An alternate model for economic governance?
Dec 13 2013
Lain Macleod would have agreed that stagflation is on India’s doorstep. Finance minister P Chidambaram, of course, would have been the first to dismiss it. He would just pointed to the Q1 GDP growth of 4.4 per cent, then the Q2 growth of 4.8 per cent. And then, as he usually does, would have said the next two quarters would be still better. All is well in the economy, he would have repeated for the nth time.
These numbers can cause an animated discussion among analysts and economists, but they mean little to the common man. All he knows is that his income has been shrinking by the day as a result of rising inflation. Industrialists worry that with virtually no growth in production, stagflation couldn’t be very far away.
With red flags up (UPA doesn’t see them) stressed industry leaders are ready to hit the panic button. Once again, they are postponing all key investment decisions for another day after the general elections. Exporters of engineering goods to gems and jewellery to low-value garments to leather products stare at order cancellation threats unless they give huge price discounts.
Drop in industrial output in the seven months from April, 11.24 per cent inflation in consumer prices in November, steep declines in core sector performance, plus moderating export growth are sure signals of the danger ahead. No one expects a revival of industry, they will be more than happy to see no further degeneration in the economic fundamentals.
What the latest macro-economic data do is demolish Chidambaram’s claims of green shoots emerging and that the economy could get only better from now on. The point is no finance minister can be seen to admit that things are bad — actually going from bad to worse. He can be trusted not speak negativism. Chidambaram is whistling in the dark.
Barring a firm projection of over 4 per cent growth in agriculture, there’s no visible sign of the economic fundamentals improving. Industrial activity is down and export performance tepid. Services, accounting for 56 per cent of our GDP, continue to grow in single digits. In the past they had led growth.
None would have imagined that vegetable prices would go up by 61.6 per cent in one month flat. Nor would have anyone expected milk, eggs, meat and fish prices to go up by 15-25 per cent every month.
For the first time, consumer price inflation has rattled C Rangarajan, who waged several battles against inflation in the past as RBI governor. He sees little hope unless onion prices are tackled effectively.
This brings us to how the government is handling the supply situation. The government admits food price inflation is due to supply constraints and lower output. It even allowed duty-free import of onions. This, when farmers in India’s western states are crying hoarse the prices of their onion produce have crashed to Rs 18 a kg because of over-supply. The story is repeated across foodgrain, vegetables, fruit, flowers, cereals, eggs, meat, fish and non-food items.
What’s puzzling is that there seems no shortage of these goods in the market. Yes, there is an occasional localised shortage. But the abundance of goods in the market demolishes the claims of supply constraints.
The ruling coalition now realises that high prices have done them in at the state assembly elections. So, will they do something about it now? Or, has the political establishment lost its will to do anything? They can’t blame the foreign hand any more. ICICI chairman Naina Lal Kidwai said the other day that both high prices and contraction in factory output were largely due to domestic factors.
Policymakers sit befuddled, not knowing what to do. Like the Aam Admi Party which promises an alternative form of political governance, will somebody come up with a alternative model of economic governance? Anybody who does that will deserve a Nobel.