November CPI at 11.24: Here is why we have got those inflation blues

B. B. KINGVivek Kaul
Hey, Mr. President,
All your congressmen too,
You got me frustrated,
And I don’t know what to do

I’m trying to make a living,
I can’t save a cent,
It takes all of my money,
Just to eat and pay my rent

I got the blues,
Got those inflation blues

Or so go the lines of a song sung by the American blues musician BB King. (You can hear the complete song here). The United States and other parts of the Western world are currently going through an environment of very low inflation. But India definitely has got what King called the inflation blues.
The consumer price inflation(CPI) for the
month of November 2013 was at 11.24%. In comparison the number was at 10.17% in October 2013. Within CPI, the food inflation was at 14.72%. And within food inflation, vegetable prices rose by 61.6% and fruit prices rose by 15%, in comparison to November 2012.
The purchasing power of rupee has gone down. In simple terms, a rupee buys significantly lesser stuff than it did a year back. Or as King put it:
Now you take that paper dollar,
It’s only that in name,
The way that buck has shrunk,
It’s a lowdown dirty shame.
Why has this happened? In the first seven months of the current financial year i.e. the period between April 1, 2013 and October 31, 2013, the government of India spent around 99% more money than it earned. Yes, you read it right. During the period it earned Rs 4,64,123 crore and it spent Rs 9,22,009 crore, which is 98.7% more.
It has followed this practice, where it has spent much more than it has earned, over the last few years. This increase in spending has largely been account of government doles like a higher minimum support price being offered for rice and wheat being sold by farmers to the government.
These doles are being handed out to the citizens of this country, in the hope that they will continue to vote for Congress led United Progressive Alliance (UPA) government.
This excessive government spending has not been matched by an increase in production. This means, that an increased amount of money has been chasing a similar number of goods and services and that has led to higher prices i.e. inflation.
jhollawallahs who think they have their heart in the right place (and everyone else is a bourgeois) have often made the argument that the government is only spending money on the poor. This spending has led to rural wages rising at 15% per year, over the past five years. This is the fastest in Asia.
The trouble is that productivity has not risen at the same rate. Hence, the amount of goods and services being produced have not risen at the same rate as income. This, as explained earlier, has led to more money chasing the same number of goods and services, leading to high inflation.
And this hurts the poor the most. In fact, rural inflation for November 2013, stood at 11.74%, significantly higher than the urban inflation of 10.53%. What is worse is the fact that food inflation is close to 15% and vegetable prices have risen by greater than 60% in the last one year.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011). So, inflation hurts the poor the most. If that was not the case, the Congress party wouldn’t have lost the recent state assembly elections so badly. Yes, rural wages have gone up, but the question is whether they have gone up enough to compensate for higher prices?
A higher inflation also leads to the regular expenditure of people as a proportion of income going up. Given this, they need to cut down on expenditure on non essential items like consumer durables, cars etc, in order to ensure that they have enough money in their pockets to pay for food and other essentials. Or as King put it:
And things are going up and up and up and up,
And my cheque remains the same,
That’s why I got the blues,
Got those inflation blues.
This ultimately reflects in the index of industrial production(IIP), a measure of industrial activity.
For October 2013, IIP fell by 1.8% in comparison to the same period last year. If people are not buying as many things as they used to, there is no point in businesses producing them. This is reflected in the slowdown in manufacturing which forms 75% of the IIP. It fell by 2% in October 2013.
When we look at IIP from the use based point of view, the production of basic goods, which have most weight, fell by 1.6%. The production of consumer goods and consumer durables fell by 5.1% and 12% respectively.
All this ultimately leads to slower economic growth. Given this, if India needs to get back to the high economic growth rates of the past, it first needs to kill high inflation. But that is easier said than done.

The article originally appeared on on December 13, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Volcker rule may not rein in speculation in Wall Street

Wall-StreetVivek Kaul 
Various regulators in the United States working together managed to finalise the final version of the Volcker rule on December 10, 2013. The rule is named after the former Chairman of the Federal Reserve, Paul Volcker.
Volcker was the Chairman of the Federal Reserve between 1979 and 1987 and famously raised interest rates to close to 20% in order to kill double digit inflation.
Before understanding what the Volcker rule is, it is important to understand how banks used to operate till a few years back. Banks borrowed money through deposits at a certain rate of interest and lent it out as loans at a higher rate of interest. The difference between the two rates of interest was the money that a bank made. It was as simple as that.
But somewhere along the line, banks started to make one way speculative bets on financial assets using their own funds. These bets, referred to as proprietary trading, ballooned in the run up to the financial crisis. As Michael Bobelian writes on “Leading up to the financial crisis, proprietary trading, in which financial institutions invested their own funds, ballooned as it became more lucrative. Those riches also carried with them immense risks that nearly destroyed the financial sector in 2008.”
Paul Volcker suggested that banks whose deposits are insured by the Federal Deposit Insurance Corporation(FDIC) in the United States be prohibited from proprietary trading. The idea was to reduce the risk that it built into the financial system, leading to the government and the Federal Reserve having to come to rescue of all and sundry in the end. As Timothy Noah writes on “The rule’s overarching goal is to reduce the type of speculation by banks that contributed to the 2008 crisis.”
But there are certain exemptions that are allowed. Banks are allowed to function as market makers and buy financial securities to meet the demand from their customers. And this is where things start to get interesting.
As John Cassidy writes on “There are also exemptions for market-making, in which the banks build up sizable positions in all sorts of securities, supposedly with the sole intention of having enough on hand to meet the demands of clients and for hedging risks taken elsewhere in the firm. But how can any outsider know whether a given trading desk is buying tech stocks, for example, to anticipate customer demand or to wager on the Nasdaq going up?”
What does the Volcker rule have to say with regard to this? It allows banks to buy financial securities to meet “the reasonably expected near-term demands of clients, customers, or counterparties.” The phrase reasonably expected is not defined.
There are also certain situations in which proprietary trading is allowed. “It doesn’t apply to government bonds, including those issued by the federal mortgage agencies and by municipalities. If Goldman or Morgan Stanley want to short Treasury securities, or the city of Chicago, they can go right ahead. Also excluded from the restrictions are physical commodities, such as oil and gold,” writes Cassidy.
Interestingly, a major reason why a lot banks(both investment banks and normal banks) got into trouble around the time the financial crisis first broke out was the fact that they held some of the junkiest subprime mortgage backed securities on their own books, in the hope of making higher returns. These were essentially speculative bets on the housing market in the United States. Cassidy points out that the Volcker rule does not nothing to stop banks from making these bets.
Also, banks are allowed to enter certain trades that may look like proprietary trades, as long as they hedge their bets. But the question is can a differentiation always be made? Neil Irwin of The Washington Post explains this point in great detail on his blog.
Irwin takes the example of bank which has bought options betting that the value of the Brazilian real may fall against the dollar. The regulator may catch on to this and ask the bank “What is this!” you say. “You are speculating that the real will fall against the dollar. You know you aren’t allowed to speculate on currencies under the Volcker Rule.”
The banker though may have a perfect explanation for it, writes Irwin. “What are you talking about? I’m not speculating on the Brazilian currency! I have this huge loan that I made to a Brazilian construction company. And they make all their money in reals. So all I’m doing is guarding myself against the risk that the real falls, and I won’t get my loan repaid. This is reducing the risk that the bank faces, not increasing it!”
Lets understand this in a little more detail. Currently one dollar is worth around 2.34 Brazilian reais (plural of real). Lets say the bank gives a loan of $10 million to a Brazilian construction company. The construction company converts the dollars and gets 23.4 million reais in return.
Now lets say, by the time the loan is to be repaid one dollar is worth 5 Brazilian reais. In order to repay the $10 million, the Brazilian construction company will now need 50 million reais ($10 million x 5). It may not have that kind of money and may choose to default totally or partially. This will amount to a huge loss for the American bank.
But to take care of this loss the bank has hedged the loan by buying options. And the pay off from the options will make up for the loan losses. Given this, it will be difficult to differentiate between a speculative trade and a hedge in many cases.
One school of argument being currently put forward is that the Volcker rule is already having an impact, given that some of the biggest banks on the Wall Street have already closed down their proprietary trading divisions.
As Kevin Roose writes on “Goldman Sachs had an entire unit, Goldman Sachs Principal Strategies, designed for prop trading – essentially, betting the firm’s own money on stuff. It was closed, and most of its people moved to a private-equity firm. Morgan Stanley had a prop-trading unit with 60 employees. It got closed, too. So did the prop-trading divisions at Bank of America and Citigroup.”
The conspiracy theory, as a Wall Street veteran told me is that banks are “setting up their traders as “independent” hedge funds.” If this turns out to be true, the overall riskiness of the financial system is unlikely to come down.
To conclude, time will tell how successful the Volcker rule will turn out to be. It might succeed in the short run, but I am doubtful whether it will succeed in the long term. It is worth remembering that the best brains work for the Wall Street, and they will find a way around it.
The article originally appeared on on December 12, 2013 

 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

'Most stimulus packages have been far too small'

Vivek Kaul

Tim Harford is a senior columnist for the 
Financial Times. His long-running column, “The Undercover Economist”, reveals the economic ideas behind everyday experiences. Tim’s first book, “The Undercover Economist” has sold one million copies worldwide in almost 30 languages. He is also the author of “The Logic of Life“, “Dear Undercover Economist”, “Adapt” and most recently “The Undercover Economist Strikes Back.” In this free-wheeling interview to Forbes India, Tim discusses the ideas he explores in his latest book The Undercover Economist Strikes Back, from why he feels that stimulus packages to revive the sagging economies in the Western world have been far too small to why money does buy happiness to why Henry Ford was the man who invented unemployment.
One of the most interesting parts of your book is where you talk about the baby sitting recession. What is that all about?
The babysitting recession was first discussed in an article published by Joan and Richard Sweeney in the 1970s, but it has been made famous by Paul Krugman. There was a babysitting co-op in Capitol Hill, Washington DC, that suffered a severe and lasting depression. Couples would keep track of who was babysitting for whom by exchanging babysitting tokens; however, there weren’t enough tokens in the economy. Almost everybody wanted to babysit for other people, accumulating a few more tokens, as a reserve, before they spent any tokens themselves. But of course the arithmetic does not work: somebody has to go out or this no economy at all.
So what drew you this example?
A number of things are interesting about this example – notably that a total economic breakdown could be fixed by a simple policy tweak: printing more tokens. (Paul Krugman has more recently tended not to mention the end of the story: the co-op printed too many tokens and ended up suffering from a serious inflation problem. But that is more of an interesting sting in the tale than a refutation of the entire example.) In The Undercover Economist Strikes Back I use the babysitting recession as a nice simple example of a Keynesian recession; in a Keynesian recession there is some dysfunction in the way the economy works, a dysfunction that can be fixed by governments printing money or perhaps borrowing and spending money. Some commentators believe Keynesian recessions are logically impossible; this is nonsense and it is nice to have a simple counter-example.
Another interesting part is about the prison camp recession. What is that all about?
The prison-camp I talk about was in Germany during the Second World War. The economic activity in the camp – a bit of production, but mostly trading items sent to prisoners by the Red Cross – was analysed in a quite brilliant article by one of the prisoners, Robert Radford, who published his findings a few months after the war ended.
And what did Radford find?
The prison camp is almost the perfect counter-weight to the baby-sitting co-op. Trade in the prison camp worked amazingly well. There were well-understood prices and middlemen ensuring that prices in different parts of the camp tended to converge to similar levels. At one stage, coffee was worth more outside the camp in the cafes of Munich than it was inside the camp, that meant gains from trade, and coffee began to go “over the wall” – the prison camp had an export trade! Despite various attempts from the senior officers to regulate trade and particularly to fix prices at levels they regarded as fair, prices were flexible and refused to respect any social or ethical conceptions of the “just price”. This was close to a perfect market. And yet… and yet the prisoners nearly starved to death.
Oh, why was that?
Why they starved is not hard to understand. The parcels from the Red Cross began to dry up as the war progressed. Food and cigarettes both became scarce. In the last, desperate days, there were few goods and prices fluctuated wildly. Finally the US Army arrived and liberated the prisoners.
But what does all this have to do with a modern economy?
The point is that there are two conceptions of what a recession really is. One conception is Keynesian, like the babysitting co-op: some internal malfunction that needs fixing. But another conception is Classical: that economies fluctuate not because of anything wrong within the economic system itself, but because of policy errors or external shocks. Of course the prison camp is an extreme example of a recession caused by an external shock, but modern economies are subject to technological changes, fluctuations in the price of basic commodities, and of course financial shocks from a banking crisis.
Where do the baby sitting recession and the prison camp recession meet? What are the policy lessons one can draw from them?
A Keynesian, baby-sitting co-op recession invites a role for government intervention – most famously through fiscal policy (cutting taxes or boosting spending) but also through monetary policy (cutting interest rates or even printing new money). A Classical, prison-camp recession invites a more fatalistic response: there’s nothing the government can do to make things better, and plenty of things it can do to make things worse. The huge argument that has raged in many economies about fiscal stimulus versus austerity is really a debate about whether recent recessions have been mostly Keynesian, or mostly Classical. If Classical, then austerity is the right response: we’re poorer and we need to get used to it. If Keynesian, then fiscal stimulus is the right response: we’re only poorer if the government gives up and allows us to be!
So are the recent recessions Keynesian or Classical?
In a book you can give black-and-white examples and in life, nothing is black and white. But in my view the recent recessions have been at least partially Keynesian and governments – especially in the UK and US, where they had a choice – should have postponed austerity measures.
The western world has been running stimulus programmes. Do they really work?
It’s interesting that this is your perception. I think most stimulus packages have been far too small – although the US has at least tried. The evidence on such things is always tricky because macroeconomists (unlike microeconomists) cannot run controlled trials. But we can try our best.
Can you elaborate on that?
The International Monetary Fund at first estimated a modest effect from fiscal stimulus – that is, government spending does make the economy larger in the short run, but only a bit. But the Fund later recanted and argued that in the recent recession, fiscal stimulus was far more effective than they’d believed at first.
Let’s assume this is correct (I think it is). How did the Fund make their original mistake? The problem was that they were looking at historical evidence on stimulus spending, and the historical evidence incorporated much milder recessions in which monetary policy was a good alternative to fiscal stimulus. Those mild recessions weren’t a good guide to recent experience, alas.
What is the best way to make a stimulus work?
As for how to make stimulus work, I argue in my book that the best bet is advanced planning: governments should have a list of well-planned infrastructure projects, and should accelerate those plans in case of a downturn. That way, we carry out the investment we were intending to anyway, but at a time when it will have nice macroeconomic side-effects.
Economists have been criticised for having too much faith in GDP growth. Even Simon Kuznets, the man who invented GDP never saw it as a measure of welfare. You write that “they rely on the popular misconception that much of what is wrong with the way the economy is organised is wrong because we collect GDP statistics, and that the way to fix our economic problems is to measure something else. I think that is a mistake”. Why is that a mistake?
Because it isn’t the measuring of GDP that has caused the problems. We had economic growth – and inequality, environmental degradation and other problems – long before we could measure it. Of course there are thoughtful critics of GDP who suggest additional things we could measure, or ways to make GDP a better measure of economic activity. But the more radical critics seem to assume that our economy is organised the way it is because some sinister force is trying maximise GDP. And that’s just crazy.
A lot of recent thinking talks about happy economics (or what you call happynomics). Does money buy happiness?
Money does buy happiness, it seems – or at least having more money, within a particular society, is correlated with being happier (or rather, with telling surveyors that you are more satisfied with your life). The big contested question in happynomics is whether that’s also true across countries: so, is a richer country such as the US happier than a poorer country such as India?
Is that the case?
Early research from Richard Easterlin suggested that richer countries aren’t happier – hence the phrase “the Easterlin Paradox”: if money buys happiness for individuals but not for countries which are collections of individuals, what’s going on? Two possible explanations: one is that what really counts is relative income. Indians compare themselves to other Indians; Americans compare themselves to other Americans. If Americans compared themselves to Indians they’d feel rich and would be happier. But they don’t, so they don’t. An alternative explanation – favoured by economists Justin Wolfers and Betsey Stevenson – is that Easterlin is just wrong: at the time of his research, the data were of poor quality. Now we have better quality data and we see that money is correlated with happiness both across and within countries. It will be interesting to see this debate play out.
Can economic growth carry on forever?
In principle, yes. Quite a few environmentalists and physicists have pointed out that the planet simply cannot support exponential growth – sooner or later (and, with exponential growth, sooner than we think) we will reach environmental limits.
You don’t buy that?
I regard myself as an environmentalist myself but I think this is just a simple conceptual error. Of course we cannot continue to use more resources or energy at an exponential rate. But economic growth is just growth in the market value of output. So it can continue forever – at least in principle. There are already signs that energy growth is being decoupled from economic growth: in countries such as the UK, the US, Germany and Japan, energy consumption per capita has been falling for a long time now. Population growth is also low or negative in many rich countries. I believe that we need to focus on practical environmental questions – for instance, how to reduce carbon dioxide emissions now – rather than these very abstract concerns about exponentiation.
One of things that you write about India is that “there simply isn’t enough money in India yet for it to be unequal”. What do you mean by that? Do you see it changing in the years to come?
The World Bank economist Branko Milanovic has this idea of the “inequality possibility frontier”. Imagine an extremely poor subsistence society. Then imagine some class of plutocrats, who somehow confiscate wealth and spend it themselves. How much can they take? The answer is: not much if the society is to survive, because the poor cannot dip below the average income because the average income is barely enough to keep you alive. Now imagine a much richer society. This, in principle, could be far more unequal because the poor could still survive on a tiny fraction of the average income. Milanovic and co-authors were interested not only in how unequal a society is, but how unequal it is relative to how unequal it could possibly be. My point was that despite important gains over the past twenty years, India is still a very poor society. There’s a limit to how unequal it can get until it gets richer – which should make us worry about the inequality we do see.
Why was Henry Ford the man who invented unemployment?
Ah yes, this is one of my claims – and I should say that it’s an exaggeration, of course. But here’s the puzzle: Henry Ford of the Ford Motor Company raised wages at his factory to such a level that men were queuing round the block for jobs, being hosed down by police in a sub-zero Chicago January. Why have such high wages? Why not cut them and save money, given how much demand there was for jobs?
The idea here is “efficiency wages” – that it can be efficient for an employer to pay well above the market rate because it gives him the pick of applicants, and a fiercely loyal group of workers who will do almost anything to keep their jobs. And of course, that describes many – perhaps most – jobs in the formal sector today. That means, in turn, that we’ll always have unemployment, not because of some macroeconomic slump, but because individual profit-maximising companies prefer efficiency wages.
You quote a lot of John Maynard Keynes all through the book. One of the things you quote in the last chapter is “the master economist must posses a rare combination of gifts…He must be a mathematician, historian, statesmen – in some degree….” Do you see that in current day economists?
Not enough. But that challenge is what makes economics such a marvellous subject to study. Everything is there in the subject, waiting to challenge us. Despite all the difficulties, economic remains a wonderfully important and rich topic to explore – and it’s still a great time to be an economist.
The interview originally appeared in the Forbes India magazine dated December 13, 2013

The curious case of Mr Jain

prashant jainVivek Kaul

 Sometime in late October I went to meet my investment advisor. During the course of our discussion he suggested that my portfolio was skewed towards HDFC Mutual Fund and it would be a good idea to move some money out of it, into other funds.
Don’t put all your eggs in one basket” is an old investment adage. While, I try to follow it, I also like to believe that if the basket is good enough, it makes sense to put more eggs in that basket than other baskets.
HDFC Mutual Fund has been one of the few consistent performers in the Indian mutual fund space. And a major reason for the same has been Prashant Jain, the chief investment officer of the fund, who has been with it for nearly two decades.
Jain has been a star performer and due to his reputation the fund has seen a huge inflow of money into its various schemes. Some of these schemes HDFC Prudence, HDFC Equity and HDFC Top 200 became very big in that process.
These schemes haven’t done very well over the last three years. Their performance has been significantly worse in comparison to other schemes in their respective categories(
Value Research has downgraded them to three star funds from being five star funds earlier). And this has surprised many people. “How can Prashant Jain not perform?” is a question close observers of the mutual fund industry in India have been asking.
One explanation that people seem to have come up with is the fact that the size of the schemes have become big, making it difficult for Jain to generate significant return. This is a theory that is globally accepted, where the size of a scheme is believed to be inversely proportional to the return it generates.
As Jason Zweig points out in the commentary to Benjamin Graham’s all time investment classic, 
The Intelligent Investor, “As a (mutual) fund grows, it fees become more lucrative – making its managers reluctant to rock the boat. The very risk that managers took to generate their initial high returns could now drive the investors away — and jeopardise all that fee income. So the biggest funds resemble a herd of identical and overfed sheep, all moving in sluggish lockstep, all saying “Baaaa” at the same time.”
While this may be a reason for the underperformance of the schemes managed by Jain, it is not easy to prove this conclusively. Jain feels there is no correlation between size and performance of a scheme, or so he told the 
Forbes India magazine in a recent interview. He pointed out that there are no large mutual fund schemes in India, and the largest scheme is less than 0.2% of the market capitalisation, which I guess is a fair point to make.
So how does one explain the fact that Prashant Jain is not doing as well as he used to in the past. John Allen Paulos possibly has an explanation for it in his book 
A Mathematician Plays the Stock Market. As he writes “A different argument points out to the near certainty of some stocks, funds, or analysts doing well over an extended period of time.”
Paulos offers an interesting thought experiment to make his point. As he writes “Of 1000 stocks (or funds or analysts), for example, roughly 500 might be expected to outperform the market next year simply by chance, say by the flipping of a coin. Of these 500, roughly 250 might be expected to do well for a second year. And of these 250, roughly 125 might be expected to continue the pattern, doing well three years in a row simply by chance. Iterating in this way, we might reasonably expect there to be a stock (or fund or analyst) among the thousand that does well for ten consecutive years by chance alone.”
But one day this winning streak comes to an end. And the same seems to have happened to Prashant Jain. In fact, William Miller who ran the Legg Mason Value Trust fund in the United States, beat the broader market every year from 1991 to 2005. In 2006, his luck finally ran out. Miller once explained his winning streak by saying “As for the so-called streak…We’ve been lucky. Well, maybe it’s not 100% luck—maybe 95% luck.”
If Miller was lucky so was Jain. Any significant deviation from the norm does not last forever. As Nassim Nicholas Taleb writes in 
Fooled by Randomness “In real life, the larger the deviation from the norm, the larger the probability of it coming from luck rather than skills…The “reversion” for the large outliers is what has been observed in history and explained as regression to the mean. Note the larger the deviation, the more important its effect.”
This is not to suggest that Jain’s performance has only been because of luck. Not at all. But it was luck that pushed him up to the top of the charts. Luck was the “icing” on the cake.
Michael Mauboussin discusses a very interesting concept called the paradox of skill in his book 
The Success Equation – Untangling Skill and Luck in Business, Sports, and Investing. “As skill improves, performance becomes more consistent, and therefore luck becomes more important,” is how Mauboussin defines the paradox of skill.
The Olympic marathon is a very good example of the same. Men run the race today about 26 minutes faster than they did 80 years back. Also, in 1932, the difference between the man who won the race and the man who came in twentieth was 40 minutes. Now its less than 10 minutes.
Now the question is h
ow does this apply to investing? “As the market is filled with participants who are smart and have access to information and computing power, the variance of skill will decline. That means that stock price changes will be random and those investors who beat the market can chalk up their success to luck. And the evidence shows that the variance in mutual fund returns has shrunk over the past 60 years, just as the paradox of skill would suggest,” says Mauboussin. “I want to be clear that I believe that differential skill in investing remains, and that I don’t believe that all results are from randomness. But there’s little doubt that markets are highly competitive and that the basic sketch of the paradox of skill applies,” he adds.
And that is what best explains the curious case of Prashant Jain and the recent non performance of the mutual fund schemes that he manages.
The column originally appeared in the Wealth Insight magazine edition of December, 2013 

(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek) 

As Congress looks for scapegoats, is more Sonianomics on its way?

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.
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 on December 11, 2013 

 (Vivek Kaul is a writer. He tweets @kaul_vivek)