That the UPA is fighting a losing war with inflation is now apparent – with WPI inflation remaining close to double-digits, and food inflation crossing double-digits on Thursday in a year of good monsoons. An important reason for this may be an oversupply of economists with the UPA – who have ended up confusing the markets with their cacophony of forecasts and prescriptions. This confusion is contributing to a climate of rising inflationary expectations.
Four economists – the Reserve Bank’s Duvvuri Subbarao, the Planning Commission’s Montek Singh Ahluwalia, the finance ministry’s Chief Economic Advisor (CEA) Kaushik Basu, and the PM’s Economic Advisory Council Chairman, C Rangarajan – have been holding forth on inflation as far as one can remember over the last two years. And they have all gone wrong consistently. They have been speaking in such a variety of voices and tones that the only sensible thing one can conclude is that they are not sure what to do. A government which has four top-class economists at the helm, and which is presided over by yet another PM-cum-economist, seems clueless about what to do about inflation. A glance at Friday’s newspaper headlines is instructive. Four days ahead of the next RBI monetary policy review, these are the statements coming from our eminent economists:
C Rangarajan: “We can see seasonal decline in November and December. It (inflation) is expected to come down to 7 percent by March-end,” reports Business Line Business Standard has Rangarajan castigating the RBI for taking baby steps in the past. “RBI took baby steps to contain inflation… aggressive policy earlier would have been a preferred policy alternative,” he said.
Montek Singh: BusinessLine paraphrases the Planning Commission Deputy Chairman’s statement thus: “The inflation rate is not likely to soften before November. In fact, it may start softening by December-end and may go below 8 percent only by March 2012.”
Kaushik Basu: In a recent interview to NDTV Profit, the chief economic advisor said he would put an outer limit of 9 percent for inflation in December. Three months ago, in July, he was telling us that he expected “inflation to come down to a little over 6 per cent by March 2012,” reported The Financial Express. He went further and said the government should try to target an inflation rate of 4 percent. In September, Basu wanted Subbarao to think “out of the box”, and consider a reduction in interest rates. “I believe that is something (reduction of interest rate) which ought to be considered.”
D Subbarao: In his September policy review, the RBI governor said: “Food inflation is at near-double-digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum, reflected in the de-seasonalised sequential monthly data, persists. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12.”
Pranab Mukherjee: The finance minister expects inflation to come down to 7 percent by year-end. His explanation for why it is still high? “The higher inflation is mainly due to the impact of global financial meltdown and certain domestic factors.” To sum up, we have one prediction of 6 percent by March-end, one of 7 percent and another of 8 percent – and an RBI governor preferring discretion on his exact rate expectations. And what is the chief cook, the economist-PM, saying about it all? Earlier this week he schmoozed with the other cooks – Subbarao, Montek and Rangarajan – to see if they could figure out where inflation was headed and what they could do about it. The Economic Times quoted him as saying this: “The purpose of that meeting was to explore ways and means of how we can bring about a moderation in the rate of inflation,” Manmohan Singh said.
Two conclusions can be drawn from this cacophony.
One, that the flurry of predictions and prognosis is adding to the confusion on where inflation will be. Of the four economists in action, only one of them is the RBI governor. But all the others have equal qualifications for the job, and what they say neutralises what the RBI chief is saying. While the PM and Rangarajan have been former RBI governors, the other two economists had (or still have) hopes of becoming one (Kaushik Basu and Montek Singh). In essence, the market is hearing four RBI governors (or potential governors) talking – not one – even without considering the PM and the finance minister. This is what is spooking inflationary expectations. As Kaushik Basu himself argues in a recent paper: “It is widely believed…that when a well-informed responsible government or quasi-government agency makes an inflation forecast that, in itself, can cause the course of inflation in the future to change. This is because, at least in the short run, the actual inflation rate depends, in part, on what people expect the inflation rate to be. Inflation can get worsened by the very fact of higher inflationary expectations and likewise prices can be stabilised, to a certain extent, by virtue of leading people to expect that prices will be stable.” Maybe this is why government economists have been trying to talk down inflation saying the WPI will fall to such-and-such level by such-and-such date. But talking down inflation is a double-edged sword: it works only if some of the predictions are borne out by reality. But this has demonstrably not been the case. In December last year (2010), Basu was predicting 6.5 percent inflation by March 2011. “I am hoping that we will end the year around 6.5 percent. It is a bit worse than what we had earlier expected but not too bad,” Basu had said. Actually, Mr Basu, since then it has only gotten worse and worse. So talking inflationary expectations down cannot work when you get your forecasts dead wrong. Maybe, it’s time to let Mr Subbarao be the sold voice on inflation? Two, there is still a strong possibility that all of them may continue to be wrong, given the sheer amount of potential inflation still left in the economy. Oil prices may have to be raised to reduce under-recoveries of Rs 1,20,000 crore for the marketing companies. Power tariffs have to be raised as distribution companies are reeling in losses. Coal prices have to be raised due to high payouts to workers and shortages. The government may have to borrow more given the number of companies coming for capital or bailouts (banks, Air India, etc). Then there is the shortfall in revenues and disinvestment proceeds. In short, the economy’s inflationary potential is still understated. When governments borrow excessively, rates rise, and inflation results. Maybe the economists should concentrate on reducing the voodoo element in UPA economics and let Subbarao deal with the nuancing of the anti-inflation message.
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