Column

Eight months ago, when the world was staring at the possibility of its second Great Depression, the uppermost thought in the minds of most governments was how to throw money at the problem and somehow avoid this fate. Today, that danger is gone. Short of showering money on people from helicopters, everything has been done to put cash in the hands of whoever seemed to need it.

Between last September and now, the scale of the global handouts has, by one reckoning, crossed $5 trillion — that’s five times as big as the entire Indian economy — just to avoid a repeat of 1929. In his last budget, finance minister Pranab Mukherjee quantified the cost of our own stimulus packages till date at Rs1,86,000 crore.

However, this understates the real stimulus provided. We have been in stimulus mode for the last five years, ever since the UPA formed the government in 2004. While the initial splurge was funded by high revenue growth, the last two years have been negotiated on steroids. If India has not suffered as much as the rest of the world in the current meltdown, it is because we had (unknowingly) primed the pump well in advance. Our stimuli have included not only the budget concessions since end-2008, but also the subsidies on fuel and fertilisers, apart from the farm loan waiver (Rs71,000 crore) and rural employment guarantee scheme (NREGS).

The costs of these stimuli — totally unrelated to the risk of deflation — are now showing up in the huge fiscal deficits (Rs4,00,000 crore this year), and suppressed inflation. Taking the fiscal deficit (the gap between government expenditures and revenues) and subsidies together, we are talking of nothing less than Rs5,00,000 crore of money being thrown at the economy this year alone.

With so much money chasing things to buy, especially food, is it any wonder we are on the threshold of high inflation? Predictions of 8% inflation by March, 2010, are already a dime a dozen. Every brokerage house is predicting it. But since inflation is led by soaring food prices — as seen in pulses and vegetables — we are also looking at significant political instability despite the huge mandate given to the UPA. Nothing upsets people as much as the prospect of seeing the value of their hard-earned money going down or having to pay more for their daily necessities.

India’s future inflation is going to be led by two factors — food and oil. The huge investments in rural welfare (from NREGS to loan waivers) have put more money in the hands of the poor and marginalised sections of society. They have used this to eat better. This is pushing up food prices significantly. Just as George Bush blamed India and China for global food price inflation, we can blame our own poor for the same evil.

The rising prices of global oil will only fan the fire. Oil is a force multiplier for inflation. When fuel prices zoom, they feed through to every sector of the economy. Since a lot of farm production depends on diesel pumpsets and road transportation, food costs will be both directly and indirectly impacted.

Unfortunately, there is no easy remedy for this. The only antidote to rising food prices is to grow more food or import more. The former is a long-term process since it means reducing dependency on the monsoons, increasing the irrigation potential and strengthening the supply chain of cold storages. The latter option — import of food — is often not possible. Whenever India enters the food import market, global prices shoot up anyway.

The prospect of higher inflation will make things difficult all around. Since the government won’t do much to rein in its spending, the Reserve Bank will try to damp down the fire by raising interest rates. This, in turn, will slow down economic growth and government revenues, creating a negative cycle. Recovery will take a while.

Whichever way we look at it, the only way we can come out of this mess is by looking at investing on the supply side: increasing food and other output, investing in infrastructure, et al. With agriculture likely to be blighted by sub-normal monsoons this year, the prognosis isn’t good. Get ready for a couple of years of slow growth with political turmoil.