The political impact of inflation

Inflation in India has been on the rise for the past few weeks, and now stands at 7%. Much has been said about the economic mpact of high inflation- i.e. interest rates will rise, access to capital will shrink and hence growth will sufer. Indeed, pundits are already talking about 7.5% GDP growth, compared to the 8.5% and 9% a few months ago.

But for politicians, there is an even bigger danger. In the past, price rises have unseated governments and the UPA  will not be immune unless inflation is brought down to half the current level. The government has initiated action, but for these steps to bear fruit will take time- perhaps as much as 6 months. But that is precisely the dilemma. Elections is key states like Karnataka are just round the corner (less than 2 months away), and the Congress can’t afford to lose. In 6 months, the entire country will start prepping for general elections, which will almost certainly be conducted in early 2009 at the latest. Inflation dents any government’s pro-people image like no opposition can. And the UPA’s “aam aadmi” protestations will fall on deaf years. The people will vote through their ballots and a change in guard will be the likely result.

But given that inflation is being driven by factors like the rising price of crude/petroleum, food imports like wheat, edible oil etc., there is perhaps only so much that the government can do. And even if the NDA or some other coalition comes to power, managing the legacy of high-inflation will not be easy; it will take up perhaps the first year or so. It is only by 2009 end or so that one can expect the world economy to come out of the current slowdown. The next 8 months will also see a new President in the White House. What policy changes occur as a result will be a major determinant of the global politico-economic dynamics- and hence inflation.