Policy Paralysis and Inflation

Policy Paralysis and Inflation
Feb 3rd 2011, C.P. Chandrasekhar
Inflation that had been officially declared as being on the wane is back and raging. Focused on food articles, it is eroding the real incomes of the already poor and, therefore, the popular support which brought UPA II to power. Particularly damaging is the fact that high inflation has been the norm for a year now, with its incidence shifting across commodities, but most often falling on one or other set of food articles. The government seems to be helpless and just wishing that the problem would go away. Almost a year ago, when addressing a Chief Minister's conference on food prices early in February 2010, Prime Minister Manmohan Singh declared: "The worst is over as far as food inflation is concerned. I am confident that we will soon be able to stabilise food prices." Three months later, on more than one occasion, government spokespersons, like Chief Economic Advisor Kaushik Basu, had declared that inflation had ''peaked out'' and was on a downward trend. Such statements are not surprising since in the current dispensation government representatives at the highest level are expected to talk down prices and talk up markets. It is not what you say but the confidence with which you say it that matters.

But there is reason to believe that the government did actually believe that inflation would follow some sort of a cycle, and more likely moderate quickly than rise significanty. One or two predictions of an impending price decline are understandable. But, over the last year, almost every month or even week, one official spokesperson or the other (be it the Finance Minister, the Finance Secretary, the Deputy Chairman of the Planning Commission or the ubiquitous head of the PM's Economic Advisory Council) declared that inflation is bound to moderate, in a voice tinged with surprise that it has not done so earlier.

This expectation came from a particular reading of the situation. Whenever prices...