Friday, November 4, 2011

Prime Minister Manmohan Singh is Wrong on Inflation

Inflation in India is edging up steadily and stubbornly. It is not abating a bit, and people are getting frustrated. Such relentless rise in the prices of goods and services is now testing the patience and nerves of the Indian populace. Amidst all these hardships, the politicians - who are in charge of policy making - are evading any serious discussion of inflation and its causes. Not only they are not serious, but their mind numbing and irresponsible statements regarding the causes of inflation are now becoming very frustrating, especially for someone who knows economics. I can understand the ignorant statements of finance minister Pranab Mukherjee and Mr. Advani, but it is hard to fathom what is wrong with prime minister Manmohan Singh who is an academic economist having a PhD degree from Oxford! A former economics teacher of famous Delhi School of Economics seems to have forgotten his economics.

After the recent hike in petrol prices by the government owned petrol companies (PSUs - Public Sector Units) like HPCL the outrage is growing and some of the political parties in UPA government are threatening to pull out from the coalition Singh government. Looking at this uproar PM Manmohan singh issued some amazingly ignorant statements about the possibe causes of Inflation. Here is what he said:

"What prices are going up are prices of vegetables, prices of eggs, prices of fish, that is the secondary and tertiary food items. That is a reflection of the demand for these commodities exceeding supplies....That in turn, to some extent at least, is a sign of growing prosperity of our country. If our national income increases by 8 per cent per annum and our population is increasing at 1.6 per cent per annum, the per capita income is growing at 6-6.5 percent....It is bound to lead to a demand for more diversified type of food basket. I am not saying this is a fool proof way of describing this complex reality, but in analyzing food inflation, I think, this is an aspect that should not be lost sign of."

Apart from being highly insensitive to the plight of poor people, these statements reveal that Mr. Manmohan Singh is just making Keynesian rhetoric. Keynes was wrong on about everything that he wrote in his General Theory and so does Mr. Singh who is using Keynesian paradigm for finding causes of inflation. I don't need to refute Mr. Singh here line by line because Henry Hazlitt - some 50 years ago - demolished the Keynesian system literally line by line in his brilliant work, The Failure of New Economics.

I will only add one thing here is, that Mr. Manmohan Singh should try to understand Jean Baptiste Say's 'Law of Markets' which states that 'there can be no demand without supply' in the market or as famously - although rather misleadingly - known as 'supply creates its own demand'. This implies that, if Indians are becoming prosperous then they are already producing the supply of goods which they are demanding from each other. In such a situation there is no question of demand outstripping the supply of goods and services.

Although Mr. Singh is partially right when he says that the demand for goods and services is rising, but his subsequent analysis is erroneous. He needs to ask himself how and why the demand in the economy is rising? Is this demand real - i.e., created by producing real wealth - or created artificially by printing truck load of phony currency by the RBI? If he will try to find answers of these questions by using sound economic theory then he will find that this increase in demand is artificially created by RBI money printing and government's profligate spending of this money e.g., already government's fiscal position is worsening before the financial year ends.

I understand Mr. Singh is very busy and thus he won't be able to study inflation in detail. Precisely because of this reason I humbly request and urge him to read Henry Hazlitt's Inflation in One Page (pdf link). This one page explanation of inflation by Hazlitt is what is all that Mr. Singh needs to correctly understand the phenomena of Inflation. If he will read this page then he will find the following logical explanation of Inflation:

Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.

After reading this, I hope and am sure that Mr. Singh will stop making highly irresponsible statements like above. It will also help him in combating the inflation monster decisively, if he is at all serious in combating it in the first place.

1 comment:

  1. Sir, where is the monster of recession reached and how much time it will reach India? BPO sector seems to be in trouble. But the think is what makes china up roaring?

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