Inflation, government and the people

The current phase of inflation seems to have undone much of the good that the UPA government created for itself through a “revolutionary budget” as Sonia Gandhi put it. The ‘Times of India’ describes this whole process as ‘pollonomics’. The government obviously wanted to showcase itself as a magnanimous organizing body which was compassionate enough to call of all the money which was due from the farmers, which was actually anyway lost, but calling it of at the most propitious time when elections are due would have resulted in electoral and political gain for the government. But now all that ‘good work’ (of a few weeks!!) may not ultimately give the government the edge that it needed for the next election. The BJP and CPI (M) are already threatening a nation wide agitation in second week of April if prices are not under control by then.

Whether the government will still win the election or not is a different matter, let us look at the phenomena of inflation that we are facing at the moment. First of all it is a global phenomenon; there is a jump in the food prices in the world market. Let us compare our inflation rate with the country we always like getting compared with for every reason, China. Currently China is growing at 11.4% and the inflation has hit a 12 year high of 8.7%, now that’s something to scream about, “inflation nearing 9%” almost sounds like “I have put on 20 kgs in one month and I have to lose the same in 15 days!” There is no doubt that bringing down the inflation rate from such a high rate not only takes a little time but it also affects the growth rate. We have already seen a drop in our economic growth rate to 8.7% from the high of 9.4% in 2007. Basically there is a clash between these two objectives of growth and maintaining price stability, but with both these figures going to their worse end we might have to face stagflation. Stagflation was a term employed by the supply side economists in the 70s, to describe the then existing economic crisis, and moreover they(supply side economists) held that these crisis had resulted because of neglecting aggregate supply in the economy and only focusing and framing demand managed polices which were advocated by Keynes. However, stagflation is not a properly defined term in economics, we know that when there is negative growth in two quarters continuously it is called recession, but there is no so such barometer which you plan plug in an economy and determine whether stagflation exists or not.

Now let’s look at the measures taken by the government to tackle the problem of inflation. First and foremost it must be mentioned that this problem will not be short-lived, as the latest report of the Asian Development Bank says that inflation will be a regular problem with the Asian countries. But the government undoubtedly has to do something for two reasons:

a) To ensure the welfare of the people

b) To win the next election (I can’t stop talking about it!)

So lets see what the government has done, first it has banned the exports of various commodities including rice, next it has abolished import duties to increase imports and increase supply of goods in the domestic market, then it has banned forward trading and recently it was reported that it is also taking measures to control prices of cement along with food articles by importing cement from Pakistan at Rs150-175 for a bag of 50 kg (it is sold at 225-240 in the northern states). Now all of these measures consist the supply side polices, along with that there are some monetary and fiscal polices also that he government might undertake, like increasing interest rates (it’s actually done by the RBI) tight money supply to prevent demand pull inflation and appropriate fiscal management. Apart from this the government also considers increasing food subsidies to bring about temporary stability in prices. However, while all these policies are being implement it is interesting to note that currently many countries are facing the problem of inflation, therefore they are also implementing similar such policies if not identical, what happens then?? If our government decides to ban exports and abolish import duties to increase supply, it can happen that other countries are doing a similar thing; Saudi Arabia is already implementing these policies. So how then does the government proceed with this problem? Im not saying this is happening per se at the moment, but currently with many countries facing a similar problem this is a theoretical possibility.

It is needless to say that the above policies will affect growth and in turn the stock market but this is inevitable, controlling inflation at the moment is of utmost importance, all the national newspapers can wait for a few months to write their favorite headline “Growth back on track” and “Sensex like never before”.

 

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Zone family……Education and Health

There has been an addition to the “zone” family in our country, now along with SEZ (special economic zone) EPZ (Export processing zone) the intended SAZ (Special agricultural zone, we will now have SDZ (Social development zone. The setting up of this zone comes as a response to the increasing questions and concerns about our educational and health systems. On the educational front, problems are present at every junction right from funding to quality of teachers to receptivity of students to infrastructure and many other things. Institutes of Higher learning have their own problems as well, as we recently read that IIT Bombay doesn’t have enough money to pay regular salaries to its professors and non teaching staff, they have requested for grants from the Central government of about 20 crores to meet all these expenses.

Apart from the IIT’s several other institutes for engineering also come under criticism from the HR managers of various firms, for example Infosys claims that till two years back they had to interview only 3 or 4 candidates everyday to find the correct profile for the job, today they have to interview nearly 14 to 15 people everyday. We all know that there has been a gap between the classroom and the industry, what is worrying is that this gap is now increasing at a faster pace.

Then comes the health sector, there are main parameters to judge the performance of this sector in our society. First, equitable access, low cost and good quality. The third factor is a requirement all over the world, but the first two are much more important in our country due to the increasing inequalities between people. Even in this case the problems exists in much severity at two different levels, the rural poor or for that matter even the urban poor have very little access to any proper medical treatment, infact their living conditions are so deplorable that they are duped by people who conduct the illegal business of selling kidneys by promising the donor a good amount of money in return.

At the higher level, it is estimated that in India all offices loose almost 14% of their working days on account of poor health of their employees. It was estimated by Indian council for research on International economic relations(ICRIER) that in 2006 India’s loss in GDP due to health hazards was almost $8.7 billion and if the existing situation persists then this loss can go up to $54 billion in 2015. Hence on recognizing these two major problems of education and health the government has come up with the SDZ as a tool to minimize this problem if not completely eliminate it. The details of this zone are not yet officially declared, let us wait and watch whether there is something in store for everybody!!