Saturday, April 19, 2008

Inflated Egos

Byline by M J Akbar: Inflated Egos

On 16 April finance minister Chidambaram announced that action would be taken against cement and steel cartels. Were those cartels formed over lulnch that day, forcing the finance minister to leap into action immediately? These cartels have been in business for many months. Prices have been rising for on an incremental basis for a while. Why didn't cartels attract the attention of the finance minister before 16 April?

Is inflation some kind of a sudden plague, which hits without warning, spreads contagious havoc for a while and then disappears as mysteriously as it came? Finance ministers would love such an explanation, wouldn't they? Government propagandists could command a high premium from their masters if they managed to sell such a myth. Unhappily for governments, and fortunately for mere mortals, the voter is not gullible.

Inflation is an interesting phenomenon. It is a consequence of decisions not taken, as much as decisions taken.

A simple analysis of statements made in Parliament during the debate on inflation by finance minister P. Chidambaram and cricket minister Sharad Pawar (who also looks after agriculture when he gets time from running the Board for the Control of Cricket in India) will indicate what I mean.

The most startling analysis of basic causes was made by Pawar when he pointed out that the poor had acquired more liquidity, were therefore buying more food, and this, in conjunction with a change in dietary habits was pushing up food prices.

Well, that's it then. All you have to do is tell the poor to behave. They should remain semi-starved, as they have been for thousands of years, so that the middle class and rich can buy food at acceptable prices.

The poor, Mr Cricket Minister, are not fools: they do not think that any government can suddenly change their diet from bajra roti and dal into pilao. Even a government that pompously claims to belong to aam aadmi, or the ordinary people, does not raise hopes among ordinary people. Life has taught them to be realists. The poor do not expect pilao, but they do believe that if they began life with just two rotis for a meal they have a right to three rotis after a while. Is that too much? The insensitivity of Pawar's statement did not seem to upset anyone in the political class, proving how insensitive everyone has become.

The point is more moot. When did the shift in dietary patterns – as for instance, the rising demand for wheat in traditionally rice-eating South – take place? On the morning of the debate in Parliament? This change in food habits has been a slow turn, years in the making, and the agriculture ministry has been studying this pattern for a long while. So what did the agriculture minister do about it? Nothing. Did he encourage a shift in crop production through, for instance, incentives to ensure that India did not face a wheat shortage? Here is a consequence of decisions not taken.

There is a further twist to the story. We underestimate the role of corruption in inflation. There was a wheat shortage earlier. When did Sharad Pawar step in to import? Not when world prices were low, but when prices had peaked and you had no option but to buy at available rates. The importer of that wheat on behalf of Sharad Pawar is probably flying around in the private jet. A check might unearth some interesting details.

On 16 April finance minister Chidambaram announced that action would be taken against cement and steel cartels. Were those cartels formed over lulnch that day, forcing the finance minister to leap into action immediately? These cartels have been in business for many months. Prices have been rising for on an incremental basis for a while. Why didn't cartels attract the attention of the finance minister before 16 April?

On the same day the government announced it would import one million tonnes of edible oil. Had prices of edible oil begun rising at the stroke of the midnight hour on 16 April? Why did the Honourable Minister suddenly wake up before a debate in Parliament? As long as prices only threatened the livelihood of the poor, the government of Dr Manmohan Singh did nothing. When prices began to threaten the life of the government, there was a flurry of activity.

The government of Dr Manmohan Singh is guilty of collusion in inflation.

The economic principle that has driven this government is the oft-repeated "trickle-down theory", a favourite of World Bankers infesting this administration. Every economic phrase has a human meaning. This particular phrase means that the government knew that there would be a waterfall for the few at the top floating in swimming pools, and only a trickle would reach those dying of thirst at the bottom. Its attention has always been focused on the management of the waterfall.

We should have expected this, but we do not have a memory. What was the rate of inflation during the five years that Dr Singh was finance minister under Narasimha Rao? In 1991-92 inflation was 13.7%, and these are the figures for the subsequent years of his finance ministership: 10.1%, 8.4%, 12.5%, 8.1%.

There is a correlation between inflation and political instability. Food prices are not the only factor, but they are a principal reason because food security is an important basis of collective national confidence. The government of Dr Singh, Chidambaram and Pawar believed that food security could be left to market forces. Market forces have now begun to bleed this government.

Inflation during the Jawharlal Nehru decade, between 1951-52 to 1960-61, was 1.8%. That was undeniably the most stable period of the last sixty years. Inflation averaged 6.3% in the Sixties, and the Congress was swept out of power in the states between Punjab and Bengal. It barely managed to survive at the Centre in the 1967 general elections. Inflation rose to 10.3% during the Seventies; the turmoil was as high as inflation. Two national governments were voted out of office. Inflation dropped to 7.2% in the Eighties and 7.8% in the Nineties, but the people still considered it too high and the turnover of governments was high. Calm returned when inflation was reduced to less than five percent in the first half of the new century, despite a serious drought for one year. Anything above five per cent creates political tremors.

Dr Manmohan Singh's five years as finance minister reduced the Congress Party from about 240 seats in the Lok Sabha to 145 seats. At the same rate of attrition his five years as Prime Minister could take the Congress to below a hundred seats.

Dr Manmohan Singh's government is so dazzled by market forces that even now it is reluctant to ban futures trading in agricultural products. Let me quote an American columnist, William Pfaff. He was not writing in The Theory and Practice of Soviet Marxism but in the distinctly American International Herald Tribune [Speculators and soaring food prices, 17 April 2008]: "Speculative purchases have no other purpose that to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer…It is astonishing in the present situation that the international financial institutions and government regulators have done little to control or banish this parasitical and antisocial practice. The myth of the benevolent and ultimately impartial market prevails against all contrary evidence."

Dr Manmohan Singh has been kept out of the politics of power since he became Prime Minister, but the administration of power has been his responsibility. If he had spent even half the time examining the earth beneath his feet as he did staring transfixed at a nuclear deal with George Bush, he would have seen that angel of death known as inflation approaching many months ago. There was so much hope when Dr Singh became Prime Minister. He will now be remembered for a nuclear deal that was waylaid by allies, and an economic policy that was shredded by the arrogance of ministers and the complacency of servitors.


Anonymous said...

Absoultely true!One way for looking athe problem is who benefits the most due to price rise in cement ,steel sectors and exporters
A Quick POP Quiz
=>Eureka, beat me if all these lobbies DO NOT have close links with ruling UPA Government?

=>Who owns cement units in Tamilnadu and benefits from cement cartels?

-DMK Govt Right!

=>Steel prices have gone through the roof die to rising iron ore prices due to exports from India?
-Politicians from Karnataka,----- and Industrialists close to the ruling class ( A liitle bird tells me Industries Minister Kamal Nath will know, from his robust defence against increased levy on Iron Ore exports)

The best part of the story is all this knowlege is in the public domain in India and one does not have to be a Genius-----do you get me Steve!!!!


Anand said...

I dont quite agree with MJ Akbar. Inflation may be rising, but it is not necessarily such a bad thing for India. Remember South Korean economy growth saw simultaneous high inflation. Also the inflation may not necessarily mean that poor are worst affected. On the contrary, farmers, instead of speculators in Futures market could be the beneficiary. There remains possibilities of market manipulations, but, atleast theoritically, that should be controled by market regulator/ law enforcing agencies. What we need is effective and enforeable regulations.

I think one of the ways government can address is to raise the minimum wages and enforce this.

Any artificial controls on the price of food, can mean that farmers are paid less, farming is less attractive and farmer suicides continue unabated.

Again, another positive point with natural inflation could be rise in labor cost which is good for the nation, though the industry may not like it; as it has to become more productive.

Now is the time for us to forget history, because we are living in extraordinary times. India and China are truely emerging and so we cannot be held hostage to old world economic theory. There is a need to clearly and soundly identify what is right and what is not. Possibly a task best left to experts. To that extent, I would rather believe Dr Singh and the FM. They are one of the most qualified people we have. If they can get it wrong, I think anybody can. Remember even Don Bradman got out at 0. But he remains the best bet when you decide for a batman for your all time wotld team.