Any country where there are celebratory headlines about the inflation rate having ‘plunged to a low value of only 8.79%’ needs its collective head examined. People are already urging Rajan to cut interest rates and encourage growth. It is not only the politicians but even the private sector leaders who should know better. India used to have a high reputation as a low-inflation country. Never before has it had four years of persistently high inflation with the government doing nothing to correct the inflation trend but secretly approving its redistributive effects for its rural vote gatherings strategy. Perhaps in that if in nothing else, UPA-2 has achieved its policy aims. It wanted to punish the urban areas for having enjoyed the fruits of liberal reforms. The weapon was food price inflation. The NAC designed this policy. Now, hopefully, it will ensure the defeat of Congress in 2014.
The perverse nature of the Indian political economy consists of a deliberate misunderstanding of how prices allocate resources and how any neglect of the economic logic of pricing imposes costs somewhere on someone in an unintended fashion. Politicians believe, or at least pretend to, that any item—goods or service—sold through the state must have a price which bears no relation to costs. As we see in Delhi, the AAP believes that water or electricity must be priced popularly rather than in any way which would make sense in terms of the environment or the economy. Water is scarce and should be