Its Economy and Politics – The New Indian Express

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If inflation continues to soar, you will have to work like a dog to live like one. The joke, dripping with black humor, of American comedian and actor George Gobel resonates around the world.

The origins of the term inflation, according to the lexicon, date back to the 14th century. It evolved in its journey through literature into economics textbooks. In the old world, as Shakespeare wrote, lending money for free “lowers the rate of utilization here at home in Venice.” In the modern world, easy money fuels inflation and erodes the purchasing power of income.

Inflation used to mean too much money for too few goods. In a globalized world, inflation represents the results of prices triggered by causes ranging from demographics to dollar dominance and of course created currency.

Between the arrival of the Covid-19 virus and vaccines, countries printed money to keep economies afloat. The effects of excess were compounded by scarcity – the disruption of food and energy markets following Russia’s war on Ukraine.

The free lunch price aka debauchery is paid for by the world. Consumer price inflation exceeds 9% in developed economies and exceeds 10% in more than 50 other countries. As this column observed a few weeks ago, with the RBI and central banks are flying blindpeople can’t do anything but prepare for the impact.

The ghost of inflation has come back to haunt Indians. On Friday, the Indian National Congress took to the streets draped in black to show its disaffection with the government and its policies. One wonders if the form – the color adopted for the protest – added value to the function. The party did attract attention, but what was the message to the people?

Given the intellectual ballast it boasts of, the party could have presented a viable/achievable vision of what could be done to mitigate the scourge of rising prices, especially on households and MSMEs.

The monsoon session blockade reflects the parties’ inability to cede ground for the greater common good and win over minds. As a party with an unassailable majority and an expanding electoral footprint, the BJP could have offered space and challenged Congress and other parties to present a viable alternative political model on the floor of parliament.

A report by CRISIL shows that food inflation in eight states – governed by BJP and non-BJP governments – is below 6%, lower than the national average. Surely there must be lessons here worth sharing. For their part, the opposition parties seemed focused on the placarding. In parliament and outside, media and public attention could have been used to debate/present a menu of competing ideas/solutions.

Mitigation solutions arise at the intersection of creative political tensions – between the ruling front and the opposition. Politics cannot simply be an argumentative industry spouting out a mass of verbiage and rhetoric.

Certainly, the political class of a democracy celebrating 75 years of independence – in all its richness, its dynamism and its argumentative colors – can do better with its people. This does not manifest itself in dissent speech in or out of parliament.

Amid the dharna drama, the Reserve Bank of India on Friday raised repo rates (the rate at which banks borrow money from the central bank) by 50 basis points or half a percent to curb inflation .

According to its own estimate, inflation should be 6.7% for the year and will be well above the target level of 4% even in the first quarter of 2023-24. Clearly, the RBI needs to do more.

There is a lot of foam about the repo rate being at a higher level than pre-pandemic levels. This observation has limited relevance given the current context. As Governor Shaktikanta Das has observed, “the globalization of inflation coincides with the de-globalisation of trade”.

The friend-shoring of supply chains adopted by developed economies has implications for India’s exports, current account gap and currency value – remember, the RBI has already levied about 50 billion dollars to defend the rupee.

On Wednesday, the Bank of England raised rates by 50 basis points, the highest in 27 years, and forecast inflation peaking at 13.3% and an 18-month recession. On Friday, the US Federal Reserve discovered that the labor market was hotter than expected, triggering expectations of what Fed Chief Jerome Powell calls “unusually large” rate hikes.

The path of rate hikes will widen the interest rate differential between India and developed economies. This will have an impact on portfolio flows and the cost of capital.

The anticipated burden of rate hikes will tighten financial conditions and prevent the flow of foreign funds into portfolios and direct investments. Rising day-to-day living costs and the loss of wealth effect will impact consumption and growth.

This could aggravate the imbalance of expenditure and revenue. To sustain growth and enhance India’s attractiveness, the government will need to accelerate reforms.

The road ahead is paved with uncertainties – and the US-China-Taiwan saga is still unfolding. India is the fastest growing major economy, but it will be impacted by the specter of a global slowdown. The Modi government has praised its handling of inflation. He now faces the challenge of designing a low-cost, high-growth economy.

Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
([email protected])

If inflation continues to soar, you will have to work like a dog to live like one. The joke, dripping with black humor, of American comedian and actor George Gobel resonates around the world. The origins of the term inflation, according to the lexicon, date back to the 14th century. It evolved in its journey through literature into economics textbooks. In the old world, as Shakespeare wrote, lending money for free “lowers the rate of utilization here at home in Venice.” In the modern world, easy money fuels inflation and erodes the purchasing power of income. Inflation used to mean too much money for too few goods. In a globalized world, inflation represents the results of prices triggered by causes ranging from demographics to dollar dominance and of course created currency. Between the arrival of the Covid-19 virus and vaccines, countries printed money to keep economies afloat. The effects of excess were compounded by scarcity – the disruption of food and energy markets following Russia’s war on Ukraine. The price of free lunch, that is, debauchery, is paid by the world. Consumer price inflation exceeds 9% in developed economies and exceeds 10% in more than 50 other countries. As this column observed a few weeks ago, with the RBI and central banks flying blind, people can’t do anything but prepare for the impact. The ghost of inflation has come back to haunt Indians. On Friday, the Indian National Congress took to the streets draped in black to show its disaffection with the government and its policies. One wonders if the form – the color adopted for the protest – added value to the function. The party did attract attention, but what was the message to the people? Given the intellectual ballast it boasts of, the party could have presented a viable/achievable vision of what could be done to mitigate the scourge of rising prices, especially on households and MSMEs. The monsoon session blockade reflects the parties’ inability to cede ground for the greater common good and win over minds. As a party with an unassailable majority and an expanding electoral footprint, the BJP could have offered space and challenged Congress and other parties to present a viable alternative political model on the floor of parliament. A report by CRISIL shows that food inflation in eight states – governed by BJP and non-BJP governments – is below 6%, lower than the national average. Surely there must be lessons here worth sharing. For their part, the opposition parties seemed focused on the placarding. In parliament and outside, media and public attention could have been used to debate/present a menu of competing ideas/solutions. Mitigation solutions arise at the intersection of creative political tensions – between the ruling front and the opposition. Politics cannot simply be an argumentative industry spouting out a mass of verbiage and rhetoric. Certainly, the political class of a democracy celebrating 75 years of independence – in all its richness, its dynamism and its argumentative colors – can do better with its people. This does not manifest itself in dissent speech in or out of parliament. Amid the dharna drama, the Reserve Bank of India on Friday raised repo rates (the rate at which banks borrow money from the central bank) by 50 basis points or half a percent to curb inflation . According to its own estimate, inflation should be 6.7% for the year and will be well above the target level of 4% even in the first quarter of 2023-24. Clearly, the RBI needs to do more. There is a lot of foam about the repo rate being at a higher level than pre-pandemic levels. This observation has limited relevance given the current context. As Governor Shaktikanta Das has observed, “the globalization of inflation coincides with the de-globalisation of trade”. The friend-shoring of supply chains adopted by developed economies has implications for India’s exports, current account gap and currency value – remember, the RBI has already levied about 50 billion dollars to defend the rupee. On Wednesday, the Bank of England raised rates by 50 basis points, the highest in 27 years, and forecast inflation peaking at 13.3% and an 18-month recession. On Friday, the US Federal Reserve discovered that the labor market was hotter than expected, triggering expectations of what Fed Chief Jerome Powell calls “unusually large” rate hikes. The path of rate hikes will widen the interest rate differential between India and developed economies. This will have an impact on portfolio flows and the cost of capital. The anticipated burden of rate hikes will tighten financial conditions and prevent the flow of foreign funds into portfolios and direct investments. Rising day-to-day living costs and the loss of wealth effect will impact consumption and growth. This could aggravate the imbalance of expenditure and revenue. To sustain growth and enhance India’s attractiveness, the government will need to accelerate reforms. The road ahead is paved with uncertainties – and the US-China-Taiwan saga is still unfolding. India is the fastest growing major economy, but it will be impacted by the specter of a global slowdown. The Modi government has praised its handling of inflation. He now faces the challenge of designing a low-cost, high-growth economy. Shankkar AiyarAuthor of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India ([email protected])

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