## Wednesday, February 07, 2007

### Inflation control

My column in Business Standard today is titled Inflation control. It is on the themes of why low inflation matters; what are the tradeoffs between GDP growth and inflation growth; the ban-milk-exports style of inflation control; monetary policy as the right path to achieving low and predictable inflation.

I am fascinated by the commitment of the Indian political system to low inflation. A de jure inflation targeting system can only, in the final analysis, be successful when it has such political foundations of support: when there are already glimmers of a de facto inflation target. Inflation has got to be important enough that politicians choose to give up other possible uses of monetary policy; my sense is that India does have this kind of passion about low inflation.

1. Why is so much emphasis being on the monetary side, as the current run in inflation is driven by Ss constraints in the primary articles. And no effort is being made to raise the productivity of the agriculture sector.
For the past 50 years billions of Rs has gone into pump priming this sector but of no avail.
Though the monetary controls will have some tightening bias,but eventual control would only happen if , the supply bottle necks are removed.

2. Only yesterday I came across this article from the Economist - which I think is quite relevant to today's times -

http://www.economist.com/finance/displaystory.cfm?story_id=8625681

The malaise, it seems, is much deeper and the solutions proffered quite practical !

3. "I am fascinated by the commitment of the Indian political system to low inflation."

There is a reason for it - favourable opinion during elections. Can a political party win if price of onions go thro the roof under its watch? I doubt it :)

4. Lots of primary articles' like milk are perfect markets - millions of producers, millions of buyers, no market power. Monetary policy affects the demand curve for milk just like it does for nonprimary articles'.

Winning elections and low inflation - it's nice, but the third world is littered with silly governments that run up high inflation. If you were a space alien and landed up in India, and marvelled at the weird things that are done, that prepares you for an unrelenting barrage of bad economics. High inflation and volatile inflation would not surprise you. Mercifully, that is not the case.

5. Political objective to keep prices under check is something seen across the countries. For instance even in US prior to the december elections, Goldman Sachs was cutting its Oil exposure, once gasoil touched almost $3/ gallon in August. Since then GS kept cutting its position and thus came the entire energy complex crumbling down. The benefit: GS head become the US treasury secretary, Bush achieved his objective of controlling prices. So political compulsions are obvious, but the point is why cant the same urgency be shown towards improving the supply dynamics, which will give bigger mileage to the political class. 6. "why cant the same urgency be shown towards improving the supply dynamics" Because it takes a long lead-time and the details are fuzzy to lay person and politicians have to show they are on the case right now. I guess I am saying the obvious but one gets no political mileage from long lead projects, especially in India – our lazy popular media and opposition doesn't help. The back tracking on petrol/cooking gas price control is a clear case of how politicians think they have put a show of controlling prices (eventually we pick up the tab thro’ subsidies anyway). Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question. LaTeX mathematics works. This means that if you want to say$10 you have to say \\$10.