Here comes double digit inflation

(Please click image for a larger version)

It is our turn to say, we told you so! Actually we didn't expect things to get this bad so soon.

Meanwhile the FM has made some interesting statements reacting to the BJP resolution on price rise. Some of his points are well taken. The statement is available on the front page of the Finance Ministry Website, scroll down to the entry dated 2008.06.06.

In 2003-04, the NDA's last year, the economy registered a growth rate of 8.5 per cent. However, this was a statistical aberration and entirely due to the base effect of the low growth rate of 3.8 per cent in the previous year. The agriculture sector appeared to bounce to a growth rate of 10.0 per cent in 2003-04, but this, again, was only a statistical quirk because the previous year had recorded a negative growth rate of 7.2 per cent! Not surprisingly, when the NDA claimed in 2003-04 that India was “shining”, the people voted them out.

Notice the high dramatic tone. Arguably the Finance Ministry website is being used as the FM's personal blog and a political vehicle.

The FM is referring to this document [pdf] in the above statement. Sure enough, the agriculture, forestry and fisheries had a negative growth of -7.2% in 2002-03. From this low base, in 2003-04, NDA Government's last year, the same sector had a 10% growth. But here is the kicker, in 2004-05 (UPA's first year of this term), the sector achieved a 0% growth. Zero, as in zilch, nada. So, what magic did the UPA perform?

The current inflation figures are for the period just after the fuel price hike took effect.

Notwithstanding the many successes under the UPA Government, we admit that inflation is a problem. It was a problem under the BJP/NDA Government too. In 2000-01, in 48 out of 52 weeks, the WPI was over 6 per cent; in 22 of those weeks, it was over 7 per cent; and in 12 of those weeks, it was over 8 per cent. These are facts that cannot be wished away. During the entire six year rule of the BJP/NDA, crude oil prices per barrel ranged from US$13 to US$36. How I wish that the UPA Government had enjoyed such benign crude oil prices? We have not been fortunate.

The FM pins all the blame on oil prices alone. It is true that oil and commodity prices gravitated upwards during the past two years. However, that alone can not account for double digit inflation. Even before the fuel price hike inflation was running at 8% or above. The fuel price hike was supposed to add 50 - 70 basis points by itself, since fuel has about 5% weight in the WPI. What explains this sudden unexplained jump? This proves that there are strong inflationary forces lurking underneath. The blue line in the above graph is the inflation over a week earlier, annualized. The latest figures show that the WPI jumped by almost 100% in annualized terms, over the previous reporting period.

The FM laments high oil prices while boasting strong GDP growth. The NDA rule coincided with a general slowdown in the world economy and a US recession. After the recession from 2000-01, it took nearly two years for the US economy to get back into track. The stock market recovered late 2003 and then started peaking until the housing and credit bubble burst in 2007.

In other words, if the NDA regime had the advantage of relatively benign oil and commodity prices, it suffered due to global economic slowdown and financial turmoils. Both these factors were reversed during the UPA regime. We had a liquidity glut and enormous inflows. At the same time commodity prices went up.

The less said about the FM's assertions about fiscal discipline, the better. The UPA is all set to end this term with an avalanche of spending. No Government will be able to roll back the NREGS or the farmer loan waiver schemes without political backlash. The UPA has started a dangerous game of competitive largesses.