Wednesday, February 25, 2009

A 3.9% Inflation Rate is Not Low Enough

That comment was issued by an economist in connection with the 2004-05 budget. He further remarked that our major trading partners were clocking rates of inflation of 1-2% with some of them even experiencing deflation.

3.9% is not bad if you ask me but what is more important is that citizens trust that you are serious about combating the worst enemy of the poor. A good way of achieving this is to keep inflation within a target (ideally between 1-3% but 4-6% is not a bad place to start either) and to have the people in charge of fiscal and monetary policies never take their eyes off that target.

Fastforward 5 years and that economist has been Minister of Finance for almost 4 years. So here's a good time to see how he's been doing on the inflation front. Not too well, I'm afraid. As at December 2008, his average annual rate of inflation was 8.53% which is more than twice a level he thought was too high only a few years back. In fact that's 3.5% more than the average annual inflation rate of 5.03% for the previous government (or 70% more if your brain can only think in percentage terms).

And if inflation is so high it's because he's been making blunder after blunder after blunder or if you prefer because he doesn't seem to have even the smallest clue as to how our economy should work. Because if he did he wouldn't have brutally depreciated our rupee in the second half of 2006 at a time when record FDI was coming in the country (FDI is usually associated with an appreciating currency) and he would not have kept gas prices at a level that's killing our competitiveness.

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