It's Monetary Policy Review time again and, ahead of it, the media reports a full meeting of the ‘War Council' — the Prime Minister, the Finance Minister, their Economic Advisers, and the RBI Governor.
Not likely that any new ideas emerged and none was announced. But the key architects — the Prime Minister's Economic Adviser, Dr C. Rangarajan, and the central bank chief, Dr D. Subba Rao — have made their choice: they want to increase interest rates till inflation dies down — in fact, they don't seem averse to cutting growth to achieve this.
For, the goal clearly is to kill ‘evil inflation expectations' and encourage those of the ‘right' kind — ‘rational expectations'. (‘The RBI won't stop till inflation cools to its target level').
Shorn of the jargon, it means making businesses and consumers feeling less confident about the future — so less spending, and falling inflation.
But less spending on what? Food? Surely not. Armchair advice from desi , videshi and Indian expat economists is not in short supply. But it's obvious that, if not exactly, the situation bears recognisable resemblance to the old story of nine blind men describing an elephant.
Wage policies
In a sense, inflation is entrenched in the Government's own wage policies, which incorporate automatic cost-of-living adjustments. Inflation rises, so, pronto , do Government salaries. They are as far away from productivity link as one can imagine.
One desperately looks for a reference to this in official economic documents. The closest is the ritual advice found in the annual ‘Economic Surveys' and RBI reports on containing the fiscal deficit.
The truth is that the RBI ‘accommodates' Government's completely elastic wage expenditure and the two are in ‘collusion' in stimulating demand amidst their professed concern about inflation.
What about the private sector? Are its actions inflation-enhancing? Unlike in Government, there's a clear connect between wages and productivity.
The Chief Economic Adviser is right that wages have gone up but, therefore, wrong in his inflation attribution to wages. And Indian industry has little leeway in pricing, exposed as are most segments of it to domestic and global competition.
Price trends in consumer durables are generally soft and price increases are offset with more or less equivalent discounts. There's a pretty high degree of absorption of rising fuel and freight costs. No culprits here.
Key areas
Thus we are left with two major areas responsible for general inflation — energy and food. The former is a pass through, at the mercy of international prices.
The sub-10 per cent rise in overall food prices actually masks the high rate of increase in several individual categories, including necessities.
But will monetary policy do the trick of controlling food inflation? The fact is food inflation is less important in a rapidly-growing economy characterised by productivity-backed rapidly-growing incomes even in the bottom rungs of the population.
On the other hand, the net effect of policy-tightening may be eroding consumer and investment confidence, risking private sector job creation and the need to employ the massive additions to the labour force year after year.
What's required is razor-sharp focus on non-productive incomes, profits and activity, not the loose cannon of just increasing interest rates.
(The author is Chennai-based financial consultant.)