Economists haven’t understood inflation

Discussions on the state of the economy have centred round inflation, growth and interest rates. The Government feels that inflation is inescapable with growth and that no growth is possible with high interest rates.

In other words, in our economic journey, we have to compromise on one factor to maximise or minimise another. Not necessarily. Through lateral thinking, two factors seemingly at odds can be simultaneously optimised.

Before delving into monetary governance, we can examine this postulate in action in another area, the automotive industry.

Despite proliferating models and massive volumes calling for large inventories, just in time (JIT) techniques have reduced material holding across the supply chain. World class quality is available at declining real costs.

The Alto/M800 price for instance, has compounded just 5 per cent annually, over three decades. There is a surge in every performance criterion and nobody asked for a compromise or trade-off between conflicting requirements such as price and quality or inventory with sales growth. What explains this?

The implementation strategy revolved around a comprehensive approach. Automotive majors that wished to set up or expand shop, understood that throwing money into their plant alone would not do. An entire ecosystem consisting of suppliers, subcontractors, dealers, et al had to be carried along to ensure that the weakest links would perform.

Land tracts were purchased to set up supplier parks as in the case of Rudrapur in Uttarakhand. Often, suppliers were given loans, crucial machinery, gauges, tools and even packing material. Software was provided for various applications ranging from design and quality to labelling and bar-coding. Dealers were trained, customers were educated, employees were compensated and even a used car market was structured.

Total productive maintenance (TPM), total quality management (TQM), six sigma and the like helped refine processes and there was a feverish effort to ensure that money and material flowed smoothly, end to end. GPS-fitted vehicles were monitored for clockwork deliveries.

What is the record of the Government in expediting monetary and economic flow across the country?

Taking the automotive industry again, Allahabad exactly bisects the country vertically and most investments were channelled to the western half. Five locations, namely the agglomerations of Chennai, Pune, NCR, Rudrapur and Bengaluru-Hosur, have got most of the investment. Unimaginative taxation, misdirected populist measures and over-concentration of investments in urban areas have impeded the smooth flow of money, material and anything else to the interior.

Income tax rates for citizens in Malabar Hill and Marathwada are identical. Ambani and aam aadmi living cheek by jowl have the same property tax rates.

Amma canteens serving highly subsidised food are cornered by those drawing dollar denominated salaries instead of the deprived. Tycoons, techies, tax and town planners, among others, have distorted the natural flow of wealth. Failure to allow resources to cascade in an orderly fashion to all levels and to remote areas has caused economic constipation and engendered inflation.

Not surprisingly, CRISIL has credited investment-centred Tamil Nadu with the most unequal development and Kerala, not exactly the hottest business-oriented FDI epicentre, as the state with the most equal development. Indeed, petro dollars channelled into housing in remote areas have helped in the distribution of prosperity.

House rent, school fees, domestic fuel and transport bills are all sources of pain impacting all, including food producers. High food prices are a consequence of inflation rather than the root cause.

Along with attracting investments, comprehensive plans should be launched to ensure that the fruits of liberalisation quickly reach the tail end of society.

Relying on the “trickle-down effect” has dammed the prosperity deluge upstream and growth cornered by a few has spurred inflation.

In these circumstances, the periodic drill on tweaking cash reserve ratios, statutory liquid ratios or bank rates by the RBI will have limited effect. Potatoes and papayas have not derailed the RBI’s objectives as much as myopic vision and tardy translation. If bicycles, buses and BMWs share the same lane, all will crawl.

The writer is an executive with a leading corporate. The views are personal

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