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Productivity, efficiency surest antidotes against inflation

S. Balakrishnan

WORRIES about Government finances dominate discussions on economic policy. The Government is abjectly apologetic; the Finance Minister pleads helplessness in controlling expenditure and subsidies. He can understand the strong feelings on spending cuts -- why, he would take to the streets himself against such measures if he were in the Opposition!

Fortunately, inflation has been extraordinarily quiescent, giving the Government and RBI several degrees of freedom in setting fiscal and monetary policy. And, luckily, the tame behaviour of prices looks like continuing. The fiscal deficit poses no immin ent danger to price stability, leaving the RBI with sufficient leeway on the interest and exchange rate fronts.

Of course, policy-making in India is a complex trade-off in political economy. As a Western newspaper recently remarked, no First World central banker need worry about the price of onions and its effect on inflation as Dr Bimal Jalan must. The RBI has ma naged a difficult inflation -- interest rate -- exchange rate situation with elan (although our long-standing controls on capital outflows were of considerable help).

The US' success in drastically reducing inflation and inflationary expectations owes as much to its leap in productivity as confidence-inducing monetary governance. Our policies, on the other hand, pay no attention to the compelling need to improve effic iencies in manufacturing and infrastructure. Indeed, there seems to be little awareness of the central role of productivity in cost containment and inflation control. And we are referring here not to efficiency in (or of) Government -- which, as the FM s ays, is too much to hope for -- but the private sector, including the blue-eyed boy of foreign investment.

Practically every key sector -- power, telecom, insurance -- into which private investment has been inducted is on the basis of guaranteed returns, cost-plus (eg telecom) or existing (eg insurance) tariffs. And they don't come cheap. If newspaper account s are to be believed, the cost of power from a high-profile project in Maharashtra, set up by one of the world's largest energy companies, is nearly Rs 8 -- thrice as much as from the next cheapest source. Foreclosing the plant will involve a compensatio n of Rs 35,000 crore to the foreign promoter for assets worth at best a few thousands of crores of rupees. Talk of bonded labour!

Not that we did not know this. Well-meaning critics and experts warned the State and Central Governments of the high cost of power from the project and the complete one-sidedness of the agreements and financial guarantees given to the foreign investor. T hey have been proved right. Much before fiscal deficits ruin us, the power bills of private electricity producers will.

The same story is being repeated elsewhere. Some time back, the regulatory authority for the telecom sector -- it is hard to believe this but it did happen -- opposed a proposal to offer low-cost mobile phone services. One would have thought these bodies exist to protect consumers and would welcome tariff reductions. On the contrary, they seem to have an entirely misplaced view of their functions and responsibilities.

The new insurance companies must again abide by existing tariffs. Our idea of privatisation is queer: mere substitution of public by private ownership or coexistence in a price-protected environment.

Thus, not content with public sector inefficiencies, the Government is unwittingly perpetuating feather-bedding practices in the private sector as well in the process of catalysing new investment The risk is that assured cost-plus prices for energy and u pstream products will affect the competitiveness of downstream economic activities.

Clearly, microeconomic reform is our Achilles heel. The Government must realise that efficiency, productivity and competition are the surest anti-inflation medicines for the economy. It must soon get down to concrete action in these areas.