Mostly Economics

This has been a question asked by a few.

Arvind Subramanian of PIIE adds more thoughts on the matter. He says it is a mystery how public has been so far silent on this high inflaition. Barring some cries against few food items (like onions in 2010), the public has been more or less silent. What are the reasons. He points to six possible reasons:

• (i) Protection of rural India — Rural India incomes protected via NREGA which now has wages indexed to inflation..
• (ii) Declining importance of food — NSS surveys show share of food in consumption declined from 41% to 29%, hence less impact of rise in food inflation
• (iii) Decline in fixed-income earners — more wages seem to be indexed to inflation so people are not really concerned
• iv) Rise of debt-financed consumerism — This is a good point. He says people are increasingly financing consumption via debt:

according to RBI data, personal consumer loans increased roughly threefold during the 2000s from 3 percent of GDP to about 10 percent. Higher inflation lowers the real cost of borrowing and effectively subsidizes consumption. However, this argument is valid only if borrowing is at fixed rather than floating interest rates, and consumer loans in India tend to be of the latter type.

• (v) The absence of large price changes — may be price changes are more incremental and not onetime big changes for people to note
• (vi) Growth matters more: people seem to be more concerned over growth..

Hmm…

In the end he says:

In any event, since higher inflation tolerance is still just a possibility, its causes unclear, and its reversal not improbable (as in 2008), RBI should not relax its guard. And the government should help with some serious fiscal consolidation on its part. The Sita of macroeconomic stability should not be sacrificed by diluting the Lakshman rekha of 5 percent inflation.

Another point he makes towards beginning is how RBI is one of the few better run institutions in the country:

Keeping inflation low and stable has been one of India’s major policy successes. On the strength of this achievement, the Reserve Bank of India (RBI) could pride itself as one of the better-run public institutions in the country. But conducting monetary policy was among the easier jobs in India. In some ways, RBI had little choice but to deliver macroeconomic stability because of the propitious political economy of inflation. The politically assertive middle class has had low inflation tolerance, with 5 percent considered the threshold —or Lakshman rekha —beyond which the clamor for action, never constrained by apathy or acquiescence, becomes difficult to ignore. RBI’s policy merely reflected an unavoidable respect for the inflation preference of key voters.