Fed-Fueled Inflation May Cost India’s Congress, Aiyar Says

Fed-Fueled Inflation May Cost India’s Congress, Aiyar Says

Indian Prime Minister Manmohan Singh’s ruling party would lose a national election if it were held today because of voter anger over the highest inflation in Asia, a former member of his cabinet said.Singh’s government should’ve done more to insulate Asia’s third-biggest economy from unprecedented stimulus engineered by Federal Reserve Chairman Ben S. Bernanke, according to Mani Shankar Aiyar, a former petroleum minister who served in the cabinet from 2004 to 2009. He said U.S. monetary easing helped fuel India’s price rises, which exceeded 11 percent in November.

“On inflation I have no defense to offer — none,” Aiyar, a lawmaker and senior party member, said in a Jan. 9 interview at his New Delhi home. “If there were an election today, we would do very badly.”

Congress party leaders will meet later this week to devise a strategy to extend a 10-year run in power as rising prices, the slowest economic growth in a decade and corruption scandals erode its popularity. India’s main opposition Bharatiya Janata Party won the most seats in four of five state elections held over the past two months in the final test before national polls due by May.

Comeback Possible

“We could still come up from behind in the next five months,” the 72-year-old Aiyar said. “I am not promising we will, but we could.”

Singh, 81, signaled earlier this month that Rahul Gandhi, 43, would replace him if Congress wins a third term. The scion of India’s foremost political dynasty may be named the Congress party’s prime minister candidate when about 1,000 leaders from across the nation meet on Jan. 17.

“The whole world knows that Rahul Gandhi’s name will come first whenever the question of prime ministership crops up in Congress,” Janardan Dwivedi, a general secretary of the party, told reporters on Jan. 3. “But political parties have certain formalities, a process.”

In India, governments have historically won and lost elections over rising prices, including the cost of onions, which are a key ingredient in the nation’s cooking. Inflation of more than 6 percent between 1994 and 1996 contributed to the defeat of the Congress government led by Prime Minister P.V. Narasimha Rao.

India’s economy grew 8.5 percent on average from 2009 to 2011, compared with 9.7 percent for China during that period, according to International Monetary Fund data. Gross domestic product in India expanded 5 percent last year, the slowest rate since 2003, and will probably grow at that pace in the fiscal year ending March 31, according to central bank estimates.

‘Bernanke Boom’

“The problem really is if you go stimulating the economy artificially to boost up the rate of growth,” Aiyar said at a book-lined study at his home in New Delhi. “We were part of the Bernanke boom. We were a subprime mortgage at the time.”

Consumer-price inflation eased to 9.87 percent in December, the statistics ministry said in a statement. The inflation rate for November was revised to 11.16 percent from the earlier 11.24 percent.

Wholesale-price inflation averaged about 7.3 percent in the four-year period from 2009 to 2012, compared with about 6.1 percent in the previous four years, according to data compiled by Bloomberg. By comparison, China’s consumer-price inflation averaged 2.7 percent from 2009 to 2012, from 3.5 percent in the previous four-year period.

Domestic Factors

Domestic factors such as constraints in the supply of goods and services have been the bigger trigger of India’s elevated inflation, according to Radhika Rao, an economist at DBS Bank Ltd. in Singapore.

Singh said earlier this month that his government could have done better at controlling price rises.

His administration more than doubled the guaranteed support prices for wheat and rice in the year ended June 30 from 2005-2006 to boost the wages of Indian farmers. He started a program to employ one adult in every poor rural household for a minimum of 100 days a year, and enacted a law that will provide cheaper food to about two-thirds of the country’s 1.2 billion people.

“The worry about inflation is legitimate, but we should also recognize that incomes for most people have increased faster than inflation,” Singh told reporters on Jan. 3.

When asked if inflation is the biggest concern for Congress, Aiyar said: “What else could be the top issue for a political party in an election year?”

To contact the reporters on this story: Andrew MacAskill in New Delhi at amacaskill@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net