If inflation continues to soar, you’re going to have to work like a dog just to live like one. The quip, dripping in dark humour, by American comedian and actor George Gobel is resonating globally.
The origins of the phrase inflation, the lexicon informs, can be traced to the 14th Century. It has evolved in its journey through literature into textbooks of economics. In the old world, as Shakespeare wrote, lending money gratis ‘brings down the rate of usance here with us in Venice.’ In the modern world, easy money fuels inflation and erodes the purchasing power of incomes.
Inflation used to be short-hand for too much money chasing too few goods. In a globalised world, inflation represents price outcomes triggered by causes ranging from demography to dollar domination and of course created money.
Between the arrival of the Covid-19 virus and the vaccines, countries printed money to keep economies afloat. The effects of excess were aggravated by shortage -- disruption in food and energy markets following Russia’s war on Ukraine.
The price of free lunch aka profligacy is being paid for by the world. Consumer price inflation is raging above 9 per cent in developed economies and in double digits in over 50 other countries. As this column observed a few weeks back, with the RBI and central banks flying blind, people can do little but brace for the impact.
The phantom of inflation has come home to haunt Indians. On Friday, the Indian National Congress took to the streets draped in black to showcase their disaffection with the government and its policies. It is debatable whether form -- the colour adopted for the protest -- added value to the function. The party got attention alright but what was the message to the people?
Given the intellectual ballast it boasts of, the party could have presented a viable/feasible view of what could be done to alleviate the scourge of rising prices, particularly on households and MSMEs.
The blockade of the monsoon session reflects the incapacity of parties to yield ground for a greater common good and conquer minds. As a party with an unassailable majority and expanding electoral footprint, the BJP could have afforded space and challenged Congress and other parties to present a viable alternative policy model on the floor of parliament.
A report by CRISIL shows food inflation in eight states – ruled by BJP and non-BJP governments – is sub-6 per cent, lower than the national average. Surely there must be lessons here worth sharing. On their part, the opposition parties seemed focussed on placarding. In parliament and outside, media and public attention could have been leveraged to debate/present a menu of competing ideas/solutions.
Mitigating solutions are born at the intersection of creative political tension – between the ruling front and the opposition. Politics cannot be simply an argument industry emitting a mass of verbiage and rhetoric.
Surely the political class of a democracy celebrating 75 years of Independence --in all its richness, vibrancy and argumentative colours – can do better by its people. That is not manifest in the discourse of dissent in parliament or outside.
Amidst the dharna drama, the Reserve Bank of India on Friday hiked repo rates (the rate at which banks borrow money from the central bank) by 50 basis points or half a per cent to curb inflation.
By its own estimation, inflation is expected to be at 6.7 per cent for the year and will be well above the 4 per cent target level even in Q1 of 2023-24. Clearly, the RBI needs to do more.
There is much lather about the repo rate being at a higher level than pre-pandemic levels. That observation has limited relevance given the current context. As Governor Shaktikanta Das observed, “globalisation of inflation is coinciding with deglobalisation of trade”.
The ‘friend-shoring’ of supply chains adopted by developed economies has implications for India’s exports, the current account gap and the value of the currency – remember, the RBI has already drawn down around $ 50 billion to defend the rupee.
On Wednesday, the Bank of England hiked rates by 50 basis points, the highest in 27 years, and forecast peak inflation of 13.3 per cent and an 18-month recession. On Friday, the US Federal Reserve discovered the labour market was hotter than expected, triggering expectations of what Fed Chief Jerome Powell calls “unusually high” rate hikes.
The trajectory of rate hikes will widen the interest rate differential between India and the developed economies. It will impact portfolio flows and the cost of capital.
The front loading of rate hikes will tighten financial conditions and inhibit foreign funds flow into portfolios and direct investment. Rising day-to-day cost of living and the loss of wealth effect will impact consumption and growth.
This could aggravate the imbalance in expenditure and revenues. To sustain growth and burnish the allure of India, the government will have to front-load reforms.
The road ahead is paved with uncertainty – and the US-China-Taiwan saga is yet unravelling. India is yet the fastest growing large economy, but it will be impacted by the spectre of the global slowdown. The Modi Government has lauded itself for its inflation management. It now faces the challenge of engineering a low-cost, high-growth economy.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)