Vivek Kaul
Abraham Maslow, a famous American psychologist said in 1966 that “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” This statement is also referred to as Maslow’s hammer or the golden hammer.
A very good example of this is the Congress party and its belief that giving out doles to the people of this country translates into electoral votes, something referred to as Sonianomics these days. In the recently concluded state assembly elections in Chhattisgarh, Delhi, Madhya Pradesh and Rajasthan, the party has been more or less wiped out.
After the results came it has been widely suggested that Sonianomics has stopped working. People are not influenced by only doles any more, they are looking for other things as well. As R Jagannathan, the editor of Firstpost, wrote in a recent column “The Congress defeat lies embedded in this hidden voter realisation that by getting freebies, the government may be robbing them of something else that may be dearer – self-respect, safety or faster job or income growth.”
But the question that crops up here is whether the Congress party is thinking along similar lines? Turns out, it isn’t. A report in the Daily News and Analysis details the thinking of the Congress party leaders after the election debacle. “They(i.e. the Congress leaders) put the blame on the government’s economic policies, which they said directly hit the party’s core constituency — the weaker sections — which deserted the party and voted for the BJP and the AAP. These leaders demanded the immediate reversal of economic reforms such as those which led to hikes in the prices of cooking gas and diesel. It was argued that price rise affected every family, and that unbridled inflation did the party in,” the report points out.
Yes unbridled inflation did the party in, but there is a lot more to this argument than just blaming the economic policies of the government to raise cooking gas and diesel prices.
The prices of cooking gas and diesel started to go up on a regular basis only in the recent past. And that was after the fiscal deficit of the government threatened to go way out of control. The oil marketing companies sell diesel, cooking gas and kerosene at a price at which they do not recover their full cost. The government compensates them for this under-recovery. Given this, its expenditure goes up, and thus pushes up the fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends.
Hence, the increase in price of cooking gas and diesel has added to inflation only in the recent past. But high inflation has been around for more than five years now. Ruchir Sharma author of Breakout Nations and the Head of Emerging Markets and Global Macro at Morgan Stanley explains this in a column in Financial Times. As he writes “With consumer prices rising at an average annual pace of 10 per cent during the past five years, India has never had inflation so high for so long nor at such an unlikely time…Historically, its inflation was lower than the emerging-market average, but it is now double the average. For decades India’s ranking among emerging markets by inflation rate had hovered in the mid-60s, but lately it has plunged to 142nd out of 153.”
So inflation clearly did not appear overnight. It has been around for a while. Its just that the Congress led UPA government failed to tackle it. Manmohan Singh even equalled inflation to a sign of prosperity. “This (inflation) is a reflection of demand exceeding supply, to some extent it is a sign of growing prosperity of the country,” he said in November 2011.
The main reason for inflation becoming a part of our daily lives is because the Congress led UPA government has been handling out doles, in trying to build a welfare state. As Sharma puts it “The government has let fuel and fertiliser subsidies spin out of control and has bought wheat and rice at artificially high prices to appease large farmers. It has been building an expansive welfare state, rather than pursuing reforms to boost productivity. The government has also been pushing up wages through, for example, measures to guarantee employment to rural workers. Over the past five years rural wages have been rising at an annual pace of 15 per cent – faster than productivity growth and higher than in any other Asian country.”
When income growth is faster than growth in productivity it inevitably leads to inflation. To put it in simple terms, more money chased the same number of goods and services, and this has led to sustained high inflation.
The government led by Manmohan Singh saw this as a cost of prosperity and chose to do nothing about. In fact, on the food front a lot of inflation was created by the government. The dole giving culture that the UPA has espoused has led to the government constantly increasing the minimum support price(MSP) that it pays to farmers for rice and wheat it buys from them.
As economist Surjit Bhalla put it in a recent column in The Indian Express “World food prices (FAO data) increased at an average compounded rate of 6.7 per cent per annum between 2004 and 2009; UPA procurement prices increased at an average rate of 9.9 per cent. Since 2009, in the last four years, international prices of food have risen 7.3 per cent; UPA 2 price increase per year — 9.3 per cent. The link between procurement prices and CPI is very strong theoretically and empirically…For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI.”
When the government keeps offering a high price for rice and wheat, a lot of it lands up in the godowns of the Food and Corporation of India, through which it procures food grains. This means that there is lesser rice and wheat in the open market, and thus pushes up prices there. One way of controlling this is to ensure that the government releases some rice and wheat in the open market from its stock. But that doesn’t seem to be the case.
As TK Arun writes in The Economic Times “The food minister has been overseeing a prolonged phase of food price inflation, from atop the largest hoard of grain in India’s history, touching 80 million tonnes (MT) when the buffer stocking norm called for only 31 MT. If only he had sold off large quantities of the grain locked up in government stocks fast enough in the open market, rice and wheat prices would not have gone up a steady 20% month after month, jacking up the price index.”
These are the real reasons behind the high inflationary scenario in the country. The dole oriented economics practised by the Congress led UPA is responsible for it. But the Congress leaders obviously can’t look at it that way. For them, it is a vote generating machine. Hence, they have chosen to blame the increase in price of diesel and cooking gas for the electoral debacle.
Given this, it is more than likely that whatever little economic reform has been done by the Congress led UPA government will take a backseat for the remaining part of their term. Sonianomics will make a comeback.
The article originally appeared on www.firstpost.com on December 11, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)