Comment

As inflation hits the roof and the s*** hits the fan, the UPA government’s carefully-crafted pre-election gambit is unravelling. A few months down the line, few poor farmers may remember that their loans were written off, courtesy Sonia Gandhi. Unless there is a dramatic fall in prices, all they’ll remember is that inflation has made them substantially poorer.

The irony is that the UPA government has always been very careful about not repeating the mistakes of the NDA, especially the brag about India Shining. But it has not fought shy of claiming credit for the 9 per cent growth rate. The two are one and the same thing.

Our voters did not boot the NDA out merely because of the latter’s insensitive campaigning. They could see for themselves that some people were doing fine when they were not. You don’t need a slogan called India Shining to be envious of other people’s good fortune. You can see it and feel angry enough anyway. People know that even under the UPA, those rich folks are getting richer, never mind the official concern for the aam aadmi.

For starters, inflation is high precisely because of the UPA’s concern for, and obsessive fear of, the aam aadmi. The roots of this inflation lie partly in the massive social sector spending of the UPA government, and even more in the Left’s attempts to hobble the government in pursuing sensible economic policies.

When you spend crores of rupees on boondoggles like the national rural employment guarantee scheme — it needed to be done, but it has its consequences — the first impact is on wage-goods demand. The poor will spend any additional money they earn on food and essentials (wage-goods), thus contributing to price increases. When millions of poor people earn enough to spend more on the things they need, they will push prices up faster than if only a few rich people were living it up.

To this situation, one should add the Left’s foolish demands: that fuel prices should not be hiked, never mind how high global petro-goods may have risen. Between May 2004, and now, the international prices of crude have risen more than 200 per cent; in India, prices have risen by less than 40 per cent. And we are not talking kerosene and cooking gas here, but petrol, the rich man’s fuel. In the case of diesel, it’s even less. Many rich people drive diesel cars.

Now let’s see what the net result of selling oil at subsidised prices is. One immediate consequence is that inflation levels get understated. Another hazard is that people will not try to save fuel. And since fuel is subsidised in an era where automobiles are swamping the roads, we are essentially encouraging foolhardy consumption. Is it any surprise that citizens are spending hand over fist and the bull jumped over the moon?

Now consider what would have happened if the government had steadily passed on the full impact of the crude price hikes, protecting only the poorest of the poor. First, higher prices would have surfaced earlier, telling people that life will be tougher. Chidambaram would have got a bit less than his 9 per cent growth, but at least he would not be subsidising conspicuous consumption. The stock markets would have boomed a bit less loudly, but then they wouldn’t have crashed like they did this year, too.

In other words, if the UPA government had acted sensibly on oil prices, there was less chance of ‘irrational exuberance’ taking root in the economy or the markets. I suspect that both Manmohan Singh and P Chidambaram wanted to claim credit for the economic boom, and were thus hesitant to do anything to hinder it. With the Left tying their hands on reforms, that’s all they could claim credit for. They are now paying the price for their inability to stand up to the Left. The boom they did nothing to create is now ready to bite them in the butt in the form of unwelcome inflation. Foolish economics leads to undesirable political outcomes.

Email: r_jagannathan@dnaindia.net