This is the scenario that seems to be shaping up today – though it is too early to predict what will happen in the remaining 12 months in which this lameduck government stays in power.
First, the Index of Industrial Production (IIP) came in at a barely positive 0.6 percent in February. The April 2012-February 2013 IIP average is no better at 0.9 percent. So industry did not grow for one whole year – and that is why inflation is coming under some control now. No one is investing or buying more than the year before.
Second, consumer price inflation is still in double digits – printing at 10.39 percent in March compared to 10.91 percent in February. But this is largely luck. Just when diesel prices are being raised, global oil prices have fallen by enough to make the “fuel and light” part of the Consumer Price Index (CPI) rise by just 8.31 percent in March. It is the non-food part of the index that is keeping inflation down – once again, a tribute to how successfully the government has managed to damage growth.
Third, the final IIP figure for 2012-13 (March) is sure to be a dampener, not least because the index number for March 2012 was high at 187.6. Compare that with February 2013’s 176.2, and it is clear that a pole-vault is required to show positive growth. Unlikely to happen. One should not be surprised if IIP for the whole year is near zero.
Fourth, some luck is heading UPA’s way in the form of a fall in gold and crude oil prices. This should ease the current account deficit (CAD), but the fall in oil (Brent crude is now at $103.11 a barrel) will help dent the price index. But if the UPA is committed to raising diesel prices to market levels, this fall will reduce the fiscal deficit (subsidies) but won’t impact the price index positively. Reason: any fall will still be neutralised by domestic increases, since the diesel price subsidy when crude is at $113 is Rs 6.50 a litre. Crude will have to fall more sharply to impact our CPI.
Fifth, consumption trends are nothing to write home about. In February, the consumer part of the IIP was flat – at 0.5 percent. While non-durables grew at 2.9 percent (which was still a fall from last year’s 4.4 percent), this rise was neutralised by a fall in consumer durables output by 2.7 percent. People are clearly not in a mood to splurge on autos, fridges or computers.
The prognosis for inflation is thus mixed: while fading growth is reducing pricing power for the manufacturing and services sectors, both at home and abroad (witness the Infosys results yesterday), political pressures will be pushing the food part of the index in a different direction. Food, which comprises nearly 50 percent of the CPI, is pulling the index higher with a 12.42 percent rise in March.
Going forward, one has to expect further pressures on food inflation even without growth as we head for election season. This is because minimum support prices (MSPs) for foodgrain tend to be jacked up more than needed in an election year.
Moreover, the Food Security Bill, which wants to cover two-thirds of the population with super-subsidised grain (Re 1 per kg for coarse grains, Rs 2 for wheat and Rs 3 for rice), could end up pushing up food prices.
One may ask: why should food inflation rise when you are going to get rice and wheat at Rs 2 and Rs 3? This should bring down CPI.
Two reasons why. One, if food is to be supplied this cheap, subsidies will bloat. It is the high fiscal deficit resulting from uncontrollable subsidies that is part of the cause for inflation.
Two, there is also this counter-intuitive argument for higher food inflation: when the average family gets basic cereals at such low rates, the extra disposable income available will be used to buy high-protein foods – including milk, vegetables, processed foods, even booze. Cereals and products account for 14.59 percent of the CPI, while non-cereal food and beverages account for 34 percent. If inflation in these products shoots, food inflation will rise even if you get rice and wheat cheaply.
Historically, the Congress party’s rural vote-buying techniques have always resulted in high inflation.
If we look at CPI annual averages in the past, whenever the Congress has ruled the country, inflation has soared.
In the 1991-96 period, the first five years of reforms under Manmohan Singh, average CPI (Industrial workers) was 10.2 percent. In the next two years of the United Front government this average fell to 8.1 percent. Inflation really tumbled to 5.4 percent during NDA rule from 1998-2004, setting the stage for faster growth with low inflation.
This is the benefit that UPA-1 reaped, but, thanks to its usual profligacy, inflation has again started soaring from the levels achieved during NDA. During the first eight years of UPA (upto 2011-12), inflation has already averaged 7.7 percent.
But take the initial years out, when the Indian economy was in the sweet spot created by global growth and NDA’s low inflation, and the UPA’s real record surfaces: inflation averaged over 10 percent in 2008-12, till growth came crashing down in 2012-13.
The Congress-led UPA’s lasting legacy, as we have noted in the past, is inflation. This, in fact, is what is bringing down growth. As we have noted several times before, that spells stagflation.
Only luck can now reverse this legacy – and the kind of luck needed is a dramatic fall in world oil prices over the next one year.
But even with this luck, the bottomline will be: low growth, high inflation.
The moot point is why is inflation a Congress phenomenon? One can only attempt a guess: when a dynasty has to rule forever without real charisma or popular support, you need to buy votes by spending government money, whether it is through farm loan waivers or subsidies. It’s not that non-Congress dynasties have fared any better once their charisma faded, but they have limited the damage to some states. At the centre, there is only one dynasty in action. That probably is the link between Congress rule and higher inflation.
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