Not only are rising prices going to have economic and social effects, there will certainly be serious political ramifications. Inflationary conditions will probably persist and may even get worse. While many believe such conditions are primarily due to rising energy costs, the data in India suggest that food and commodities are also a major determinant.

In other words, despite the fact that the government has not passed on a large part of the fuel price increases to the consumer, prices have been rising rapidly.  Eventually, oil price costs will certainly be passed on to the Indian citizen, one way or another. The government may do so directly, through prices at the pump, or indirectly through greater losses in the public sector backed by some accounting jugglery like oil sector bonds. It might seem to some that the latter implies that government is “absorbing” the price rise. Not so: it is not in the government’s DNA to absorb anything; all that it can do is control the manner in which such shocks are directed into the national economy.

By not passing on price rises in the past, the government only delayed their passage through the economy. This will happen over the next few months and this time it will be beyond the government’s control. The unorganised and organised sector will also be passing on these costs. Given the poor rains in western India, the rising trend in commodity prices, and the impending hike from major steel producers, there is little that the government will be able to do. The best that can be hoped for is that food and commodity prices stabilise in the next few months, which may very well happen due to good monsoons in north and east India.

The current inflation was expected, predicted often (including in this column), and at least the key players in the government had more than an inkling. But they did not want to assert themselves. This was a mistake: not only was it dereliction of duty, but now the Congress will go into election season with ever-increasing prices. 

Had the government kept a tight leash on its expenditures, used its money carefully and not thrown it away on leakage-prone schemes and ensured increases in agriculture sector investments (something that we have not for the past two decades), inflation would not have been as high, and much more in line with other countries, even if prices of oil products were passed on as they were felt internationally. To give some figures, developed countries’ inflation rates even in these times are typically less than 4 per cent; inflation in India is far greater. Though government data shows inflation to be in the 12 per cent range, it is actually more likely to be in the 15-20 per cent range. (The government cannot underestimate inflation for long, and keeps on revising its old figures upwards.)

This is a lesson for the professionals that work on behalf of the politician. Subservience should not be equated with serving the best interest of your political masters. When the ruling political conglomeration pushed for greater welfare expenditures, when they prevented oil prices from being passed on and when they delayed infrastructure investments at the state and Central level, the professional economists and bureaucrats gave in each time, instead of sticking to first principles. 

Economic policy based on first principles is actually not all that complex. Value the money that you have and don’t throw it away; invest in the future as much as is possible; don’t mess with the prices; and if you expect prices to go up in the future increase its supply now. But these principles need professionals who stand their ground, whether they are lawyers, bureaucrats or economists. This government had its share of the best. But they gave in. And their political masters have lost out big time as the forthcoming elections will show.

The writer heads the economic research firm Indicus Analytics

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