Wages of sin

A deeply traumatised nation also needs to address the ordinary business of life. The average Indian cannot neglect her ever-pressing task of managing the household even as she mourns the traumatic loss of one of her sisters. She must perforce wonder if this is going to be any easier in this new year than in the one just past, when the world didn’t quite end.
She needs to take stock of where her country stands now. The last year began with the gloss coming off the Indian success story. It was no longer a rock star among nations bothered by economic downturn. India, too, faced the blues, with slowing growth, rising prices and shell-shocked managers of the economy. The numbers on various indicators told a dismal story.
The government initially did what it normally does under such conditions. It went into denial, saying that this was a mere blip and India would soon be back on the growth trajectory. The Budget of March 2012 promised 7.6 per cent growth, inflation under seven per cent and assured us that no bitter pills in the form of increase in controlled prices or taxes were needed.
The author of those predictions has since gone on to Rashtrapati Bhawan. Alas, no such comforts awaited either his successor or the citizen at large. Throughout the year, the government faced the mortification of revising for the worse all its prognoses. The present official expectation of growth of under six per cent is greeted with a rare degree of scepticism. Prices have continued to mount. The aam aurat does not need to know that the wholesale price index is up eight per cent yearly or the new consumer price index has registered a 10 per cent per annum increase. She now pays higher prices for every item of daily needs. She knows that fruit, vegetables and milk have become steadily more expensive for the last four years. But the small comfort she had of wheat and rice prices not rising in the previous year also vanished in 2012. Fuel prices increased rather dramatically, all manners of services now cost more, and loan outgoes continue as before. The vast majority of Indians are outside government payroll and do not earn inflation-indexed incomes. Caught in the scissors of fixed incomes and rising prices, the households had to both curtail their consumption and face lower savings.
So as we greet 2013, the main problem facing India yet again is inflation as it has been since 2008. What makes inflation so stubborn and why does its control elude our world-renowned economic administration?
Our collective economic behaviour has been not unlike that of the average American household a few years ago, punch drunk on seemingly cheap housing loans and easy plastic money, leading to recklessly living beyond means. Over the years, successive governments have offered various sections of population goods and services below cost, be they farm inputs, grains through the public distribution system, or petroleum products. Subsidies of the Central government alone now amount to over `4 lakh crore a year, or over two per cent of the gross domestic product (GDP). Government revenues, on the other hand, continue to fall short of its expenditure. This deficit is met through an increased public indebtedness. It will be over `10 lakh crore this financial year. That would make the already revised budgetary deficit target of 5.3 per cent of the GDP most likely to be overshot once again.
The other fly in the ointment is the imbalance in foreign trade. The economic slowdown has not affected our thirst for imported oil or gold. While our exports have been slowing down, imports continue at the old pace. Our spending in foreign currency exceeds our earnings of it. That deficit, too, is likely to exceed five per cent of the GDP. The combined effect of such imprudent economic behaviour is likely to be a growth rate of only five-odd per cent this year, the lowest in a decade. We will thus have an economy circumscribed by three rates of five-plus per cent: the budgetary deficit, the current account deficit and the annual growth!
It is not as if the government is not aware of these factors. The Reserve Bank of India listed all the usual suspects in its financial stability report released last week: high budgetary and current account deficits, lower investment, sputtering industrial growth and slowing exports, and not for the first time either. P. Chidambaram, the finance minister, has time and again stressed the need for fiscal consolidation, that is, controlling the deficit. The mid-September flurry of “reforms” — increase in diesel and LPG prices, permission for 51 per cent foreign investment in multi-brand retail and a host of lesser measures — caused the usual cheerleading. Yet the government oil marketing companies will face under-recoveries (euphemism for subsidies!) of about
`2 lakh crore this year.
Offering subsidies is like a man riding a tiger. He cannot dismount the beast (lest it devour him) any more easily than a finance minister can withdraw subsidies, which are in effect bribes to the voters. It is thus quite possible that the 2013 Budget, the last of this government, may turn out to be a soft one again, despite all the tough talk now heard about fiscal consolidation and parsimony. Electoral arithmetic always trumps economic sense.
The real impact of the other measures would take much longer to register, if ever. It remains to be seen whether they have anything more than symbolic value. We do not know whether the sharp upward spike in the index of industrial production in October will be sustained or be just another indicator flattering to deceive. Under the circumstances, India Inc’s “sentiments” for a stronger 2013 would appear to be based more on a hope and a prayer rather than concrete pointers.
What we can now look forward to is more of the same: higher prices, greater government obfuscation and mounting uncertainty. The government had four years to display economic prudence, but it threw restraints to the wind. In the words of the Bible, is its belated and still rather muted concern for corrections an act of “against hope believing in hope” or will the pronouncement of “The wages of sin is death” prevail?

The writer taught at IIM Ahmedabad and helped set up the Institute of Rural Management, Anand. He writes on economic and policy issues.