The problem is the people

Last week's third quarter review of the economy and the repo rate hikes by the Reserve Bank of India confirm the English-speaking, urban middle class' increasing acceptance of three broad but connected streams of perception: One, that GDP growth is not just climbing to the trajectory of the halcyon days of pre-September 2008 but is about the best in the world, a feature that makes India one of the most uniquely admirable economies in the world; second, inflation is at an “elevated” pitch and could derail growth, but the RBI is at the controls monitoring its intricate by-ways with cold efficiency; third, if inflation persists despite the RBI's best efforts, blame it on the way demand for non-cereal foods has outpaced supply.

Incomes, a freshly-minted argument goes, have risen even in the rural sector, because of enhanced minimum support prices and the NREGA that has put additional purchasing power in the hands of those who did not have any and who now add to the growing volume of demand that, in turn, pushes up prices of the most essential foodgrains.

OPTIMISM UNLEASHED

These three strands create their own sub-texts that have also insinuated their way into the popular discourse. One, GDP growth of around 8-9 per cent on the back of rising industrial output and services vindicates the government's cheery economic outlook about and aggressive authorship of, India's economic destiny.

So, despite all the mud that sticks to virtually every minister and the fact that just about a third of India's population has anything to do with GDP-led prosperity, India stands tall among a sea of countries sobbing at the sink, as the developed world copes with new financial skeletons tumbling out of their cupboards.

Second, the best option for inflation control is the stern hand of the RBI even if it admits that to a large extent, inflation is a consequence of shortages and “supply constraints” beyond its control (global prices and domestic incomes rising far ahead of supply) — and not the government's stasis or activity bereft of meaning.

Small wonder then that the moment price indices inch up, eyes turn towards the RBI and wise sages nod at the prospect of another rate hike, disregarding the fact that despite a year of such hikes, inflation still governs our lives.

Finally, the third subtext recently disseminated suggests rising incomes as both the consequence of rejuvenated growth (pioneered by the step-up in government expenditures and fiscal stimulus) and the cause of inflation.

RISING INCOMES HYPOTHESIS

The idea that rising incomes are responsible for food inflation is a perverse one; recall that the Bush administration blamed India's new-found prosperity to explain away the speculative rise in global food prices in 2008. Despite some righteous anger from New Delhi, the message seems to have wormed its way into the policymaker's psyche, for we now have them telling us that the very growth they are supposed to have piloted is to blame for the price rise.

Consider the argument for what it is worth. Could incomes have risen so extensively and steeply as to cause a shift in food habits enough to create persistent and double-digit spikes in food prices? That assumption would rest on the premise of growing and sustained employment across sectors, leading to an almost universal rise in incomes.

The available data do not bear out any large scale sustained employment in manufacturing over the magical period since 2004. The Arjun Dasgupta committee on employment showed that the informal economy accounted for more than 80 per cent of total employment and calculated that by 2017 more than 95 per cent of the workforce would find jobs in the unorganised sector, a trend almost endorsed by the findings of the Economic Census for 2005; more than 95 per cent of the total establishments employed less than five workers; a fraction, just 1.51 per cent of the firms had more than 10 workers, confirming the informal economy as the prime employer in India's manufacturing.

What about employment in the organised that is the registered industrial segment? First, it employs a tiny fraction of total workforce: but what kind of employment does it enjoy?

A study by the United States Labour Department (published in Monthly Labour Review May 2010) on India's organised sector production workers found the size of contract workers (with slimmer pay packages and few privileges) almost doubling, from 15 per cent to 28 per cent, between 1998 and 2005. If contract workers are becoming the fashion, then, clearly, employment in the organised sector is not what it is made up to be in the air-conditioned halls of seminar rooms.

And neither is the size of incomes enough to warrant a “demand pressure” on prices.

PERVERSE ARGUMENT

What about NREGA adding to purchasing power and inflation? According to official data in 2009-10, the scheme provided work for some 45 million that were out of any assured work for any time of the year, especially women.

The argument that the entry of the dispossessed into the food “market” causes supply problems surely casts doubt on the assiduously-built reputation of self-sufficiency in foodgrains, of surplus buffer stocks and of grain exports.

The RBI is worried about the build-up in “demand pressures” from higher wages for NREGA. When did the marginalised become akin to urban consumers that create overheated demand for real-estate, thus calling for monetary intervention? And what can be more perverse than the worry that higher pay for NREGA beneficiaries would stoke inflation?

Leave aside the suspicion that India's ruling elite has passionately embraced the notion of twisting reality or ignoring parts of it to conform to pet economic predilections. We are now led to believe that the villains are the people. For the UPA-2 dream merchants, reality must behave.