Prolonged inflation is dehumanizing - S.S.Tarapore

There is a strongly articulated viewpoint that inflation is a necessary concomitant of growth. The Indian economy has now been in the throes of inflation for the second year. In the ultimate crunch, proponents of growth have prevailed over the Common Persons fear of inflation. There have been many instances, in the past, when inflation has spun out of control but on each occasion decisive action has been taken to curb inflation, irrespective of the fall out of these anti- inflationary policies. In the recent period, however, there are strong underlying political economy pressures to ensure that nothing be done which would slowdown growth. The longer we defer slaying the dragon of inflation, the worse would be the eventual price which has to be paid for reining in inflation. Among the emerging market economies, ( EMEs), India was known for one of the lowest inflation rates. It is disconcerting that now India has one of the highest inflation rates among the EMEs. In contrast, those countries with historically high inflation rates have brought down their inflation rates. In India there is, at present, a powerful lobby that sees great merit in not countenancing any deceleration in growth, notwithstanding the devastation caused by inflation. Anyone advocating a conscious slowdown in growth is treated as a renegade who should be ostracized. We seem to be moving towards a society which upholds the Thrsymachus Principle that " justice is the interest of the stronger"( a viewpoint which is rejected in Plato's Republic) There is a strongly articulated viewpoint that inflation is a necessary concomitant of growth. Policymakers with impeccable credentials cogently argue that the objective is growth with price stability but many of these policymakers are not willing to recognize that some growth has to be sacrificed in the control of inflation. When a couple of years ago, the then US President George Bush attributed the world commodity inflation to the poor eating too much, there was an uproar. It is amazing how attitudes have changed. International Monetary Fund ( IMF) officials have argued that consumers should get used to paying more for food as demand is rising faster than output and that it will take years before production can be expanded to keep up with increased demand. Nearer home, in India, it is being argued, in official documents, that the policy of " financial inclusion" is the cause of inflation. For instance, it is argued that because of the Mahatma Gandhi National Rural Employment Guarantee Act ( MGNREGA) consumption has gone up thereby causing inflation. Inflation is attributable to the Common Person putting his money into circulation! There is also a viewpoint that inflation in primary articles, particularly food, is because the standard of living of the poorest segments going up. There is the ingenious argument that inflation is healthy as it reflects the improvement in the standard of living of the masses. It is now becoming the conventional wisdom that inflation is caused by the poor eating better. In this context it is argued that only vibrant growth can ensure that inflation would abate and any slowing down of growth would worsen the inflationary situation. This is like advocating sinning for a good cause! While Indian macroeconomic policy is not formally committed to " inflation targeting", traditionally, monetary- fiscal policy has all along emphasized the importance of a low " acceptable" rate of inflation. In policy pronouncements the " acceptable" rate of inflation for March 2011 has moved up from 5.5 per cent in April 2010 ( when the inflation rate was 11 per cent) to 8 per cent as we approach the end of March 2011. One recognizes the difficulties in conducting macroeconomic policies as extraneous developments in the global economy ( particularly crude oil) are contributing to the inflationary pressures. While there are no soft policy options, what the present policies portend is an acceleration and not a deceleration of inflation. It is unfortunate that the weakest segments, particularly in the interiors of the country, are unable to strongly articulate the imperative need to undertake a significant and enduring reduction in inflation. What is also of concern is that the urban and semi- urban poor are being hit by the all pervasive effects of inflation. Inflation is even hurting the articulate middle class and there are dangers of a serious social backlash. Now, what should be the response of the small saver in a scenario where inflation shows no sign of abating? There are two policy signals which need to be taken note of. First, policymakers have expressed the hope that lending rates will drop as inflation eases. Secondly, banks are temporarily offering relatively high rates of interest on fixed deposits, which for senior citizens is currently as high as 10 per cent for periods of 555 days. Small depositors would do well to quickly lock themselves into these relatively high deposit rates as these deposit rates are unlikely to continue beyond the end of March 2011. There would be strong pressures to reduce lending rates well before a significant reduction in inflation rates which will imply that deposit rates would fall in the very near future. In the present milieu, the small depositors would do well to immediately storm the deposit desks of banks. As the sage economist the late Professor P. R. Brahmananda has poignantly said: " Not caring about inflation is like going into battle not caring about the wounded, the dying and the dead." Such an approach is dehumanising.