One of the unexpected blessings of Government’s and the RBI’s single-minded concentration on inflation is that the hype about the financial sector is dying down.
S. Balakrishnan
Inflation fear has gripped the world. Turn the pages of any financial paper or Web site and the news and talk is only about how the general price level is rising much faster than at any time in more than the last decade.
It could not have come at a worse time. Growth is ebbing and the US is in recession thanks to its housing and mortgage crises. If central banks cut interest rates to stimulate growth, they risk inflation. And raising rates seems hardly the thing to do in the midst of an economic slowdown.
Inflation is always a monetary phenomenon, continue to say the monetarists, forgetting that their guru, Milton Friedman, long ago gave up advocacy of his famous 4 per cent money supply increase rule. In fact, toward the end, he started praising former Fed Chairman, Mr Alan Greenspan, for his discretionary approach to setting interest rates. Mr Friedman himself agrees that shrinking money supply was one of the prime causes of the Great Depression. Price stability is easily achieved – just constrict liquidity sufficiently. Monetarism in any form is crude.
It was left to an unknown blogger in the latest issue of The Economist magazine to put the much needed perspective in a situation in which central banks are confused. The blogger makes the key point that inflation has different effects on different income classes. At low incomes, food and other essentials consume most of the income. But even a 20 per cent increase in food prices barely dents the budgets of middle and high income households. To quote the blogger, ‘focused policies that target inflation in ‘essential goods’ sectors are likely superior to broad-brush monetary policies’ and taking cover in ‘monetary manipulations’.
Shorn of jargon, what is being said is that aggressive supply side actions are necessary to bring down inflation in goods consumed by the weaker sections of the population. Monetary policy may actually be irrelevant and do more harm than good. Allowing exchange rate appreciation to bring down inflation could have the effect of encouraging wasteful imports, with no impact on the prices of essentials.
One of the unexpected blessings of Government’s and the RBI’s single-minded concentration on inflation is that the hype about the financial sector is dying down. The Tarapore, Mistry, Raghuram Rajan, et al reports are in cold storage as policymakers grapple with the price problem.
Those claiming the rupee’s strength was a sign of foreign investors’ confidence are silent as the latter pull out billions from falling stock markets and the rupee tanks. Foreign direct investment – FDI – is, however, staying and more is coming in, showing how wrong our misguided emphasis on portfolio investment is.
The neglect of agriculture, water management, energy conservation (look at the shocking numbers of petrol-guzzling cars and SUVs on the roads with single occupants) and deteriorating public education systems and healthcare (being substituted by an expensive and often inadequate, sub-standard private sector) make one wonder if we have not got our priorities completely wrong.
No comments:
Post a Comment