Inflation - the sorry tale

There is a lot of talk about inflation and the increase in food prices these days. But when I think of inflation there are other things that worry me more...

One of the biggest distorting factors in our economy is the state of taxation in our country. It is so inequitable - everybody except the salaried escapes the net - that it leaves a lot of unaccounted money floating. That cant be put to any easy productive use and finds its way into the real estate sector and perhaps the stock market (this I am not sure though). I haven’t seen reliable figures on the inflation in the real estate market myself and the consumer price inflation index doesn’t take into account this factor at all. Which is very surprising to me because housing is a universal basic expense for everyone - poor included. In fact for the poor and the middle-class, it probably forms as much as 20% of their monthly expense. And the inflation in the real estate market and the services sector, I think, is galloping ahead of the CPI. That is the bigger danger. So I think the 6-7% inflation is all bull. And unless we take urgent steps to achieve a more equitable growth and growth in all sectors of the economy, inequity in society will cause lots of social unrest manifesting in so many other forms. Thats India’s biggest challenge today and not achieving sustained 8% growth or matching China’s march.

And agriculture and infrastructure should be the biggest area of focus. Investing in infrastructure and improving agricultural productivity is most important and better in the long run than macro-economic interventions like tweaking the interest rate and reducing the liquidity. Instead of trying to manage inflation, we would do better to manage its effects. And subsidies are necessary but they should be better thought through. Offering farmers incentives to move away from pulses to cash crops doesn’t seem like a great idea to me, especially considering that probably no other country grows these lentils. All said and done, I think the biggest source of food price increases still remains manipulation by some cartels and hoarders, FCI included.