Monday, February 28, 2011

Anchoring Inflationary Expectations

Anchoring inflationary expectations

Anchoring them high that is.

In the preamble to his budget speech, our ineffably cheerful Finance Minister repeatedly referred to both inflation and fiscal consolidation - as well he should, given conditions in our economy. However, aside from wishful thinking, the measures he proposed did nothing to remedy either.

The make-work wages under the NREGA have been linked to the Consumer Price Index; wages for the women who (supposedly) staff 'anganwadis', or child-health centers, have been doubled; the hike in wages of government employees, effective from Jan 1st 2011, will be announced in the next fortnight, and is worked out by a formula linked to the cost of living. All excellent ways to bake inflation into the system.

As regards fiscal consolidation, or reducing the government's excess of expenditure over revenue, the FM heroically announced that this would drop from 4.6%. Doesn't quite add up: the growth in government expenditure, projected at 3.4%, doesn't fit with inflation, rising interest costs, and rising wages. Nor does it take account of inflated oil prices, and the consequent ballooning in subsidies required for our Oil Marketing Companies (OMCs). Staying with subsidies, in the tug of war between Sonia Gandhi's National Advisory Committee (NAC) and her PM's bureacucrats, the latter seemed to have been dragged over the line. Which means that the food subsidy would go up too.

Unless, of course, the Prime Minister throws a few senior managers from the Food Corporation of India into jail. In which case, our bill for rampant leakage of publicly funded grain to the trade will actually subside.

Our markets were relieved that the Finance Minister didn't raise excise duties. The relief lasted less than half the session, and in the end, our stocks were back to roughly where they began. As indeed we are - without a plan to deal with inflation, burgeoning subsidies and ineffective public servants with spiralling cost-to-taxpayer.

What a colossal waste of an opportunity.

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