Inflation and the Risks of the Free Policy – The New Indian Express

There’s nothing like context — and a change in geographic location — to drive realities home. Last June, the Reserve Bank of India invoked images of Sri Lanka to highlight the growing risk to the state of public finances. He said: “The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt sustainability.” The reference drew derisive and dismissive comments. India, after all, is not Sri Lanka.

Cut to October, UK. The imagery and “critical importance of public debt sustainability” is all too real and visible in the headlines of the chaos in brittany. The British economy, which has seen the appointment of the fourth chancellor in four months, is the living laboratory of a crisis that threatens global financial stability.

The crucial point is the fusion of the cause and the consequence of the rise inflation. Developed countries are pumping in more and more money to protect their people from rising costs, even as central banks try to withdraw excess money to bring inflation down. As interest rates rise, the balance is more difficult to negotiate. The cauldron of competing crises captures global attention and dominated the debate at the annual meeting IMF and World Bank meetings in Washington.

There is no respite. This week, consumer price inflation rose more than expected in the United States, derailing theories of an inflation spike. Also in India, the CPI rose to 7.41% in September from 7%. Central banks have only a blunt instrument to reduce inflation – and rising interest rates trigger consequences represented by what is now called the cost of living crisis.

The spectrum of risk holds lessons for India. It highlights the need to contain the accumulation of deficits and debt fueled by competitive populism. In Gujarat, the Aam Aadmi party promises free electricity up to 300 units per month, unemployment benefit of Rs 3000 and Rs 1000 for women and monthly stipend for new lawyers in addition to health care and l free education. Congress entices voters with free electricity, Rs 3 lakh farm loan waivers, Rs 500 LPG bottle, Rs 4 lakh to relatives of those who died during the Covid-19 pandemic and more . The list of gifts is similar and long for voters in Himachal Pradesh.

The expansion of political intervention is not limited to states bound by a ballot. The government of Telangana, which has floated the idea of ​​income support for farmers as a result of a national scheme, has launched an ambitious plan for Dalit families in the state. The Dalit Bandhu Scheme offers a one-time grant of Rs 10 lakh to families, with no collateral conditions, to start a business. The states also wooed government employees with the promise to restore the old pension scheme.

Indeed, the expansion of the politics of the promise — targeting specific electoral classes, from the unemployed to the elderly, in more than 15 states — is visible in the growing list of programs and in data on state tax conduct. And no political party can claim innocence. There is no doubt about the distress at the bottom of the pyramid. As this column has observed, the critical factor is the need to align public spending with a public, not a political, objective.

There is also the issue of affordability. The RBI report finds that “slowing own tax revenue, a high share of committed spending and the growing burden of subsidies” are making many states’ debt levels unsustainable. It is instructive to note that the free phenomenon is growing even as the Supreme Court considers the issue and sets up a bench to review its 2013 judgment. Pending the outcome, at the very least, India will know the extent of the interventions and their impact on services essentials such as health and education.

Political impulses and impulses have a price. Although India is better positioned than most economies, it is hardly immune to global inflation and slowdown. The persistence of inflation in the United States suggests the US Federal Reserve raise interest rates further by at least 1.5 percent. Higher rates make the dollar stronger, make imports more expensive, impact flows to emerging economies and worsen the cost of living. The rising cost of capital will slow the pace of growth. IMF and World Bank estimates have already reduced 2023 growth for all major economies, including India.

History bears witness to the fact that macroeconomic crises in India almost always emerge at the intersection of fiscal and current account deficits. The rise in the US dollar has caused the value of the rupee to fall to 82.30 per dollar, and the current account deficit is hovering at over 3.5%. Already, the yield on 10-year government bonds is 7.42%. As the RBI is forced to react to rate hikes in the United States, the cost of money at home will impact consumption and growth.

Stability relies on effective debt management to enable growth. The rise in free policy – promises of unquantified and unallocated expenditure to obtain votes – threaten the fragile state of India’s balance sheet. It is imperative that the political class recognize the price that India may end up paying for its debauchery.

Shankkar Aiyar

Author of The Gated Republic, Aadhaar:

A biometric history of India’s 12 digits

Revolution and accidental India

[email protected]

There’s nothing like context — and a change in geographic location — to drive realities home. Last June, the Reserve Bank of India invoked images from Sri Lanka to highlight the growing risk to the state of public finances. He said: “The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt sustainability.” The reference drew derisive and dismissive comments. India, after all, is not Sri Lanka. Cut to October, UK. The imagery and “crucial importance of public debt sustainability” is all too real and visible in the headlines about chaos in Britain. The British economy, which has seen the appointment of the fourth chancellor in four months, is the living laboratory of a crisis that threatens global financial stability. The crucial point is the merging of cause and consequence of rising inflation. Developed countries are pumping in more and more money to protect their people from rising costs, even as central banks try to withdraw excess money to bring inflation down. As interest rates rise, the balance is more difficult to negotiate. The cauldron of competing crises captures global attention and has dominated the debate at the IMF and World Bank’s annual meetings in Washington. There is no respite. This week, consumer price inflation rose more than expected in the United States, derailing theories of an inflation spike. Also in India, the CPI rose to 7.41% in September from 7%. Central banks have only a blunt instrument to reduce inflation – and rising interest rates trigger consequences represented by what is now called the cost of living crisis. The spectrum of risk holds lessons for India. It highlights the need to contain the accumulation of deficits and debt fueled by competitive populism. In Gujarat, the Aam Aadmi party promises free electricity up to 300 units per month, unemployment benefit of Rs 3000 and Rs 1000 for women and monthly stipend for new lawyers in addition to health care and l free education. Congress entices voters with free electricity, Rs 3 lakh farm loan waivers, Rs 500 LPG bottle, Rs 4 lakh to relatives of those who died during the Covid-19 pandemic and more . The list of gifts is similar and long for voters in Himachal Pradesh. The expansion of political intervention is not limited to states bound by a ballot. The government of Telangana, which has floated the idea of ​​income support for farmers as a result of a national scheme, has launched an ambitious plan for Dalit families in the state. The Dalit Bandhu Scheme offers a one-time grant of Rs 10 lakh to families, with no collateral conditions, to start a business. The states also wooed government employees with the promise to restore the old pension scheme. Indeed, the expansion of the politics of the promise — targeting specific electoral classes, from the unemployed to the elderly, in more than 15 states — is visible in the growing list of programs and in data on state tax conduct. And no political party can claim innocence. There is no doubt about the distress at the bottom of the pyramid. As this column has observed, the critical factor is the need to align public spending with a public, not a political, objective. There is also the issue of affordability. The RBI report finds that “slowing own tax revenue, a high share of committed spending and the growing burden of subsidies” are making many states’ debt levels unsustainable. It is instructive to note that the phenomenon of gratuitousness is growing even as the Supreme Court considers the issue and has set up a bench to review its 2013 judgment. Pending the outcome, at the very least, India will experience the extent of interventions and their impact on essential services such as health and education. Political impulses and impulses have a price. Although India is better positioned than most economies, it is hardly immune to global inflation and slowdown. The persistence of inflation in the United States suggests that the US Federal Reserve will raise interest rates further by at least 1.5%. Higher rates make the dollar stronger, make imports more expensive, impact flows to emerging economies and worsen the cost of living. The rising cost of capital will slow the pace of growth. IMF and World Bank estimates have already reduced 2023 growth for all major economies, including India. History bears witness to the fact that macroeconomic crises in India almost always emerge at the intersection of fiscal and current account deficits. The rise in the US dollar has caused the value of the rupee to fall to 82.30 per dollar, and the current account deficit is hovering at over 3.5%. Already, the yield on 10-year government bonds is 7.42%. As the RBI is forced to react to rate hikes in the US, the cost of money at home will impact consumption and growth. Stability relies on effective debt management to enable growth. The rise of the giveaway policy – promises of unquantified and unallocated spending to secure votes – threatens the fragile state of India’s balance sheet. It is imperative that the political class recognize the price that India may end up paying for its debauchery. Shankkar Aiyar Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India [email protected]

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