India: Cut down defence spending to fight inflation
[Published in: The Telegraph (Calcutta), 18 August 2008]
Inflation and Morals:
- The answer to inflation is to cut down defence spending
by Ashok Mitra
Please have a heart; to ask a government wedded to the philosophy of the free market to discipline the demon of rising prices would be no less than cruelty. Inflation opens a floodgate of opportunities for producers and traders. A time lag exists between the production of a commodity and its sale. If prices shoot up during this interval, the producer makes a windfall profit in addition to the normal profit he already had borne in mind in his calculations. Given the gap of time between the purchase of stocks and their actual sales, the trader too experiences a windfall gain if market prices shoot up meanwhile. Free market economics ordains non-interference on the part of the government with happenings in the market. The continuing process of inflation helps producers and traders to keep making windfall profits. They should be allowed to do so, admonishes the doctrine of laissez-faire, the government must look the other way.
Such, then, is the crux of the matter. Inflation in the country, as measured by movements in the wholesale price index, is currently spilling beyond the rate of 12 per cent; in terms of the retail price index, it must be even higher. The government, given its commitment to neo-liberalism, can only watch the situation. It watches the situation with complacence for another, more intimate reason. The producers and the traders who are gathering in the profits are its classmates; their support sustains the government.
True, there is the other point of view. Whatever its class interests, the government functions within a democratic framework and will have to face the electorate soon. The overwhelming majority of the electorate consists of the poor and middle classes who are the severest victims of inflation. They could very well turn away from the parties constituting the government in case the wounds inflicted by rising prices become intolerable. Should not the government, for dear life, do something to save itself from the wrath of the people? For instance, could it not arrange to supply, through the public distribution system, essential commodities at a subsidy to the less fortunate sections? No, it could not; the proposal would be immediately shot down by decision-makers who shape and guide the destiny of the government. It is all very simple. Subsidized supply of commodities would adversely affect money-making by producers and traders; demand gets diverted from the free market to the public distribution system. That is as good as sabotaging the free market. The government, therefore, makes up its mind; it would not expand — on the contrary, it would phase out — the practice of supplying essential goods at subsidized prices.
There is a more basic reason why votaries of free market economics disfavour subsidies. Subsidies involve extra outlays on the part of the government. Such additional spending calls for additional taxation, the main burden of which supposedly falls on the traders and producers who rake up the profits engineered by inflation. Once more, class interests emerge as the issue. That part, the government, the free market doctrine says, is an evil; by its very existence, it stifles the freedom of individuals. This evil should not be allowed to extend its sphere of activities beyond defence and the maintenance of law and order. Offering subsidies belongs to this category of forbidden expenditure.
There is always an exception to the rule. Free marketeers do not mind increases in government expenditure if it is for defence spending. They would also not protest against the government laying out extra money on an extravagant scale for supposedly ensuring greater security for the nation, more specifically, for its leaders.
One further argument posted by those opposing subsidies is that these often lead to an excess of public spending over the government’s aggregate income. The inevitable sequel is again inflation, since too much money allegedly chases too few goods. Somewhat breathlessly, the conclusion is then drawn: any attempt to contain inflation via subsidies is self-defeating, it would only feed into inflation. Such simplistic logic will scandalize the followers of John Maynard Keynes, who had proved most effectively how a skilful deployment of deficit financing ensures gushing increases in income and employment and does not cause inflation. But Keynesians are now in the doghouse and the orthodoxy of balanced budget is back as king.
A timid soul might still offer a suggestion at this juncture: by all means have a balanced budget, but why not cut back on defence spending and use the savings to provide subsidies that could quell inflation? The timid soul, the chances are high, would immediately be dubbed an enemy of the country. Members of parliament will debate for hours on end the wisdom of according farmers an additional fertilizer subsidy of a thousand crore rupees; they will pass without discussion a 30,000-crore hike in the defence budget.
Better admit the nitty-gritty of reality: inflation is one of the corollaries of a free market existence. It widens the scope of profit-making. The higher the level of profit enjoyed by the top brackets in society, the greater is deemed to be the success of the liberal experiment, never mind what it does to the majority of the nation. There is, of course, a flip side to it. While the nation’s majority might feel helpless for a while, being at the receiving end of the maulings caused by inflation, this helplessness could gradually give rise to resentment and anger; this could have repercussions on the ballot box.
That bridge will be crossed, it will be said, when the government arrives there. A caste-, clan-, ethnicity-divided electorate can be expected to produce a caste-, clan-, ethnicity-divided parliament. In that event, it might well be possible to manoeuvre a majority support and come back to governance. Traders and producers, currently having it so good thanks to inflation, could then prove to be a most effective deus ex machina.
Inevitably, a moral will be sought to be drawn. Inflation and absence of subsidies do not necessarily topple a government. The not-so-ancient history of the collapse of the Soviet Union might be alluded to as a counter-point: the Soviet authorities subsidized about everything, from childcare to house rent to opera tickets, and yet failed to defeat destiny.
But is not a wrong reason being adduced here for the collapse of the Soviet Union? Its population enjoyed the bliss of comprehensive social welfare measures. Yes, the shadow nonetheless fell. Most of the population yearned for the richer, more luxurious things in life; which the State was unable to provide. Budgetary constraints stood in the way. A middle-income country’s leaders had vaulting ambition, they wanted to match the United States of America in military prowess, including in the arena of nuclear capability. The strain was too much on the country’s resources; the better things in life had to be denied to the populace. The disappointed people turned their backs on the leaders — and on their party.
If there is a lesson from the Soviet catastrophe, it is for reining in defence expenditure and spending what is saved thereby to provide the people with the kind of things they badly want. That moral should stand all countries in good stead and in all seasons, including in the season of inflation.