Inflation - 2008

On Tuesday 29th April 2008, prime minister Manmohan Singh had called for sobriety in corporate lifestyles and salaries while finance minister P Chidambaram asked companies to lower profits to keep product prices down and aid the government in its fight against inflation.

Quite naturally many of my friends started their, by now common, ritual of lambasting the government for suggesting that increasing salaries are the cause for inflation and that the Govt should have no business meddling in private sector affairs etc. Not that my friends were alone in this - many private sector bodies also publicly ridiculed the PM / FM for this comment.

Now let us get back to reality and analyse what they said.

Regarding the comment - please read them carefully. Nowhere do they say that salaries are the reason for inflation. They are merely asking for sobreity in corporate lifestyles and salaries and various othet things to help the government fight inflation. I think it's a fair ask. They did not say, lowering salaries will lower inflation.

I do not see anything above that indicates their belief on the cause of inflation. High product prices, lot of money chasing few products, extravagance etc all make it difficult to control and manage inflation. They may or may not be the only cause.

I did not see any mention / indication of a regressive compensation policy to curb inflation. If at all the government wanted to do that, they have easier, albeit unpopular, mechanisms - like applying a cess / raising taxes. Be thankful that goverment are asking / requesting you to do things rather than make it happen themselves - which they are more than competent to do.

Inflation is NOT bad. It's a direct consequence of growth. If we do not want inflation, let's agree to not have any growth. Managing inflation is a tough task. If Govt took steps to control inflation, thereby affecting growth, we all would be shouting - what the hell, why is Govt doing this when it affects growth. It's a thankless job being stuck between devil and the deep sea. Let's do our bit to help rather than point fingers and blaming someone else. Inflation numbers can never be looked at in isolation. It has to be looked at in conjunction with growth rate as well and when you start doing that you will understand that it's not just as plain simple as looking at growth rate, you need to look at the inclusivity of growth.

Let me present you a few examples.

If you had a product (for arguments sake lets take Onions) to sell, who would you sell it to? Unless you are in altruistic mode, you would sell it to the person who can pay you the most. So, if 10 % of Indian populace make exorbitant amount of money and could not care less as to whether he/she pay's 50 Rs for a Kilo of Onions or 100 Rs, then what would be market price? As a seller if I had 10 kilos of onions to sell, I would rather sell 5 kilos at Rs 100 than 8 kilos at 50. In an ideal world you would want to sell 10 kilos at 50 - That's the challenge of inclusive growth, of balancing growth and inflation.

Another point that has been made quite often is this tendency of this newly rich 'IT' section of the populace and their contribution to rising inflation. Here again we need to be careful before we blame / absolve this group of all crimes (dare I say).

For example, an IT guy not bargaining and paying for Auto does not count under inflation (I don't think we count transportation costs under inflation).

An IT guy not caring whether or not he has to pay Rs 50 or Rs 100 for a kilo of Onions does count under inflation.

An Auto driver (most likely to be the under-previliged of the society) making money is beneficial. It's inclusive growth. Pretty much the same as you having 2 house maids, three drivers, 2 gardeners etc. You are sharing / spreading your wealth among a section of a society that benefits it.

Escalating house prices and buying it irrespective of whether its 45,50,55,60,65 or 75 lacs or buying Toyota's and Honda's and Fords at 25 lacs or eating pizzas at 500 Rs etc - while a good indicator of growth, and might even benefit the poor, though I doubt it would benefit as much as paying the auto driver directly.

Spending that spreads inclusive growth is good. Spending that puts things out of other peoples reach is bad.

I am no expert on finance and economics and last but not the least on politics. Bottom line is that you cannot preach Gita to en empty stomach. It's fashionable for the intellectuals these days to lambast the government for anything and everything they do. Agreed they are not the best of the lot and if we think we are better than them, then let us go ahead and do their job, else let them do their job.

Last but not the least, let us not get carried away with chart busting inflation numbers. Remember Perception of inflation is more dangerous than inflation itself. It's like that story where a weatherman based his prediction of winter based on the tribal folk buying logs in the mountains who in turn based their purchase on the prediction of the weatherman.