Raghuram Rajan has played a dead bat in the latest RBI move. There is a lot of uncertainty and it is not at all clear that another turn of the interest rate screw will bring inflation down. There are rumours of a bear market in food grains and prices are supposed to be coming down. There is already an onion glut (Is the government buying and building up stocks for the next upturn in the prices?). But the inflation rate remains high.
Monetarists convinced the world that inflation everywhere was the result of too much money chasing too few goods. It seemed to them that the ‘too much money’ part was controllable since the monetary authorities were in charge. All one had to do was to ‘stop the printing presses’ as Milton Friedman taught us (For all his love of freedom, Milton Friedman was a firm believer in Central Bank action which Hayek never condoned). But as in all ‘laws’ of economics, there are ceteris paribus caveats. For one thing the money supply eluded a precise definition as we went from M0 to M1, and finally to M4. Elementary distinctions between money and credit had to be relearned.
But even so, there is the other blade of the scissors, as Alfred Marshall would say. Why not ask if there are
too few goods being chased by too much money? Is India’s inflation a supply-side problem as I have argued for sometime now? After all, it is the
UPA’s policy of constantly enhancing procurement prices despite overstocked warehouses and rotting grain dumps (farmers are a big vote bank). Plus, the tightening of rural labour markets by NREGA and other activities have pushed up costs and prices. Even after 66 years of Independence, India does not have a fully integrated market for food grains as there are some arcane restrictions of movements of food grains which would do justice to 18th century France—laissez faire, laissez passez was about letting food grains move without obstacles in the first place.
Away from food grains, the non-agricultural economy has been in doldrums. That, too, is more due to uncertainty than any structural issue. We will only know the true state of the economy perhaps three months after the general elections in 2014. If there is a change of party in power, there is a scope for a fundamental reordering of the Indian economy. The immediate logjam in infrastructure