Bracing for Yet Higher Prices

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The government’s claim that the recent mini-budget would not trigger another round of inflation is about as believable as its excuse that somebody else is always responsible for everything that goes wrong with the economy under its watch. For even as the finance ministry proposed withdrawing tax exemptions on a number of items, its ministers were saying with a straight face that prices of items that are essential for ordinary citizens would not be affected at all. That feeling, quite naturally, is not shared by anybody outside the government just yet; not the least because all its promises about inflation and growth have so far turned out to be persistently hollow over a sustained period of time.
For starters, when you abolish incentives pretty much across the board there is really no practical way of restricting price spikes to items only used by the elite. And even if one is able to draw the line somewhere, it is still only natural for production costs to go up, which puts pressure on the economy as a whole. There’s also no way of holding the government accountable in case prices do rise suddenly because it will just say that while it did what it had to, with the best of intentions no doubt, prices still moved unexpectedly because previous rulers left the economy in very bad shape; which makes no sense at all in the present context.
It would’ve been far better to communicate more honestly with the people. We have no concept of presenting money bills two quarters into a fiscal to cut taxes or increase subsides, quite to the contrary actually, which explains why mini-budgets are often followed by a rise in inflation or at least inflationary expectations. And there’s nothing to suggest that this time is going to be any different.
The simple fact of the matter is that the government was unable to convince the IMF that the incentives and subsidies stacked up in the budget was a good idea, and had to fold its financial plans for the whole year just to keep the aid pipeline open. There’s no doubt that this step will greatly affect not just prices but also the growth trajectory. And since the people are still being told that all is and will remain well, their proper reaction will only be gauged when it’s time for the next election.