The current inflation woes of India can be traced, among other things, to the excessive liquidity created in the economy during 2009, says Mr S. Narayan, former Economic Advisor to the Prime Minister, citing a recent study by a Singapore university.
More than Rs. one lakh crore were pumped into the system, over a few months that year, through ‘cash distribution’ and ‘loan waivers,’ and that is when inflation began ticking faster, he told a startled audience during a panel discussion on the socio-economic dimensions of inflation organised by the Madras Chamber of Commerce and Industry on Saturday.
The meeting had begun with a sombre caution by the Chamber President Mr T. T. Srinivasaraghavan, that inflation affects all of us, and adversely impacts equitable development, threatening ‘what is now largely celebrated as the India growth story.’
Mr M. R. Venkatesh, Chairman of the Chamber’s Expert Committee on Economic Affairs, outlined newer perspectives to inflation such as ‘speculator-push, media-pull,’ going beyond the conventional cost and demand dynamics.
With high growth and higher inflation, real interest rates earned on bank deposits have turned negative, observed Mr Narayan. Ominously, savings rate is starting to go down, he added. Questioning the common argument that inflation makes the economy grow, Mr Narayan highlighted the trend that with savings getting squeezed, money is getting into riskier investments and further fuelling inflation.
Worryingly for the industry, he noted, capital formation numbers are not going up, and the effects could unravel in 2011 in the form of dampened economic growth. His speech also drew attention to lower foreign debt coverage ratio due to decline in forex reserves, and to the dependence on foreign debt for capital creation which could lead to a stress in the economy.
Other panel speakers were Mr K. Venugopal, Joint Editor of The Hindu Business Line , who laid emphasis on the need for increases in agricultural productivity, and Mr Victor Louis Anthuvan of Loyola Institute of Business Administration, who saw inflation as a symptom of a larger problem of market imbalances.
Answering a question from the audience, Mr Narayan wished that expert reports on pulses and edible oil long lying with the Government got some attention. Rather than trying to promote agriculture all over the country, let there be a State-specific approach, he urged, mentioning the example of agriculture-surplus States such as West Bengal, Orissa and Assam, as also the neighbouring Bangladesh which has moved from food deficiency to prospective self-sufficiency.
