Populism, Inflation and a Budget

Indian finance minister Pranab Mukherjee presented a budget for fiscal 2011-12 that carried an embedded message: it’s inflation, stupid. Rising prices are India’s number one economic and political problem.

The figures he presented were striking. He promised to hold government expenditure to only three per cent more than last year. The figure was nearly 20 per cent the year before. Factor in inflation and Mukherjee was, in fact, promising to shrink government spending by three or four per cent in real terms. Part and parcel of this were some extraordinary promises: subsidies would actually fall by 140 billion rupees. And reduce the government’s fiscal deficit by nearly two per cent of gross domestic product.

These are amazingly difficult circles to square. Is the National Advisory Council, the unofficial Ministry of Populism, closing shop in coming months? But more important is the fact that India has never been able to slash the fiscal deficit by such a huge amount or contain government red ink enough to fulfil its own deficit predictions.

So one should expect a supplementary budget later on in the year. But this budget has shown that what weighs on New Delhi right now is the seemingly inexorable rise of prices.

The problem is that the government can’t do too much about inflation. There seem to be a number of reasons why prices are jumping. One of them is the government’s explosion of spending over the past few years. Another is the broad rise in incomes among Indians. The other is straightforward supply-demand bottlenecks. It goes on.

Mukherjee laid out the government’s intentions on how to slay or at least cripple the inflation beast. One is obvious: restrain its own runaway spending and reduce the monetary side of things. The other is in the form of reforms like the general sales tax, foreign direct investment in retail and so on with the eye of reducing internal barriers and domestic inefficiencies that contribute to rising prices.

The question now is whether the weakening government of Manmohan Singh will be able to implement its own budgetary suggestions. It hasn’t been able to deliver on most of its other promises.

Implementation is political rather than economic. The positive point of view is that in the coming four big state elections, Congress will sweep Kerala, limit its losses in Assam and see an ally do well in West Bengal. An ally may also hold its own in Tamil Nadu. Then the party will be emboldened enough to let Singh do more of what he wants.

The negative view is that the United Progressive Alliance will fare poorly and strengthen the Congress party’s view that it needs to focus on welfare spending and other populist measures. Inflation is a given so the solution is to focus on distribution.

My suspicion is that food inflation is here to stay at least for the next several years. India can ease rising prices if it builds additional capacity in other areas like steel, cement and so on. The political response to this will determine whether the Singh government can do something worthwhile for India’s long-term economic prospects. Or whether it will be populism, stupid.

Copyright © 2011 Hindustan Times.