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The Hindu Rate of Graft?

If you want to know the main problems stalling India’s rise, watch the policies of its Reserve Bank. The Financial Times has the story:

India has responded to near double digit inflation by raising interest rates for the 12th time since March 2010, as its central bank prioritizes reigning in high prices at the cost of economic growth.

Inflation, and particularly the rising cost of food, has caused the central bank to take a more active role in the economy despite growing concerns that its policies are failing to halt inflation and are stagnating the economy:

India’s inflation rate accelerated to a 13-month high of 9.78 per cent in August, highlighting the dilemma facing policymakers as they wrestle with the challenges of rising prices and a slowing economy.

Indian monetary policy is not the real problem.  Fiscal policy more than monetary policy is to blame for India’s exponential inflation rate.

Prices will not stabilize until Indian society confronts the government’s culture of corruption. This will be a slow and tortuous process: mass political awakening and participation is necessary to build a modern society and political culture, but mass politics in a diverse and still very poor country like India creates more state and minority parties seeking their share of the national treasure: Pork barrel spending rises, the national budget rises, inflation rises.

The central bank’s actions may slow inflation in the short term, but stabilizing prices by increasing capital costs is an expensive way to offset pork barrel giveaways.  Many Latin American countries spent decades wrestling with inflation driven by patron-client politics and interest group logrolling.  The danger that India’s corruption addiction could seriously short circuit its growth is very real; politicians, intellectuals and social leaders need to start making the case to the voters that even in politics there is no such thing as a free lunch.

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