Senior fellow Arvind Subramanian's column in Business Standard on India's inflation.
From the Article
Keeping inflation low and stable has been one of India’s major policy successes. On the strength of this achievement, the Reserve Bank of India (RBI) could pride itself as one of the better-run public institutions in the country. But conducting monetary policy was among the easier jobs in India. In some ways, RBI had little choice but to deliver macroeconomic stability because of the propitious political economy of inflation. The politically assertive middle class has had low inflation tolerance, with five per cent considered the threshold – or Lakshman rekha – beyond which the clamour for action, never constrained by apathy or acquiescence, becomes difficult to ignore. RBI’s policy merely reflected an unavoidable respect for the inflation preference of key voters.
In this light, the mystery, or rather the greater mystery, in the latest episode of inflation is not why RBI has been less than forceful in getting inflation under five per cent. Rather, it is why the public has not created a political furore over the issue: call it the mystery of citizens not barking in daylight. And the puzzle has only deepened because inflation has exceeded five per cent by a substantial margin and for a considerable period of time (19 months and counting) as Jahangir Aziz of JPMorgan has pointed out in an excellent recent analysis. To be sure, in early 2010, when the prices of select food products soared, there was popular uproar but that has subsided even though overall inflation has remained stubbornly high.
Consider a number of possible hypotheses/explanations and the objections to them.
(i) Protection of rural India: given that food inflation has remained relatively elevated, clamour for action from the poor, especially in rural India, should have been considerable. But the National Rural Employment Guarantee Scheme, especially now with wages indexed to inflation, has served to cushion the poor from the worst consequences of inflation. The problem with this hypothesis is that the politically voluble constituency on inflation has tended to be the salaried, urban middle class. It has not been the beneficiary of any significant inflation-cushioning government actions. Why it has not spoken up remains a puzzle.