Corruption and Inflation

It takes the likes of Anna to point out that inflation may not be simply a fiscal or monetary policy problem

India has been struggling with high inflation for almost three years. In our entire post independent history, we have not witnessed such sustained prevalence of broad based inflation which has been so persistent. It seemed initially confined to food products, especially pulses, eggs and poultry (the so called “protein inflation”), but very soon it spread to everything from industrial commodities, to fuel, sugar, and even to services like tuition fees, doctor’s bills or taxi fares.  The RBI has been trying vainly to contain inflationaryn expectations by tightening money supply, in the hope that less money in circulation will cause prices to dampen. But no such luck, as yet. The global recession, the downgrade of U.S. bonds, continuing unemployment in Europe and America, doesn’t seem to be reducing inflation in India. It took Anna Hazare to point out something obvious. If bribery is rampant, then the cash economy is not only flourishing, but expanding. It cannot be completely hidden or inscrutable, because the notes are printed by the RBI. The RBI’s own data shows that cash in circulation grew at an alarming rate which was 300 percent more than in previous years. This is called “cash leakage” by monetary economists. Cash leakage peaks whenever elections take place. The EC now insists that separate bank accounts be opened, to track candidate expenses. More than 8000 candidates stood for elections in 2009, for the fifteenth Lok Sabha. If you believe their filed expense statements, except for just four of them, nobody breached the expense ceiling of Rupees 40 lakhs. Most of them did not spend even half the permitted limit. But anecdotally, we know that a lot of illegal cash was flowing, nay overflowing, in the system.

Pune Mirror