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Interview with P.T.R. Palanivel Thiaga Rajan, Finance Minister of Tamil Nadu.
P.T.R. PALANIVEL THIAGA RAJAN, TAMIL NADU’S Minister for Finance and Human Resources Management, is the youngest legislator to handle the “senior” portfolio of Finance in the State. Also, when he was appointed to this tough job, he had served as a Member of the Legislative Assembly for just one term.
Seasoned politicians were sceptical of his ways, but PTR, as he is known, has managed to deliver on the promises he made, asked questions of the Union government, and remained a strident critic of the current taxation regime, especially the goods and services tax. He holds the Union government and the Reserve Bank of India (RBI) responsible for the current high levels of inflation and wants them both to act quickly and decisively to control inflationary tendencies. Excerpts from an interview he gave Frontline:
NSO (National Statistical Office) data for April show that Tamil Nadu’s inflation is at 5.4 per cent at a time when the national average is 7.8 per cent as measured by the CPI (consumer price index). How do you explain the difference?
Inflation is a very complicated thing. There can be two sides to inflation. One side is demand-driven inflation. The other is pent-up demand or supply-side shocks or some aberration in the normal cycle .... Much of our [India’s] energy is imported and oil prices drive up a lot of our inflation because the government passes it on straight to the consumer and this [fuel] is an input cost in every major industry.
From that perspective, I think there has been an argument in the last 10-15 years whether monetary policy was still alive or dead in the traditional sense—that you could keep on printing unlimited amounts of money without stoking inflation. This was a never-before-seen phenomenon—that this kind of excess liquidity in trillions and trillions before COVID, and trillions more after that would not lead to a spike in inflation.
There were two components to the theory why that didn’t happen. The first is that no matter how much excess liquidity was pumped in, it was not going into the hands of the people who could consume it. It was only going to the hands of those who could invest it. So, too much of the money was going to the rich and too little to the middle class and the poor. If the money goes to the rich, they will not be able to spend any more. I mean they can, but it will be on assets and art and shares, etc.
It doesn’t complete the cycle…
It doesn’t affect the consumer process. It affects the market valuations; it affects asset prices. It was also not leading to actual economic activity. With monetary policy, you can use interest rates to control inflation, mostly, but it is very hard to use monetary policy to stimulate growth. It is possible that no matter how much liquidity is pumped in, there is no economic activity happening. It [liquidity] was not going into manufacturing or new companies or new jobs. Now, there is suddenly this spike in inflation.
So, why is it that there is a huge spike in global inflation and even in a place like the US, where unemployment numbers are at an all-time low? Really there is intense competition for labour, there is a huge bounce in the economy, and because of that wages are being driven up and because of that the traditional cycle of inflation— of much more money in the hands of people who are inclined to spend. This, combined with supply-side shocks from COVID… although this is not as bad as it was during the COVID years.
India is a huge importer, including of oil, and those