India, as the reasons for high and persistent inflation. But as Bhalla’s research establishes, high inflation in India cannot be attributed to these factors. High inflation in India owes largely to the “populist, Machiavellian re-election vote-bank policies of the Congress”, particularly in the cynical manner in which it pushes up foodgrain procurement prices come election time.

Even if he wasn’t criticising the middle class, it really is no wonder that Chidambaram doesn’t want us to talk about it.

(curtsey : first post)

Rupesh Yatesh Dalal
Head Research Department

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