Even as inflation refuses to moderate in defiance of a gradual tightening of monetary policy since October 2004, the familiar calls for further tightening, for inflation targetting irrespective of any other objective (incidentally, this has not worked very well in New Zealand, once the 'poster boy' of such simple-minded monetarism), appreciation of the domestic currency, increasing interest rates because currently they are negative, of there being no conflict between low inflation and high growth, etc, are being made increasingly loudly.
The negative interest rates are supposed to be a disincentive for savings, thereby increasing demand and hence inflationary pressures:
However, one has not come across much analysis of the correlation between real interest rates and national savings in India. On the other hand, I do recall an internal bank research suggesting that deposit growth has very little to do with the level of interest rates.
It may well be true that in the long run, there is no conflict between low inflation and high growth. On the other hand, tightening the monetary screw surely leads to, in fact is aimed at, slowing down the economy. To quote from the RBI's Report on Currency and Finance (2001-02), ". . . The sacrifice ratio measures cumulative output losses . . . (i.e.) deviations of actual output from its trend. . . .One study puts the estimate of the sacrifice ratio at around two for India (Kapur and Patra, 2000)."
This means sacrificing Rs 1,00,000 crore (Rs 1,000 billion) of output, and perhaps 5 million jobs paying say Rs 6,000 a month, for bringing inflation down by 1 per cent. It is worth remembering that about 75 per cent of the people in India have incomes below $2 per day.
At the purchasing power parity exchange rates, this means that families of 3/4 members with a monthly income of Rs. 2,500-3,000 fall in this category. I often wonder whether for people "at the bottom of the pyramid", a fall in inflation rate by 2 per cent is more important than increasing the income by 100 per cent through a better-paid job.
Let us not underestimate the importance of growth. As Martin Wolf said (Financial Times, June 4), it "is not everything. But
the foundation for everything".
The temptation to hike interest rates when the principal drivers of inflation are not very susceptible to monetary measures, when the economy is already slowing, needs to be balanced against the paramount need for creation of reasonably paid jobs.
On the subject of our political priorities and governance, let me turn to the Gujjar agitation in Rajasthan that had paralysed road and rail communication between Delhi and Mumbai for weeks and led to many deaths. There is something bizarre about people willing to die -- and kill -- to 'achieve' a lower status!
But it is perhaps merely a manifestation of how the caste-based reservations are perverting the value system. Even as we talk of inclusive growth, caste and religion-based reservations, which often benefit only the better-off within them, are sparking a race to the bottom, deepening the communal divide, tempting people to define themselves in exclusion to others.
Again, emphasis on caste identities leads to a common branding of complex communities; arguably, intra-caste differences are at least as large as inter-caste and inter-community differences.
(On a different level, the anti-Bengali agitations in Assam, the 'Amra Bangali' movement, the Marathi-North Indian divide in Mumbai, Narendra Modi's call for all tax revenue generated in Gujarat to be spent in it, are other dimensions of the politics of communal divide officially supported by the reservations.)
Surely, the framers of the constitution had good reasons to limit caste-based reservations to 10 years -- it is high time we move to reservations in education or jobs on economic rather than caste- and religion- based criteria.
But this is perhaps too much to expect from a government too pusillanimous to take credit for the reforms it initiated in the 1990s and the significant improvement in growth and poverty reduction it has brought about, to push the nuclear treaty it considers important to our future.
The success of the Gujjar agitation surely will lead people to believe that violence pays, that paralysing the economy is the way to achieve objectives. But to come back to where I started: Are such agitations or the Left-sponsored bandhs any solutions to the problems?
If anything, they will add to inflationary pressures -- and are hardly attractive advertisements for 'incredible India' wishing to attract investment.
There is a silver lining to the cloud: The shortage of farm labour everywhere as the sowing season has commenced. Whatever our criticisms of Bush for blaming Indians for the rise in global food and oil prices, the shortage of farm labour surely is an indicator that the landless are getting better-paid employment, and we should welcome the rise in prices to the extent it is created by the increase in the purchasing power of the poor.
