INFlation Pain in the Ass for UPA goverment ..........

The Indian coalition government led by Sonia Gandhi, the Congress party leader, and Manmohan Singh, the prime minister, is watching the return of inflation to India with understandable alarm.

Political analyst Ashutosh Varshney remarked recently that inflation was the only economic statistic with any bearing on Indian elections. Economic growth impresses foreign investors but not Indian peasants, as the previous government led by the Bharatiya Janata party discovered when its “India shining” slogan failed to convince voters in 2004.

This time it is the Congress party that faces the wrath of the electorate. Another election is due in the next year and inflation has risen to 7.6 per cent, well above the Reserve Bank of India’s “comfort level” of 5 per cent. Rising food and fuel prices threaten to reverse the trend of poverty reduction that has benefited tens of millions of south Asians in the past few years. High inflation is likely to undermine what public support there is for the further economic liberalisation essential to India’s future prosperity.

Like China, where inflation is also politically sensitive, India is doing what it can to suppress the problem, although – unlike in China – its task is made harder by a weakening currency. Last week the RBI raised the banking sector’s cash reserve ratio by another 25 basis points to 8.25 per cent, the third increase in as many weeks and the thirteenth since mid-2004. The central bank might yet be forced to raise its benchmark interest rate, which has been held at a six-year high of 7.75 per cent for over a year.

Indian monetary tightening and credit restrictions will not have much impact in the current circumstances. Inflation is driven more by constraints on supply and by rising international prices for food and fuel than by surging local demand. Mr Singh admitted as much when he accused the developed world of failing to do enough to counter ­rising food and energy prices.

The solutions for India therefore lie not in short-term monetary ­policy but in longer-term efforts to promote investment in agricultural productivity, energy efficiency and the country’s woefully inadequate transport infrastructure.

Yet Indian governments, often with an eye on the next election, have a poor record of implementing long-term policies that could benefit the economy and perhaps redound to the credit of administrations other than their own. This government, although it has presided over three years of high economic growth averaging 8.6 per cent, is unfortunately no exception.