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Domestic inflation, result of imported inflation

The steep rise in inflation, triggered by an unprecedented rise in the international price of crude oil and global food shortages, presents an extraordinary challenge before India. This challenge needs to be addressed by summoning the nation’s collective genius and resources in a bipartisan spirit. While contentious discourse and democratic politics have become inseparable, we can still hope to wrest our democracy in action from the tendency to subordinate larger nat ional priorities for short-term political dividends.

In the context of a public debate on the causes and consequences of inflation, I plead that sound economic policies that have delivered record growth that has placed India in the coveted league of the fastest growing economies of the world should not be questioned for the sake of political expediency. Lest ignorance, feigned or otherwise, of what the nation has achieved and the policy choices that have enabled our accomplishments possible, is used to compromise prudent economics itself, it is necessary to reiterate a compelling case in favour of the policies pursued by the nation in the last two decades.

The advent of the 21st century was “preponed,” as Eric Hobswam reminds us, by the transforming changes of globalisation, liberalisation and technology in the 1990s. This necessitated a choice between multiple approaches to modernity and growth. India opted for a path that would enable it to embrace “cutting edge strategies” to harness the opportunities presented by globalisation and to construct at the same time a matrix of economic development by which those who remain on the margins of existence are integrated with the mainstream. As we move forward in shaping the policies that would optimise India’s economic potential, our effort has been to ensure that the imperatives of social justice, inter se equities between different strata of society, and indeed intergenerational equities, are achieved. We recognised the fact that accelerated economic growth alone would enlarge the cake of prosperity to ensure distributive equities on a vast scale.

Hence, the process of economic reforms, which started with a calibrated deregulation of the Indian economy in the 1980s, was reinforced in the decade of the 1990s to deliver one of the most celebrated success stories of the early 21st century.

The empirical evidence of India’s economic growth is indeed compelling. To an empiricist’s delight, let me re-state and index a few facts. India has emerged as the world’s 10th trillion-dollar economy, its Gross Domestic Product growing at an annual rate of over eight per cent on a sustained basis. It is the world’s second fastest growing economy. It is expected to become the world’s fifth largest consumer market by the year 2020 and the third largest economy by 2035. In terms of purchasing power parity, its middle class is growing annually by 15 million to 20 million. The figure is slated to more than double by the end of 2010, from 6 per cent of the population to 12-13 per cent.

The government has embarked on some of the most ambitious government-sponsored programmes of social and economic empowerment of the poor, in the form of the National Rural Employment Guarantee Scheme, the Bharat Nirman Programme, the Jawaharlal Nehru National Urban Renewal Mission, and the National Rural Health Mission.

This spectacular record of economic progress is underscored by the fact that we have been able thereby to lift one per cent of our poorest above the poverty line every year over the last two decades. This has meant that approximately 431 million people have been moved up from the bottom of the pyramid. Another 290 million are likely to benefit by 2020. India’s Gini Index on a scale of 0-100 is 33 compared to 41 of the U.S., 45 of China and 59 of Brazil. This demonstrates that the level of inequalities in India are comparatively less than in some of the other emerging economies.

The 61st Round Survey Report by the National Sample Survey Organisation has concluded that the number of persons employed as a percentage of the total population has increased by 2.85 per cent a year between 2000 and 2005, well beyond the current population growth rate. We are informed that India’s per capita income in 2050 would increase by 35 times over the current levels. It is, therefore, no surprise that a survey by the Pew Global Attitudes Project has found Indians to be amongst the most optimistic people in the world.

Of course, the increase in per capita income lends itself to enhanced consumption and demand. This, while it leads to higher productivity and better wages, puts pressure on prices. But for this reason alone, do we turn our back on policies that have enabled the expansion of our economy and eventual distributive equities?

Any objective analysis of the factors behind the spurt in inflation can be traced to the rigging of oil prices by the international oil companies. We know, for instance, that while the demand for oil in the last year increased by one per cent to two per cent, the increase in oil prices in dollar terms was as much as 90 per cent, and in Euro-denominated trade as much as 40 per cent. There is, therefore, a clear mismatch between the demand for oil and the price paid by the consuming countries that are heavily dependent on oil imports.

The diversion of large areas hitherto under grain cultivation for biofuels, and of a fifth of America’s corn crop to make ethanol for motor fuel, has cut the acreage of other crops, particularly soyabeans. This has resulted in a global shortage of cooking oil, contributing to an unprecedented increase of about 83 per cent in global food prices over the last three years. A major part of our domestic inflation is, therefore, a result of imported inflation in a globalised economy.

In the premises outlined above, compulsive and cynical politicking on the price situation appears too full in the throat. The government’s commitment to economic liberalisation does not announce an erosion of its irrevocable “belief in the ethic of equity.” If, as historian Arnold Toynbee reminds us, the evolution of society is a history of challenge and response, as a nation it is time for us to acknowledge that uneasy compromises cannot substitute for sound economics, nor rhetoric replace reason in policy formulation. We need to remind ourselves that there are no easy or preferred options, and that the Indian state cannot sustain an unending process of raising expectations beyond its capacity to fulfil.

We may bemoan the tyranny of facts only at the cost of intellectual integrity and political morality. Facts are stubborn and will not yield merely because we refuse to acknowledge them. We need to remind ourselves that sustaining and strengthening our democracy must remain a national project and that the pursuit of democratic power can be justified only in terms of the ends to which it is applied.

And, finally, the government of the day must defend its existence and policies with reference to larger national goals, opposition of friends and foes notwithstanding.

(Ashwani Kumar is Union Minister of State for Industry.)

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