Who should we trust?

If a person is shivering and one doctor tells him it is because he is developing fever while another tells him that he is in danger of hypothermia, or below normal temperature, what will he make of it? While that almost never happens in medicine it seems to be a regular event in economics, especially in India. Here, the Finance Minister, and his stooges, firmly believe that India is in danger of deflation, or falling prices, whereas the Governor of the Reserve Bank, a highly respected economist, thinks that inflation could spike once the base effect has worn off. The raging argument around inflation and deflation is centered on only one point: should interest rate remain where it is at 7.25% or whether it should be cut and by how much. The IMF recommends a retail inflation rate of 4% and has recommended that the RBI should remain ready to raise rates while at the same time advising the US Federal Reserve not to raise rates.Not fair, say some. True, but the inflation rate in the US in one year to July was 0.2% while the CPI in India was 3.78% in July, despite falling commodity prices. Others disagree. They maintain that inflation is due to supply side constraints and a stable low inflation rate is essential for growth. The monsoon has been deficient, which will put pressure on prices, the population continues to grow unchecked and the increase in pensions for the armed forces under OROP principle, the increased spending on infrastructure and the impending Seventh Pay Commission, which will increase salaries for a vast army of civil servants, will all increase demand. Critics say that our retail inflation is based mainly on food and oil prices which are supply dependent, so a high interest rate has no effect on inflation and only hampers growth of the economy, which is essential for job creation. That was precisely the argument used by the Congress to pressure the RBI to keep interest rate at low level but every time the RBI lowered rates prematurely inflation spiked, rising to 14.97% in 2009. Retail inflation rate at 3.78% today is exactly the same as 2004, when the Congress grabbed power. Atsi Sheth of Moody's Investors Services thinks that inflation rate will determine our credit rating which is one notch above junk at present, lower than Colombia, Panama and Philippines. Not aiming for the summit, are we? So, what do professors recommend? No emerging economy will ever achieve the 10% growth rate of China so we must reform our economy. Education, institutions and governance, which means an end to corruption, are essential for growth. Economics must be practical, based on history, and not based on theoretical models taught in universities. Above all the population must be reduced to one tenth of what it is or else we will be fighting poverty forever, instead of becoming wealthy.