The Inflation Menace

The politicians will give the issue attention for purely selfish motives; the RBI governor pledges to fight it; the common man suffers

A reality check: GDP growth has slowed down, fiscal deficit is running high, industrial production is as erratic as a teenager’s mood; in short, our economy is struggling. And it has been in this situation for a while and does not seem to be going anywhere. This enfeebled state has also affected the investment climate in the country.

Touted to be in lock-step with China in leading the global economy in this century, the elephant seems to be panting right out of the blocks. Our neighbourhood dragon has its own share of problems to be fair, but the sound of our trumpet has turned out to be a mere fizzle, at least till now.

True, the situation globally has been far from normal, or familiar for that matter. Everyone – from economists and investment professionals to the homo sapiens next door have been scratching their heads, trying to tend to an itch that does not seem to go away. And in today’s globalised world, like in a marriage, your partner’s problems become your own, without you having a say in the matter. But in the same breath, we have to admit that all fingers cannot point to the west when it comes down to finding reasons for our problems.

The old foe raises its head

Among the evils that plague our economy, an old foe has made its presence felt time and again. And it has little to do with the west. Actually, inflation is not necessarily a foe always. It depends on the state of an economy. For an up and coming nation with lots of (mostly young) consumers with lots of disposable income, the comfortable level of inflation is always higher compared to a developed nation not witnessing a spurt of people.

The comfortable level of inflation is usually determined by the central bank of a country. Beyond that acceptable level, deviation in either direction is detrimental to the economy. The Goldilocks principle applies here – neither too high nor too low, inflation must be just right. In India, the central bank does not explicitly target inflation. However, it still remains a key driver in determining the stance of its monetary policy.

There are two indicators of inflation which are popular in India – the WPI and the CPI. Wholesale Price Inflation, also referred to as ‘headline inflation’, is the older one of the two. Consumer Price Inflation has also been around for some time, but CPI (Combined), which is known as ‘retail inflation’ is relatively new, the series having begun in January 2011. The idea behind introducing the CPI was to address the non-representativeness of the WPI as a measure for common man, especially since services were not included in the calculation of the WPI.

Both these numbers, which are disclosed on a monthly frequency, were released recently as of January 2014. And for the second consecutive month, they have shown a decline in pace. But it can be considered as nothing more than a mere breather, given the past trend. As 2013 dawned, worries on inflation seemed less of a threat than in the past as both indicators showed nearly uniform decline. Until May 2013, that is. From June onwards, they rose up like a phoenix from the ashes and touched a peak in November 2013, with the CPI recording its lifetime high pace of 11.16%. This up-again-down-again movement has kept the central bankers up at night.

To be fair to them, the central bankers are between a rock and a hard place. With clouds of political ambition always ready to hail on them, they only have the defence of their independence umbrella to keep their good ambitions from being drained away. And then there is the pressure of market expectations. Like children at a birthday celebration, one is not obligated to listen to their demands (though they are not illegitimate all the time), but one would certainly do better without the kerfuffle it creates.

But among all this brouhaha, where is the common man?

Well, where else but nowhere. Where have we been all this while anyway? It doesn’t even matter, does it? We are always left holding on to our mangoes (as expected of a mango man) waiting for the proverbial white knight who will rescue us to utopia or a silver bullet which will take all the pain away.

The General Elections are right around the corner; the only time political ears remove their wax and lend an ear to the common man, even if only on paper. The battle lines have been drawn and the price rise issue is high on the agenda. No stone would be left unturned to swing the public sentiment in their favour, mostly by telling them how bad they will fare with the other camp in power.

At the central bank, the latter half of the last year saw a change of guard and some aggressive and unexpected moves on interest rates since then seem to be having the desired effect on inflation. Also, the Urjit Patel Committee, which was formed to revise and strengthen the monetary policy framework, recommended that inflation should be the nominal anchor for the same and CPI (combined) should be the metric.

But the central bank cannot be alone in this fight. In times past, central bankers serving in various capacities have maintained that there is only so much that they can do on their own. Without proper government support, this old foe will continue to run rampant and rain on the common man’s parade with unbridled zest. It is high time that the political establishment and the central bank work together to contain inflation’s swagger. This, in turn, will solve a lot of problems plaguing the economy, and help everyone breathe freely and put their energies to other uses.

The policies sitting in the manifestos, rotting away in a darkened alley somewhere need to be let out to play. Because the common man has had enough and it has shown in no uncertain terms that it is willing to ‘sweep’ away anyone that doesn’t deliver.

Divyansh Awasthi, Investment Analyst, Morningstar India