INFLATION

INFLATION – WHAT ARE WE DOING ABOUT IT ? – WHAT SHOULD WE DO?

When prices go up, all of us grumble at first, then complain to people known to us and finally shout at anyone who would care to listen. The sellers of goods and services listen, so long as we are still buying at the higher prices that they are selling. We sometimes write letters to newspaper editors complaining about inflation. We feel happy when some political party (usually the opposition) starts an agitation. Some of us who feel strongly, even go to the extent of joining such agitations and feel proud that we did our duty as a responsible citizen of a democratic nation. Some time later, the government declares its intention to control inflation. Again, we feel happy, forgetting that successive governments, whether British, Congress, BJP, NDA, UPA or the Left Front have always said so. As a matter of record, sugar price has progressively and steadily gone up from 40 paise a kilo under the British to 40 rupees a kilo under the present dispensation. The same is more or less the situation for most goods and services. To be fair to all these governments, we must concede that they all have tried and failed except perhaps for short spells of time.

The question that arises is why does this happen? To arrive at an answer to this question, we must revise our elementary Economics. Prices are governed by the law of supply and demand. When demand exceeds supply, prices go up. When supply exceeds demand, the reverse takes place and prices go down. If we can always keep the supply slightly in excess of demand at any given time, we can have a zero inflation. If the supply is too much in excess of demand, deflation, the reverse of inflation takes place. If such a situation persists for a long time, it can lead to a recession , similar to the one that the Western countries are facing now. The trick lies in maintaining a balance between demand and supply. The market forces normally do it. Sometimes however, the market fails and the government, in its role as a regulator has to step in to restore the balance. It is one of the reasons for the government’s existence apart from its normal duty of maintaining law and order.

Now, we know that demand is always increasing because of increasing population and increasing prosperity ( at least for some ) among other reasons. We should therefore be producing more and more goods and services to keep pace with the increasing demand. We should also increase productivity i.e. produce the same quantity of goods and services using lesser resources or produce more goods and services using the same quantity of resources. This can actually help in even reducing prices. If we look back, we find that prices of electronic goods have progressively gone down. They are an exception. Why is it so? The main reason is that newer technology has increased productivity progressively and thereby cut costs. Even though the cost of obsolescence of electronic goods is high, it is more than offset by the advance in technology and miniaturization. Higher productivity has reduced prices. It may be noted that the government has not done this. It is the producers of electronic goods who have done it. Similarly, our biggest exports-IT software and BPOs were not created by the government. One might even say that perhaps, it was inspite of the governing classes. Perhaps you have heard the likes of Deve Gowda speaking with a venom while referring to the likes of Narayan Murty. The former types hate the guts of the latter types perhaps because they negate the self-assumed omnipotence of the former.

When we address the government for reducing inflation, we are actually barking up the wrong tree. I shall explain what I mean. In any society there are mainly four types of people. The first category belongs to those engaged in the production of agricultural and maufactured goods . The next category of people are those engaged in services that help in production such as supply of raw materials, providing financial and other services. This category also includes housewives who provide services to their menfolk to enable them to engage in productive activities. The third category of people are those who provide regulatory services i.e. government servants. The first two categories are economically an asset to the society as they help in reducing inflation. The third category viz. government servants do not contribute directly to production. To that extent, they are a burden on the society. They are however required as good regulation also enables smoother production. This fact seems to be the origin of the saying “The government, even if thought to be an evil is actually a necessary evil. Least government is however, the best government”. The fourth category of people are children, the aged, the handicapped. This is a category that cannot be considered to be contributing to production. There is however a difference. The children are an investment for the future. The aged are compensated for their past contribution. The handicapped are a collective social responsibility till such time as they are made self-reliant.

Now, I shall explain what I mean, when I say that we are barking up the wrong tree when we approach the government for reducing inflation. For carrying out their regulatory work, they have to necessarily to put some obstacles in the path of production. Good governments put as few as possible, cussed ones put as many as possible. For governance, they have to raise taxes in the form of excise and customs duties income tax and other taxes. So they not only do not contribute to production; they also raise its cost by imposing taxes. The bigger , the government in size, the bigger are the taxes. The governments, irrespective of the country they govern, are a social cost and add to inflationary pressures. The only way, they can help in reducing inflation is by lowering taxes and reducing money supply i.e. by fiscal and monetary policy changes. There are limits to what this can achieve as we have seen every time an inflation takes place and the government makes furtive efforts to reduce it. The real, permanent and effective action that governments can take is to reduce their size to the minimum, keep the laws and regulations also to the minimum and to help rather than hinder the production process. Most governments believe that all the wealth produced is actually theirs as they are the rulers and it is out of their generosity that they allow the citizenry to spend some of the wealth that they, the citizens produce. They know it is not politic to say so. They would therefore deny it vehemently but this is largely how they perceive things in their minds.

As we saw earlier, the only way to control inflation is produce slightly higher than the demand and to continuously improve productivity and cut costs of production. The government’s core competence lies in regulatory activities which as we saw earlier results in adding costs. It is not in increasing production and productivity. Under socialism, producers were actually punished for producing more than their licensed capacity. Thankfully such patently inflationary practices are no more in vogue. The core competence of the producers and their enablers is in reducing inflation due to their capability to produce more goods and services as well as to improve productivity. It is to them that we should be looking up to. Additionally it is in their own interest to do so. The least that the government can do is to make the path of the producers smoother. In the present scenario, the government could have allowed businesses to import foodgrains as the drought had reduced the supply. The Liberalization, Privatisation and Globalization have made enough foreign exchange available for this purpose unlike in the old socialist days when we had to bail ourselves out by pawning our gold reserves even for our minimal reqirements of foreign exchange. For some inscrutable reasons, the import of foodgrains was not done. The main cause of inflation in undeveloped as well as developing economies is shortage of foodgrains and other edible articles. For India, the real trick in controlling inflation lies in controlling food prices. Increase agricultural productivity as a long term measure and import food as a short term measure. The role of the middle men in agricultural marketing has to be severely curtailed but when the government is of the dalals, by the dalals and for the dalals; what else can you expect? If the dalals are controlled and returns to the farmers are increased without raising the prices to the end consumer, most of our problems can be solved. The government’s public distribution system has been a huge failure except perhaps in Kerala. Malls can however be encouraged to step in , be the only intermediary between the farmers and other producers on one hand and end consumers on the other hand, the aim of increasing the return to the producer without raising the price paid by the consumer can be achieved. It will be a win-win situation. The curtailment of the role of the multi-layered dalals, is admittedly a slow process but it has to be relentlessly pursued. Some sort of rehabilitation for them has to be thought of on the lines of the farmers dispossessed of their lands for public purposes. The best course would be to make them a partner in the process of their own extinction or near extinction!

Although it is high hopes to believe that the powers that be, would on their own, reduce their size and make government service less attractive, thereby reducing pressure on creating more government jobs: yet, pressure has to be mounted on them to do so. It is in the peoples’ hands to reduce inflation by increasing production and improving productivity.

One funny thing is that the opposition which is really a regulators’ regulator, make a big song and dance of fighting inflation calling for rallies and bandhs. They end up by only increasing the inflation by their actions. Strikes and Bandhs are only a drag on productivity. Was nature telling the leader of an opposition party something when he fainted during an anti-inflation rally? May be it was, at the very least, telling him to reduce first the inflation of his own paunch! If in the process, the opposition is able to hoodwink the voters and come to power, they would do exactly the same thing that the present government is doing but by putting a different spin on it. We, the people, need to awake, arise and stop not till the inflation is controlled. In this process, we have to accept the government as a constraint. The more mature a society, the less the need for outside regulation. A self regulatory society can aim for the least government or in other words, the best government. This is possible in a mature democracy, albeit as fast as the government would allow its maturation!

The society needs both the market forces and the government. Both have their uses. Normally, the market forces should predominate, with the government playing the role of a facilitator. In recessionary times, however, the government has to be temporarily in the driving seat. But, the moment, the recession is over, the driving seat is restored to the market forces. In a mature society this takes place automatically. The civil society is bigger than both the market forces and the government. When, oh when, shall we mature?