There is a minister shooting in every direction. While that is heartening from an equity and diversity standpoint, it does not say much for leadership. Actually, that has been the real surprise of the UPA government – the complete lack of leadership from chairperson Ms. Sonia Gandhi.
Somebody should answer, but obviously nobody ever does. The Congress party, via the Finance Minister, has been running the RBI for several months now, or so it would appear to most neutral observers. There is nothing a priori wrong with this practice because the RBI is not independent of the politicians. But different political parties have chosen to not exercise their powers, with the present UPA government being the least restrained.
My friends always remind me that I got Bush and US completely wrong. I had long maintained, until the day Bush attacked Iraq, that it made a lot of sense for the US to achieve its goals with Iraq without any military intervention. If the US were not to attack Iraq, there would be a credible threat hanging over Saddam, and it was very probable that the US objectives would have been achieved. Alas, that did not happen. I was quite wrong. Bush went to war and is now unsuccessfully trying to pick himself, and the Republicans, from self-created debris.
Just released data on WPI indicates that for the week ended March 2, 2007, year on year inflation was a high 6.46 %. On release of the data, markets went into a tizzy with the Sensex dropping 230 points before “recovering” to 140 points down. This latest inflation data seemed to confirm the conventional wisdom (even street hawkers talk about it) that inflation in India is out of hand, too high, and the government is not doing enough.
As the Finance Minister, Mr. P C Chidambaram said after the budget – good economics is good politics. I would add that good politics is good economics. The tragedy is that Budget 2007 is bad politics. The farce is to call it good economics.
The headline “Defying FM’s call, Cement Companies Raise Prices” will go down in Indian history as the most important economic event of the last seven years. There is an interesting debate going on in India as to whether India has graduated to a high growth, mature, 8 % plus economy. Several, if not most, analysts claim that without additional reforms, Indian GDP growth rate will inevitably fall to 7 percent, or less.
The 10th anniversary of Mr. Chidambaram’s dream budget was presented by a person (obviously) 10 years older, and now past 60. The tragedy is that it shows. There was so much he could have done, but he chose to take the safe, well-traveled route. A route traveled by only those who believe in eternal, glacial gradualism. A gradualism that means that you can even walk backwards, while all the time claiming that you can walk on water. Also showing the age was a hardening of the arteries. This particular FM has always had a stubborn streak, and by golly, I brought some ingenious taxes like the fringe benefit tax and the cash transactions tax, and by golly I am not only going to keep them, but also enhance them.
I don’t know if the Bombay Club exists in theory, but it does exist in practice. And who is in this club? Members used to meet in smoke filled rooms at the time Adam Smith wrote about them in the late eighteenth century; today, they have modernized and meet in wine-filled rooms or in cyberspace. But their intent and purpose remains the same – to fix the economy and prices for their own good, rather than the good of the nation, or the good of the aam aurat.
It was just two years ago that there was a raging debate about the “low” tax/GDP ratio in India and that we needed to raise tax rates in order to increase the tax/GDP ratio to a respectable level of around 16-18 percent. Economic reforms, by definition, lower tax rates, and this was another argument offered by the sleepwalkers to increase personal income tax rates. Today, just two years later, when the tax/GDP ratio will be close to 20 percent of GDP, the talk of increasing tax rates has gone down (I hope!).
It is very likely that the Indian economy entered a structurally different phase starting in 2003. GDP growth will exceed 8 % for the fourth year in a row. However, there are many who see this growth pattern as a blip. Just last month, the RBI somewhat surprisingly raised credit requirements to cause nominal interest rates to rise by 50 basis points. Given that inflation is likely to fall by at least a half percent over the next few months (oil prices have declined significantly, manufactured goods prices are stable and wholesale food prices have actually declined since September) this means that the RBI has through its policy, raised real interest rates by a minimum of 1 percentage point.
