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Friday, 05 August 2011 00:00
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Though finance minister Pranab Mukherjee argued that there was no inherent contradiction between inflation and GDP growth—he cited periods of high inflation, over 20%, during the Hindu-rate-of-growth period—there are many takers for the points made by NDA finance minister Yashwant Sinha. If growth means inflation, Sinha had said while opening the debate in Parliament on inflation, we don’t want that growth. Nor is it just foreign fund managers who are arguing there is a tradeoff between growth and inflation—assuming, as is the case today, there are no major incremental reforms that create fresh supply capacity—India’s central bank feels much the same. While announcing the 50 bps hike in repo rates last week, RBI said the “absence of appropriate actions for addressing supply bottlenecks” was bringing inflationary pressures to the fore and it also spoke of how “fiscal consolidation is … critical to managing inflation”.

 

Whether the GDP growth rate beyond which inflationary pressures rise is 7% or 8% is immaterial, most accept today that India can’t have higher growth unless various supply-side and management issues are addressed. This applies not just to critical infrastructure, it applies as much to the shortage of qualified workers, a direct result of the inability to fix the crumbling education sector. Mukherjee was right when he said the NDA found it easier to deal with petroleum prices as the price of Brent crude was $34 per barrel then as compared to $117 today. But he had little to counter when it came to Sinha’s point about how the government could have unloaded millions of tonnes of foodgrain—the way the NDA did—to lower prices.

The real issue, of course, is not about whether the NDA got it right or whether it could have done better than the UPA. As Mukherjee said, the real issue was how the government, with the help of the Opposition, could further critical reforms which would get industry to start investing again to create critical capacity—over the last decade, even nominal prices have fallen in manufacturing areas where capacity has gone up, and have gone up in agriculture where production has stagnated. Mukherjee mentioned GST and the pension Bill whose passage the opposition needed to help with, and was honest enough to admit that though the Congress had criticised Sinha when he sold off India’s gold, it was a very brave decision the then FM had taken. But not all reforms have been held back because of the Opposition parties and in many cases the government’s own policies—Sinha mentioned the ones on food—have aggravated matters. As RBI puts it, monetary policy alone can’t control inflation—excessive reliance on it, in fact, affects production and the economy’s ability to combat inflation.

 

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