Look who’s the villain

The markets have given him the thumbs-down; the critics think he has given up on reforms; and politicians are sure to bay for his blood. But P Chidambaram’s 2007-08 budget should be panned not for chickening out on reforms but for running away from the inflation battle. This dirty work now devolves on the Reserve Bank of India.

The essential message of this budget is that it is not going to let growth be affected by little things like price pressures. So while import duties have been cut and noises made about high cement prices, Chidambaram has ducked the question of deflating demand in an overheating economy. In fact, the high spends proposed on health, education, and rural projects in an election year will only stoke the fires of inflation.

With overall government expenditures set to rise by 17% in 2007-08, the extra money sloshing about in the economy is a tinder-box waiting for a match. This will force the central bank to push up interest rates further, setting the economy up for a hard landing next year. Chidambaram is asking RBI Governor YV Reddy to play villain.