Economic sacrifices at the political altar

Jan 20 2014, 09:40 IST
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SummaryWhile management education imparts good micro skills to students, what they lack is clear understanding of the macroeconomy. Considering Indias current economic issues, this is an area that needs immediate attention

Indisputably, the most pressing problem before the Indian economy currently is inflationary recession, which inflicts maximum pains on the majority population. Problems like twin deficits, volatile currency and dwindling forex reserves dont directly concern the man on the street, but are the priority. Mass poverty, corruption, income inequality, lack of infrastructure, rural neglect, etc, are chronic problems we have got so used to that we have accepted them forever. All these are economic sacrifices made at the political altar.

Inflationary recession actually began a couple of years ago. With primary articles shortages, the hike in their prices spread to other sectors; subsequently, the overdue oil price deregulation started raising fuel prices, entering most manufactured goods inflation. MGNREGA outlay was raised, raising rural folks purchasing power. With inflation quickly spreading to all sectors, RBI started raising rates and costlier finances put upward pressure on all prices. Monetary tightening did not help reduce inflation because inflation-indexation of wages ensured wage hikes in excess of inflation, and price-inelastic demand did not budge, nor market-supply improved. But the monetary tightening threw a wet blanket on producers, thereby dampening investments, hence output and job creation, putting India into recession.

Macroeconomic policymaking is a tightrope walk with trade-offs between various policy objectives. For instance, output and employment are usually sacrificed by fiscal and monetary tightening used in combating high inflation. Assumption here is: at least inflation will fall thereafter. If it doesnt, then something is wrong somewhere. Quantity theory of money indicating that inflation is always a monetary phenomenon is true in advanced economies wherein beyond full employment level any incremental money supply only enters demand and prices spike up. But in less developed nations, far below full employment levels, the additional money supply can be routed into investments to generate output, thereby reducing inflation! How can shooting prices of onions, tomatoes and milk be reduced by raising repo rate? Its high time we accepted that inflation is not always a monetary phenomenon in India and hence monetary measures can evidently prove counter-productive. The solution lies elsewhere.

The policy paralysis must end and bureaucratic logjam removed, fast-tracking single-window clearances to important investment projects suffocating in the pipeline. State-level reforms must happen in tandem with the Centre. Governments must crack down heavily on hoarders and speculators and release huge piles of foodgrains rotting in godowns. Inter-state rivalry causing ever-higher minimum support prices must be stopped. Distortions in market signal given

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