Now that the uncertainty about likely monetary steps is over, it is perhaps time to ponder over some more basic issues. One fundamental assumption underlying any discussion over the subject is that inflation is bad, particularly for the poor. Globally, the inflation hawks are often in the editorial pages of market fundamentalist publications like The Wall Street Journal and The Economist, not particularly noted for their concern for the poor. They also generally believe in the efficiency of markets and the rational expectations of economic agents resulting in pricing assets correctly, more generally in laissez-faire policies. This belief also extends to the external value of a currency, but not to its domestic value which is supposed to be kept stable by “manipulation” of money supply and/or interest rates. One wonders to what extent this stance is the result of their anxiety to protect the purchasing power of the savings of the rich. One traditional inflation hawk, the IMF, seems to be defecting from the ranks: in a co-authored paper, its chief economist Olivier Blanchard recently argued that central banks that target inflation should double the target to 4 per cent so that they have enough room to ease interest rates at the time of banking crises or recession!
The standard argument is that inflation is “good” for long-term growth. One wonders to what extent this view is still influenced by the hyperinflation of the 1920s in Germany, and the stagflation in much of the western world in the 1970s, after the sharp hike in oil prices. It is true that excessive increase in money supply can inflict enormous miseries on the people. At the other end is modern-day Japan with practically zero growth over two decades, and falling prices and nominal GDP, despite excessively loose monetary and fiscal polices, which clearly overturn all the conventional wisdom of macro-economics. Are Keynes’ “animal spirits” missing? Globalisation and the ever-changing, market-determined exchange rates have added another dimension to the domestic variables. An equally interesting puzzle for me is how Asian countries like China and Korea have far larger monetary aggregates as a proportion of nominal GDP than we do, but a consistently lower inflation rate.
Western economists talk of NAIRU (non-accelerating inflation rate of unemployment) for the desired level of unemployment. The idea is that a certain minimum unemployment is necessary if inflation is to remain low and stable — that is, policy should be aimed at keeping a few millions unemployed for the benefit of the rest of us. Higher inflation, growth and job creation would actually help the poorest in these countries. What we need is not NAIRU but GMROI, a growth maximising rate of inflation on a 10-year time horizon.
Tighter monetary policy is supposed to reduce inflation by curtailing demand. But, higher interest rates may well lead to lower investment, growth and jobs — in India, growth came down sharply for about five years after the tight money and high interest rates of 1995-96. In the US, the extremely high rates of 1979 led to a few years of recession in that country itself, and in large parts of the world, and a debt crisis in Latin America and Africa. Surely, a poor person would prefer a Rs 5,000 job with 10 per cent inflation to no jobs at 3 per cent inflation!
To turn to the inflation scenario in India, the basic cause remains food prices, which also influence non-food inflation through wages — directly through indexation or otherwise. (Global increase in commodity prices since the middle of 2009 is also a factor.) Higher food prices are a positive feature from a socio-economic perspective: They transfer purchasing power to the farm economy where per capita income is less than half that in the rest of the economy! The successive increases in the minimum support prices are surely aimed at increasing the prices the producer gets, to transfer income from India to Bharat. Again, many reports suggest that agricultural wages have gone up after the introduction of the NREGS, the UPA’s flagship programme. But surely, this means higher agricultural cost and, therefore, higher prices? Overall, we need to accept the need for food inflation, perhaps for some years. The real failure is in the criminal waste of food through lack of storage facilities and infrastructure, the hurdles in introducing more productive seeds, etc. (Something like a third of vegetables rot, and currently 18 million tonnes of grains purchased by the FCI are lying in the open!) Surely, domestic and foreign investments in organised retail are needed to reduce the yawning difference between what the producer gets and what the consumer pays, to substantially increase the monetary and managerial resources needed for building infrastructure — not just breast-beating on food prices!