To beat inflation, win the mind game

The economy waits with baited breath to see what RBI governor D. Subbarao does today. Will he raise rates again — for the 12th time in 18 months? Since inflation is far from vanquished, he may well do so. On the other hand, it is abundantly clear that the monetarist approach to quelling inflation has failed to deliver results. Instead of depressing prices, it has suppressed growth — an outcome that the government, until not long ago, was vocal about not wanting.

Regardless of what the RBI does now, what is baffling economists is that high inflation and inflationary expectations are threatening to become ingrained in the system. This should cause more worry to the UPA than the anti-corruption stir. Voters have the stomach for endemic corruption, but not persistent high prices, especially food prices.
But as with corruption, so with inflation. The UPA continues to give the impression that it is not in the driver’s seat. It is buffeted by forces beyond its control and is content to either react or leave the firefighting to others — in this case the central bank. Such a perception does little to quell inflationary expectations. Communications are at the heart of controlling inflationary expectations. Those charged with economic management must convey the sense that price rise is temporary because they take a dim view of price increase and will do everything possible to counter it (including taking steps to ensure more supply to ease prices).
The sad truth is that the government has failed to convey its commitment to reining in prices. The RBI has created the perception that it will not countenance high inflation, but not the government. Fighting inflation involves changing perceptions, which makes it a communications issue. Here the government has come a cropper.
In many cases, it has actually contributed to exacerbating inflationary expectations by allowing liberal price increases where it could have done otherwise. When government agencies do not hold down prices, they do more damage than when private companies increase prices. Oil marketing companies may be constrained to raise prices periodically, but has the Centre made a well-orchestrated countrywide effort to work with state governments and reduce the burden of imposts to ensure that the end consumer is minimally impacted? It appears that the Centre has left it to the good sense of state governments to individually and sporadically “do the needful”. The upshot: end-user prices of petroleum products keep going up steeply with frightening regularity and the hikes have a cascading effect on the prices of other goods and services.
When Mother Dairy and other government sponsored milk agencies raise prices, sometimes more than once in a season, the rest of the daily needs market sees no reason to suppress the urge to hike prices. This is the sentiment at the heart of inflationary expectations.
By the same token, when a chief minister goes on an inspection tour of bazars and lets it be known that the state government has no interest in either raising prices or suffering rising prices, the market pays heed. In Kolkata, prices have actually declined after Mamata Banerjee’s intervention. Unfortunately, the Centre has not said or done anything to convey the sense that it is determined to ease supply side constraints that have contributed to the runaway food prices. On the issue of lakhs of tonnes of grain rotting in government storage, it has responded to media stories, scathing in their indictment of criminal negligence, by throwing up its hands in helplessness. On the issue of allowing FDI in multi-brand organised retail, a move that has the potential to revolutionise the storage and distribution of farm produce, its approach has been marked by a kind of foot-dragging that is amazing. It is clear that the UPA is apprehensive that the move will not go down well with those in the traditional retail sector. But of course it will not do anything to communicate the obvious benefits of opening up that will accrue to millions all along the supply chain. Nor will it communicate with conviction that the retail pie is large enough for all players to co-exist and prosper.
With the rise of the private sector in mass communications, the government’s own communicators remain weak and in disarray. In the Sixties, when the grain-deficient country led a ship-to-mouth existence and the Green Revolution was underway, a sterling role in communications was played by agencies like the All India Radio (AIR). Today, little is known about what is being done to increase farm output and improve distribution. In any event, the AIR and Doordarshan are pale shadows of their old selves. The rise of private radio and satellite television should not have caused AIR and Doordarshan to retreat into a shell. Clearly, there is room and a role for both privately run electronic media and the traditional government-run broadcasters. It is time they capitalised on their incomparable reach and played the role they once played.
But to do that the government must get its key messages right. At present there is no evidence that it is even inclined to apply its mind to messaging. It appears to be content to let matters drift and hope for the best in an increasingly gloomy scenario. The control of inflationary expectations is to a great extent a mind game. The sooner the government acts on this verity the better it would be for the country.

Vivek Sengupta, a public affairs analyst, is founder and chief executive of the consulting firm Moving Finger Communications