The economy performed extremely well from 2003 till 2007. Growth was high, inflation was low, capital inflows were buoyant, balance of payments gave no trouble. Good times breed hubris. Even Lal Kishenchand Advani, who generally does not admit to mistakes, said recently that the India Shining campaign was one; he thought it should have been an India Rising campaign. But hubris is not a monopoly of the Bharatiya Janata Party. Here is a sample of the prime minister’s boasts in better days: “The going has never been as good for India in the past as it is now. Our economy has been growing at an impressive pace of over eight per cent. Such rapid growth over three successive years is unprecedented in Indian history. Wherever I go, I see our nation on the move. Our industry and services sectors are showing impressive growth. I see a reassuring confidence in our industry in being able to take on the challenge of the rest of the world. The growth of the manufacturing industry has touched eleven per cent in the last quarter, generating many jobs for our youth and workers. I see our service sector competing with the best and earning valuable foreign exchange.”

That was how everyone felt till two months ago. And then, inflation began to rise. From 4.3 per cent in the first week of January, the year-on-year rise in the wholesale price index climbed to 7.4 per cent at the end of March. Prices are of interest to the common man, and their figures are issued every week, so they stick in the common man’s mind. That makes them a good media subject.

As inflation has climbed, media interest has shot up so sharply that sometimes two channels want me on the air at the same time. Together with me are usually politicians from the major parties. Amongst those often fielded, the BJP puts forward Rajiv Pratap Rudy, the Communist Party of India (Marxist) D. Raja, and the Congress Kapil Sibal. Rudy has a set speech in which he lambasts the government; it is the same whether the subject is inflation or Ram Setu. D. Raja sheds tears for the common man, and excoriates the government for the good leftist advice it ignored. Kapil Sibal reels off all the measures his government has taken to tame inflation. These measures should be debated. Let me look at them — and at some that have not been taken.

On April 1, the cabinet committee on prices decided to reduce or eliminate import duties on edible oils, butter, ghee and maize (import duty on maize would go back up once imports reached half a million tons). It imposed, continued or extended a ban on export of ordinary rice, wheat and pulses, and raised the minimum export price of Basmati rice. It decided to persuade steel producers to “moderate” prices — to reduce them, in official jargon. It had earlier banned futures trading in rice, wheat, urad and tur.

Reduction of import duties brings down landed cost; it reduces the cost of imports to a domestic consumer. But such a reduction would have an impact on domestic prices only if landed cost falls below domestic prices. Suppose, for instance, that the international price is 40 per cent above the domestic price and import duty is 25 per cent, bringing the landed cost to 75 per cent above domestic price. If the import duty is eliminated, the international price will continue to be above the domestic price, and nothing will be imported unless the domestic price rises in relation to the import price.

Banning or placing quantitative limits on exports does not increase domestic supply; but it can stop domestic supply from being reduced by exports. It can, therefore, reduce future inflation, provided the future price abroad is higher than the domestic price. Thus all the trade measures the government has taken can have any effect only if domestic prices are at least equal to, if not higher than, import prices. And in our case they are not; for both wheat and rice they are appreciably below world prices. World prices have been going up, and Indian prices have fallen behind because of earlier export restrictions, and because stocks were held by the government, which does not react to profit opportunities. The government had already, deliberately or absentmindedly, insulated the domestic grain markets from international markets, and thereby created conditions which would ensure that the recent trade measures would fail. Why did it then take the ineffectual measures? Either because it wanted to be seen “taking action” against inflation, or because it does not know elementary economics, or both.

The Central government has also asked state governments to enforce the Essential Commodities Act. The act gives them many powers, but the relevant power in the present circumstances is to make traders tell the governments how much they are holding in stocks, after which the governments have the power to do what they like with the stocks — buy them, force the traders to sell that at a price of the governments’ choice, or force them not to sell the stocks. In effect, therefore, the stocks cannot be sold in the market; the immediate effect of the enforcement of the ECA is to create a black market. If the government is effective in curbing the black market, it will have prevented the discovery and publication of the market price. If it is ineffective, it will have changed nothing except make trading illegal. If it sequesters the stocks and sells them or forces their sale in the market, it can bring down prices while it does so; but it never does that because it would upset traders, and next year they would not stock any grains. Thus the ECA is completely ineffective in remedying inflation. This is why recourse to it was given up. This government has recommended recourse to it either because it is desperate, or because it does not know elementary economics, or both.

If it wants to bring down inflation, the government should start selling the grain stocks it holds at a fixed price; the price then cannot go above that price — at any rate until it runs out of stocks. But if it does that, it will have to close down the public distribution service. Most of what it sells in the PDS also is eventually sold in the market, so the impact is the same except for the profits that PDS shopkeepers make and the bribes they give. But the domestic supply will increase to the extent that smuggling into Bangladesh is reduced; and the market prices will be “moderated” as long as stocks last. By the time they get exhausted, another crop may come in, and “moderate” prices further. All that the PDS does is to raise the open market price, and create dual prices that enable the government’s favourites to make illegal profits — just as trade controls divorce domestic and foreign prices and creates opportunities for rent capture for the government and its flunkies. If it unifies the markets, it will save much money in procurement and subsidies; all reduction in government expenditure is deflationary. Less expenditure is the best policy against inflation.