EDITORIAL : THE HINDU, INDIA

The right priority

It is heartening that the Reserve Bank of India, in consultation with the Centre, has picked up enough courage to bite the bullet and take up the issue of tackling inflation as its main priority. So far, it was taking mere baby steps by way of a 25 basis point hike eight times since March 2010 to ensure that GDP growth does not falter. This time, the central bank surprised the market and a section of economic analysts by turning hawkish and raising its short-term lending (repo) rate by an unanticipated 50 basis points to 7.25 per cent and leaving the borrowing (reverse repo) rate to float lower by one percentage point at 6.25 per cent. Even as the bank rate and the cash reserve ratio have been left unchanged so as not to affect the flow of liquidity, the net effect of the annual credit policy action is that short-term funds the banks borrow from the RBI will be available at a higher rate and, as a result, housing, auto, and consumer loans will cost more to the consumer. The policy move, which will mean marginally lower GDP growth in the short term, has come as a disappointment to India Inc. owing to the negative impact on investment. But the higher-than-expected increase in key policy rates should be viewed as a chemotherapeutic dose to combat the cancer of inflationary expectations.

As it is, while food inflation has been ruling high through almost all of the past year owing to seasonal and other factors and a solution lies in easing the supply bottlenecks and increasing production and productivity, the more worrying factor is the headline inflation that has remained at a high of near nine per cent, belying even the scaled-up projection of the RBI at eight per cent for 2010-11. With prices of most commodities, especially oil, skyrocketing in global markets and with the external environment not exactly benign, the apex bank expects overall inflation to stay in the higher regions during the first half of the current fiscal and, in the absence of any further downside risks, moderate to more reasonable levels of about six per cent by the end of the year. It is clear that the reining in of demand pressures to contain inflation will have a negative impact on overall growth. While the government projected a GDP growth of nine per cent for 2011-12 as against 8.6 per cent achieved in 2010-11, the RBI has scaled down the estimate of overall expansion to eight per cent, which is in line with the realistic projections of various think tanks and multilateral financial institutions. Clearly, the country will have to bear the short-term pains if the long-term gains are to be achieved.

Canadian conundrums

Prime Minister Stephen Harper's Conservative party has recorded a decisive win in Canada's fourth federal election in seven years, taking 167 of the 308 seats in the lower chamber, the House of Commons. There were several surprises, not least the humiliation suffered by the Liberal Party, long regarded as Canada's natural party of government. Under the ex-academic Michael Ignatieff, the Liberals slumped from 77 to 34 seats, losing several in their traditional Ontario stronghold. The leader even failed to win his own constituency, or riding as it is called in Canada. Other shocks included the meltdown of the separatist Bloc Québécois (BQ), which lost 43 of its 47 seats. Further, the country now has its first Green MP, Elizabeth May. The Conservatives, for their part, can expect to serve a full four-year term in what amounts to a striking reversal of their fortunes since Mr. Harper's government was ousted by a vote of no confidence on March 26.

With this electoral outcome, Canadians will probably see more private sector involvement in their highly reputed national health service. Other likely developments are lower corporate taxes and more oil-drilling in environmentally sensitive areas. The new government may also relax some of the financial regulations that have enabled Canada to weather the global recession better than most countries. Internationally, Mr. Harper holds the United Nations in such contempt that he once went to the opening of a doughnut shop rather than a U.N. event. It would, however, be a mistake to see the Tory win as reflecting wholesale change among the electorate. The simple majority electoral system has given Mr. Harper's party a win on a vote-share of 39.6 per cent; while this is a gain of 1.96 percentage points on its 2008 showing, it also means that over 60 per cent of voters did not vote Conservative. Secondly, the Liberal debacle was largely due to the remarkable rise of the left-leaning New Democratic Party (NDP), led by Jack Layton. The NDP shot up from 36 to 102 seats on a vote-share which rose by 12 percentage points to 30.6 per cent. It even defeated a Conservative cabinet minister in Quebec, where it also won overwhelmingly against the BQ. Strong NDP support cost the Liberals several Ontario ridings by turning Tory-Liberal races into three-way contests. The Quebec vote shows nationalist rather than separatist support, and the analysed results reveal that Canadian voters are expressing a very different mood from that suggested by the aggregate outcome. Far from turning into fervid Tories, they seem to be looking for a better-defined and more confident centre-left identity than anything the Liberals can currently offer them.