A K Bhattacharya: Why finance ministers fear inflation

NEW DELHI DIARY

Of the five years when Manmohan Singh was the finance minister, only in two years did the government manage to keep the average annual inflation rate below 10 per cent. The remaining three years were hit by an average annual inflation rate (based on the wholesale price index) of 13.7 per cent in 1991-92, 10.1 per cent in 1992-93 and 12.6 per cent in 1994-95.

Those who are now complaining about rising inflation will realise that Manmohan Singh, considered to be India's best finance minister, had not done too well in taming the inflation beast during his five-year tenure. Of course, his performance on the inflation front should not be compared with that of finance ministers succeeding him, because the challenges Dr Singh faced and the state of the economy he had to manage were several times more difficult than what his successors had to deal with.

Yet, a comparison should be useful. Manmohan Singh inherited an economy that had seen an inflation rate of 10.26 per cent in 1990-91. His first year in office (1991-92) saw the inflation rate rising to 13.7 per cent. But for the following two years, the inflation rate declined to 10.1 per cent in 1992-93 and 8.35 per cent in 1993-94. All the good work, however, got undone in the following year when the annual average inflation rate hit the 12.6 per cent level. His last year in office saw the inflation rate decline to 7.99 per cent.

So, when the Narasimha Rao-led Congress went to the elections in 1996, it did not have the courage to showcase economic reforms to project the government's achievements during the election campaign. In fact, economic reforms were held responsible for Congress' debacle in some of the state assembly elections held in the early 1990s, largely because politicians and the people believed that there was a causal connection between reforms and inflation.

The United Front governments, led by H D Deve Gowda and I K Gujral, had the same finance minister in P Chidambaram. The two years under this government "" 1996-97 and 1997-98 "" saw a sharp moderation in inflation to 4.6 per cent and 4.4 per cent, respectively. There is no doubt that the reforms initiated by Manmohan Singh and sustained by P Chidambaram helped to rein in inflation in those two years. But still no political leader mustered the courage of taking credit for this.

Came the Atal Bihari Vajpayee government in 1998, which had a long tenure of over six years "" which saw Yashwant Sinha as the finance minister for almost five years and Jaswant Singh for the remaining one year and a few months. It is not often realised that the National Democratic Alliance (NDA) regime saw relatively low inflation right through its tenure.

Take away the years of 1998-99, 2000-01 and 2003-04, when the inflation rate hovered between five and seven per cent, the NDA government kept the inflation rate well below four per cent. And in all the years when the average annual inflation rate was kept between 3.1 and 3.6 per cent, the finance minister was Yashwant Sinha. Indeed, Mr Sinha emerges as the best finance minister in the post-reforms era if finance ministers were to be judged by their ability to rein in inflation. In fact, since 1978-79, when the inflation rate was zero, Yashwant Sinha is the only finance minister who could keep the inflation rate below four per cent for three years,

P Chidambaram as the finance minister in the United Progressive Alliance (UPA) government also kept inflation at a fairly benign level "" ranging between 4.3 and 6.4 per cent. The final figures for the average annual inflation rate for 2007-08 is not yet out. But this may well be more than the 5.5 per cent that was earlier projected by the government. The UPA government's primary concern today is to bring down the inflation rate. Its leaders concede that rising inflation will severely damage the party's prospects in the general elections.

It is an irony that people cannot easily comprehend. If the economy does not do well and the inflation rate rises, all ruling party politicians pay a heavy price in the form of electoral defeats. But the reverse is not true. As the NDA experiment showed in 2004, its poll campaigners used the Vajpayee government's achievements on growth and moderate inflation for electoral gains, but failed.

The message for the finance ministers seems to be clear. Finance ministers are expected to ensure high growth, more jobs and low inflation. But it would be foolish to expect political dividends from such achievements. However, if the economy slows down, jobs are lost and the inflation rate rises, the finance minister and his party will have to pay the price. And this punishment can be really harsh, if the inflation rate starts inching towards the double-digit mark after staying below it for well over 13 years. That explains the current panic among the Congress leadership.