As year 2008
started, the fairy tale of global economy came to an end. Suddenly, inflation
has become a worldwide problem. The soaring oil and food prices that were once
perceived as a mere blip in the growth cycle have suddenly become the
spoilsport of the central banks, challenging their wits to keep them under
check. This has obviously made the central banks nervous, for inflation
expectations, once entrenched deeply, becomes difficult to be eliminated. This is
reflected in Ben Bernanke’s recent attempt to resurrect the dollar: “We are
attentive to the implications of changes in the value of dollar for inflation
and inflation expectations.” The anxiety of central banks to tame inflation is
so high that no sooner did Bernanke talk up dollar than Trichet, the Chairman
of European Central Bank, gave a strong hint about the likely rise in their
interest rates. This simply pushed euro higher, defeating Bernanke’s efforts at
giving a gentle push to dollar, besides causing turmoil in bond markets.
Amidst this
pandemonium in global markets, India took some bold steps—both on fiscal and
monetary fronts. First, the government, realizing that “there are limits to
which we can keep consumer prices unaffected by rising import prices”, has
hiked the retail prices of petrol and diesel by about 10%—Rs 5 per liter of
petrol and Rs 3 on diesel—and cooking gas by 30%, besides scrapping a 5% import
tariff on crude oil—all to reduce not only the under- recoveries of oil-trading
companies, but also the demand on the
Center for additional oil-bonds that merely defer government’s financial
liability for OMCs to a future date.
On the monetary
front, the Reserve Bank of India, for the first time in more than a year,
raised its repo rate by 25 basis points to 8%—a five-year high—and perhaps all
set to raise it by another 25 basis points soon. The move, though received by
industry with a shudder, has become essential for more than one reason: one, it
has to fall in line with global central banks, else there is the danger of
rupee, which has already depreciated by 8% against dollar, depreciating
further, including against other currencies which incidentally, means costlier
imports; two, the widening current
account deficit is posing a bigger challenge, particularly, in the context of
falling foreign portfolio inflows into a none-too-happy stock market; and
three, to anchor the inflationary expectations at acceptable level, it cannot
afford to let real interest rates turn negative.
Unsurprisingly,
the government’s act of passing on the raising crude prices to consumers has,
of course, generated backlash on predicted lines. The displeasure of the common man at the rise
in the prices of petroleum products, that too, over the already rising inflation—which
has touched 11.5% by June 20 —is understandable, but what is more disturbing
are the roadblocks and street demonstrations organized by the political
parties. It only demonstrates that either they are ignorant of the ground
realities or not caring for them. The former cannot, however, be true for one
cannot presume them to be unaware of basic economics: prices are to necessarily
be able to change relative to the underlying production costs—between February
and June of the current year the crude price has gone up from $90 to $135 per
barrel. They are also aware that the
mounting oil subsidy is no longer fiscally sustainable, for we import almost
80% of our oil consumption. It is also a
matter of common sense that raising the prices of petroleum products is the
core of any policy response, for it alone can—though not directly—keep the
spiraling fiscal deficit under check, which is essential to keep public
investments intact—at least ensure the availability of funds for more deserving
programs such as NREGS. In fact, such transfer of prices, proportionate to the
increase in the global crude prices, should have been done regularly to obviate
the fiscal profligacy as also to reduce the imposition of sudden and heavy
burden on the consumers. Such decisions, though
would be painful in the short run, are certain to avoid far more pain
resulting from a fall in growth owing to higher inflation rate or fiscal
deficit, or a combination of both, widening the current account deficit, and
the resulting depreciation of rupee, in the long run. Capping it all, such
willingness to effect policy changes domestically is a must under the global
slowdown; else, we will remain at the mercy of global economic happenings. Despite these hard realities, if political
parties continue to resort to such agitations, it only means that they are bent
upon blaming the ruling party, irrespective of the fact that the current hike
is not something that is in their control.
Which reminds us
of what Sanjay Bagchi once observed: Indian
politician assigns the highest priority to the interests “not of the nation but
of his party, and within the party, to the interests of himself, his family,
his clan, his caste (and) his constituency.”
Instead, opposition parties, as the democratic theorists often fondly
said, essentially being a “government-in-the-waiting”, cannot afford to
“oppose, oppose, oppose” but “should so conduct itself…as to persuade the
people of the country that it could be an improvement on the government of the
day”, which means, educating the citizens about the economic realities and
encouraging them to sail through the difficult times.
Or, is it a far
cry?
(July, 2008)
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