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LATEST NEWS UPDATES | Neoliberal illogic by Prabhat Patnaik

Neoliberal illogic by Prabhat Patnaik

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published Published on Jan 29, 2011   modified Modified on Jan 29, 2011

The class bias in government policy is clear in the decision to release a small amount of foodgrain in the open market to tackle inflation.

MOST people would agree that there is a strong element of speculation underlying the current inflation and that forward trading contributes to it. Yet the government, though it has banned forward trading in certain commodities under public pressure, is curiously reluctant to see this point. The reason lies in its commitment to neoliberal reforms.

Neoliberal policies include the removal of ban on forward trading. This is justified by the argument that speculation, which forward trading encourages, is beneficial: it has a price-stabilising effect rather than a price-destabilising effect. The argument runs as follows: consider a year when there is an output shortfall. This would put pressure on prices. Now, since there is no particular reason to expect another output shortfall next year, everybody will believe that the price next year will be back to “normal”. They would therefore expect the current year's “abnormal” prices, caused by the output shortfall, to fall next year. This expectation of price fall will induce people to reduce their holding of stocks of this commodity below what they would otherwise have done; and this will moderate the price rise in the current year itself.

Hence, it is argued, speculation has the effect of moderating price fluctuations, that is, reducing their amplitude. It also follows from this reasoning that when there are no output shortfalls there is no question of speculation itself conjuring up any deliberate scarcity out of thin air and pushing up prices. And if speculation can do no harm but can only do good then barriers to speculation, such as the ban on forward trading, should be removed. All markets, including forward markets, should be left to function freely.

The obvious fallacy of this argument lies in the assumption that the current price rise does not affect the price that is expected to prevail next year, that is, that the notion of the “normal” remains unaffected by the current price rise. This is wrong. If, for instance, because of the current price rise there are salary increases in some segments of the economy, then the money demand next year will be higher, so that even with no output shortfall, the “normal” price next year will be higher. If speculators' expectation of the next year's price is, for whatever reasons, affected by the current year's price rise itself, then speculation in the current year may well raise current prices higher than they would otherwise have risen. And the same is true if speculators take into consideration not the “ground reality” alone sans speculation, but the actions of other speculators too. In such a case the argument about speculation being price-stabilising breaks down.

There is, however, an additional and even more powerful argument that shows why speculation is not just capable of aggravating inflation but necessarily does so. In the entire discussion above we think of speculators as being “price-takers”. They are assumed to behave on the basis of expecting a certain price to prevail, no matter how this expectation is formed; there is no question here of their deliberately rigging prices. But such rigging is a fact of life; and once we take it into account, the entire neoliberal argument about speculation collapses.

Such deliberate rigging of prices is ignored in the neoliberal argument because speculators are supposed to look only at the gains from speculation, and rigging the market, while it may benefit one single speculator at the expense of another, is unlikely to benefit speculators as a body. But since speculators are not just some “outsiders” but typically tend to be associated with the business of trading in the commodities in which they speculate, the effect of speculation on total profits, both from speculation and from trade, needs to be looked at; and when we do so, then rigging the market through speculation clearly becomes profitable not only for individual speculators but for the entire body of them.

The reason is simple. There is a whole range of commodities, the so-called essential commodities, in whose case demand is not very responsive to prices; it does not fall much as prices rise. In such cases of “inelastic demand” a price rise in the market increases the revenue and profits of all sellers. But, of course, if an individual seller tried to raise the price and others did not follow, then the individual seller would lose his or her market to others and end up making losses; but if all acted in concert to raise the price, then each would gain from it. The individual seller, therefore, is constrained in the matter of deliberately raising the current price.

The forward market

This is where the forward market comes to the individual seller's help. If a seller deliberately rigs up the forward price, by contracting to buy at a higher price in the next period than would have otherwise prevailed, then this fact increases the expected price for the next period for all sellers, which, in turn, raises the current price and yields a gain to all of them.

An example will make things clear. If the current period's price and also “normal” price in the next period is Rs.100, and a seller with a market of 100 units makes a forward contract to buy 10 units in the next period at a price of Rs.110. Others too make similar contracts and the forward price rises. With it the expected sale price for the next period rises, too, say by 8 per cent. This, in turn, pushes up the current sale price by, say, 5 per cent, which, let us assume, causes a drop in sales by 2 per cent. But even so, the seller obtains additional profits of Rs.290 in the current period against a promised additional payment of Rs.100 in the next period.

Other sellers, too, would be making similar gains. It follows that in any market with inelastic demand forward trading has an inherently inflationary bias. Sellers will push up the forward price in order to raise their current sale price, but they will not naturally try to lower the forward price for their wares. The bias is therefore only in an upward direction.

This has been so well established from past Indian experience that the current official faith in the virtues of futures markets is extremely odd. Obviously, however, the reason for this apparent faith is not blind adherence to a particular (mistaken) theory but the pressure to promote the interests of trader-speculators.

The other official excuse against a ban on forward markets is the argument that forward markets benefit peasant producers. This is baseless. The forward contracts are typically not with the peasants; so there is no question of their either being insulated against risk or getting a part of the higher price that speculation in the futures market brings about in the current period.

But forward trading is only one of the ways in which a neoliberal regime contributes to the inflationary process in essential commodities. The other crucial ways are: the strangulation of the peasant (and more generally petty producers') economy, which adversely affects the production of a whole range of essential agricultural commodities; and the strangulation of the public distribution system in essential commodities both for ideological reasons and also for reasons of “sound finance” (which enjoins severe restrictions on food and other subsidies to keep down the fiscal deficit).

Peasant economy in crisis

There is no gainsaying that the peasant economy in India (and indeed all over the Third World) is in a severe crisis. The rise in costs of a variety of inputs, including credit, because of the withdrawal of government support that was provided earlier has made agriculture unprofitable. With earlier technological advances having reached a plateau, with woefully inadequate public investment in agriculture, with the substantial scaling down of public extension services in the agricultural sector, with the drop in profitability, and with agricultural land being diverted towards “infrastructure” and real estate projects for the rich, per capita foodgrain output has come down in the last two decades. It is scarcely surprising that per capita foodgrain availability has shown a declining trend, especially since the late 1990s. By 2008, it had declined to a level that was lower than at any time since the early 1950s, lower even than during the mid-1960s which had witnessed the Bihar famine.

The decline in per capita foodgrain availability in the era of globalisation, owing to the pursuit of neoliberal policies which reverse the earlier dirigiste strategy of supporting peasant production, is a phenomenon visible all over the Third World. Food riots have broken out in several countries, and Tunisia has even seen a popular uprising, caused inter alia by soaring food prices, that has overthrown the government. India is no exception in this regard. Of course, inflation in the foodgrains sector, which was raging earlier, has moderated; but the current rise in the prices of animal and dairy products is also a reflection of the food crisis, since any jolt to the food economy has the effect of reducing fodder availability and hence constraining the supply of animal products. So the crisis in peasant agriculture lies at the root of the current inflation.

In fact, what really needs to be explained is not why inflation in food products is occurring now, but why it had not occurred earlier, prior to 2008, if per capita foodgrain availability had been declining for such a long time. The answer lies in the fact that the squeeze on the peasant economy and the general deflation of public expenditure in the rural sector affect both the supply and the demand sides. Just as these factors restrict output, they also restrict the purchasing power in the hands of the rural population, and hence curb demand. Putting it differently, if inflation is one way of enforcing a reduced per capita availability, restrictions on the purchasing power in rural areas through government expenditure deflation is another alternative way. Reduced per capita availability or absorption sometimes occurs through the restraint on purchasing power at the prevailing price, and sometimes, as now, through inflation, that is, a rise in price relative to purchasing power.

Expenditure deflation

In the period before 2008, the squeeze on purchasing power, effected through government expenditure deflation among other things, was the primary instrument of enforcing reduced per capita availability, both in India and elsewhere. After 2008, it is the rise in food prices that has taken on this role. Here speculation has also made its contribution, but it has been superimposed upon basic demand-supply imbalances.

The most important factor for the emergence of excess demand globally has been the diversion of grains for the production of biofuels (more than a quarter of the grain output in the U.S. is now so diverted). Within India, it is claimed, the main reason for the emergence of excess demand is the recent injection of purchasing power into the hands of the people through a revival of government expenditure in rural areas.

Even if we accept this argument for a moment, it only shows how fruitless this injection has been, since what it has added by way of money incomes in the hands of the people has been snatched away from them through inflation. In short, the problem of the crisis of the peasant economy, whether it manifests itself through reduced demand relative to supply or reduced supply relative to demand, remains the fundamental issue to be addressed.

The bizarre aspect of the current situation is that in the midst of the massive food price inflation, the government continues to sit on top of a mountain of foodgrain stocks, amounting to almost 60 million tonnes. True, at this moment the location of acute inflation is in sectors other than foodgrains; but foodgrains had seen sharp inflation until recently and foodgrain prices in the open market have not come down much from the dizzy heights to which they had climbed. And, anyway, the provision of cheap food to people, including to those counted as above poverty line (APL), cannot but provide relief in the midst of the current inflation.

Yet the government has not only turned down the Supreme Court's suggestion to distribute food to the hungry; it has, via another of its “slot machine” committees, to borrow Joan Robinson's term, (where the government puts in the coin and gets the report it wants), even rejected a proposal of the National Advisory Council to provide food security to the people. This proposal of the NAC had itself been criticised for its meagreness, since it sought to provide food security not to the entire population, but only to 75 per cent of it; but even this is unacceptable to the government.

The sting of this committee's report is in its tail: it suggests linking the price at which the below-poverty-line (BPL) population is to be provided foodgrains to the rate of inflation, which means that henceforth even the BPL population will be provided no protection against inflation. This amounts to defeating the very purpose of the public distribution system, a decimation of the PDS.

The reason adduced is to keep the food subsidy bill under control, the necessity for which arises because the corporate rich, whose share in the gross domestic product has risen rapidly, cannot be taxed (on the contrary they have to be provided tax concessions and other handouts), while financial interests have to be appeased by sticking to “sound finance”, that is, restricting the fiscal deficit to 3 per cent. So, with corporate and financial interests dominating the state, the axe has to fall on the increasingly hungry and inflation-battered working people.

Nothing underscores the class bias and the mulishness of government policy as clearly as the recent decision to release a small amount of foodgrain stocks, not through the PDS but in the open market, as an anti-inflationary measure. This is exactly what the Indira Gandhi government, which at least had the excuse of inexperience in such matters at the time, had done in 1972 to counter an emerging inflationary upsurge. Grateful speculators bought up what was released in the open market and inflation continued to rage, with the government watching helplessly since it had run out of its stocks.

Manmohan Singh was in the government at the time as Economic Adviser and he, if nobody else, should have remembered that episode. But exactly the same mistake has been repeated by the government he leads now. And the reason once again is the obsession to contain the fiscal deficit that financial interests enjoin upon the government: releasing more foodgrains through the PDS for combating inflation would supposedly have raised the food subsidy “burden”.

No government, under such thraldom to corporate and financial interests, can protect the people from the squeeze of inflation. The end to inflation may come, but only when the same squeeze that it imposes on the people gets to be administered in some other, alternative, ways.

What people say: ANDHRA PRADESH

“THE common man is gasping for breath as the prices of essential commodities are spiralling out of control. Do you call it a sign of prosperity?” said Mandala Bulli Babu, a 47-year-old farmer in Kundavari Kandrika village near Vijayawada, when asked about Montek Singh Ahluwalia's statement on inflation and prosperity. “Farmers are eking out a living on loans taken at high interest rates. The failure to control prices has jacked up input costs of agriculture, while farm labourers are demanding higher wages,” he says. Babu says the present inflation is not demand-driven but is the result of “failure of government policy on the agricultural front to raise output”.

V. Kanaka Durga, 30, a salesperson in a mobile phone shop in Vijayawada, says, “All my colleagues discuss only one topic: the rise in prices. My salary remains more or less the same, while the prices have gone up manifold. There is no truth in the government's claim that people are becoming richer. That people are purchasing vegetables at higher prices does not mean their income levels have gone up. Earlier, I used to buy a kilo of tomato for my family of six members, but now I am purchasing only one-fourth.”

It has been a winter of discontent this time. “Right from garlic, brinjal and other vegetables to milk and spices, prices have gone up four or five times. We can feel the pinch since we are managing two households in different places,” says Anita Rao of Visakhapatnam, a painter, whose husband, a naval officer, is posted in Tamil Nadu. She lives with her son here. “Our monthly expenses have increased three times in the past two years. The Sixth Pay Commission has given a false sense of comfort. The income hikes are not at all on a par with the rising prices,” she says.

S. Devi, a farmer of K. Kotapadu near Pendurthi, sells vegetables from her farm at the MVP Rythu Bazaar in Visakhapatnam. “We invested Rs.50,000 on raising tomato last season. But the crop was ruined by heavy rain and we are barely able to make ends meet. Even the cost of fertilizers has gone up from Rs.30 last year to Rs.75 now,” she says.

It is a daily struggle for farmers in the tribal belt of Araku and the interior villages as they fight to keep the wolf from the door. B. Raghunath of Laseru village, 125 km from Visakhapatnam, says his earnings are barely enough to feed his seven-member family. “In a good season, I earn between Rs.5,000 and Rs.6,000 by selling vegetables and farm produce. But in a lean season my income falls to Rs.1,000. Even the cost of transporting vegetables from Araku has increased from Rs.2,500 to Rs.4,000. My daughter had to discontinue her studies and work as a volunteer at a local school to earn some extra money,” he says.

Although upper middle class families manage to bear the cost surge, they refute the contention that inflation is a sign of prosperity. “For a developing economy like India, 4-5 per cent increase in prices is normal. But a more than 18 per cent rise is certainly not a sign of prosperity. Today, the government is focussing more on core inflation and neglecting hairline inflation, which affects millions of households in the country,” says Prof. K. Sreerama Murty, Chairman, Board of Studies of Economics, Andhra University.

Prof. R. Sudarsana Rao, Head of the Department of Economics at the university, says, “I bought one kg of onions for Rs.40 on Pongal day, the highest I ever paid in my life for onions. The rise in petrol prices has come as the proverbial last straw. It is time decision-makers analysed the rise in prices from the common man's perspective.”

K.K. Alemayehu, an Ethiopian doing research in Andhra University, has written to the Government of India to increase the stipend. “When we came here in 2008, our stipend of $250 a month was decent enough. But with such steep increase in prices, it is insufficient,” he says.

Venkata Reddy, a street vendor running a fast-food centre in Hyderabad, does not know who Montek Singh Ahluwalia is, nor does he know that Prime Minister Manmohan Singh attributes the price rise to increasing consumption. All that this struggling migrant from Kurnool district knows is that during every visit to the wholesale market to get rice, chicken, noodles, oil and, most importantly, vegetables like onions and tomatoes, the prices would have risen. “Every week, it is a pain to see prices spiralling. In the past few months, while all other vendors have increased the prices of food items, I have not. I cannot afford to lose customers. That is why I revise the price once in nine months or a year,” he says.

G.V.R. Subba Rao in Vijayawada;Nivedita Ganguly in Visakhapatnam; and Suresh Krishnamoorthy in Hyderabad

What people say: KARNATAKA

Most people do not know whom to blame for the price rise. Some put the responsibility on the Central government, while others blame the State government. There is also a general anger against middlemen and the trading class who are believed to be hoarding and artificially inflating prices. The general sentiment is that the rich have become richer while the poor and the middle classes are the real sufferers.

Laxman Kengar, 43, a salesman of landscape materials, says: “Everyone – the government, the rich people – is forgetting the poor. What does Montek Singh Ahluwalia mean when he says inflation is a sign of prosperity? Only the income of the rich has increased. There is imbalance in society.” With the Rs.20,000 he earns a month, Kengar has to support his wife and child.

“My savings have come down by 60 per cent over the past year. Earlier, vegetables worth Rs.100 would last for 15 days, now even if we spend Rs.1,000 a month on vegetables it is not enough. The income remains stagnant but what about the expenses?” says an angry Kengar.

Amjad Subhan, 55, a banana vendor, says: “Regular customers who bought a dozen bananas earlier can afford only half a dozen now. Earlier, I used to earn between Rs.50 and Rs.100 a day, but now to buy the same things I need Rs.300 to Rs.400. The customer comes in the form of an angel sent by God for me, but when he hears the price of the bananas he loses his temper, has an argument with me and walks away.”

Anita R., a resident of R.T. Nagar in Bangalore, works as a secretary in a small information technology firm in the city. Her attitude to the Prime Minister's and Ahluwalia's statement is one of serious scepticism. “Whatever we earn, we spend. This tyranny of price rise is killing the middle class,” she says. Anita earns less than Rs.20,000 a month and has to support her younger brother and mother.

With the Rs.13,000 he earns a month, V. Ratan Singh, 34, has to feed four mouths – himself, his wife and their two children. He is a cab driver ferrying clients in the IT sector.

“It is good that the IT industry is based in Bangalore because it provides jobs for people like me, but only the salary of the techies is going up while our incomes remain the same. No one gives me a tip, and even if they do it will be no more than Rs.50 a day. What will that give us – one dosa is Rs.25 and a tea costs Rs.10. Of my income 75-80 per cent is spent on rent and food. What am I supposed to save?” he asks. He is also angry at migrant unskilled labourers in Bangalore as he feels this deprives Kannadigas of the jobs that they should have. This is a dangerous outcome of inflation.

Sushil Kumar, an agriculturist growing paddy on his two acres on the outskirts of Bangalore, blames it on middlemen for hoarding essential food stuffs. “Even agricultural cooperatives are not of great use to us,” he says.

Vikhar Ahmed Sayeed in Bangalore

What people say: ORISSA

IN Orissa, be it in the capital, Bhubaneswar, or in the interior regions, lakhs of poor and middle-class people are reeling under the rise in prices. “Buying essential commodities has become a challenging task for us. We spend most of our income to buy rice, kerosene and vegetables at market prices,” says Minati Nayak, a middle-aged woman living in a slum cluster in the heart of Bhubaneswar.

Minati works as a maid in several households and her husband pulls a trolley-rickshaw. Unable to manage things smoothly, she has sent her physically challenged minor son to work in a shop on the outskirts of the city. Though Minati and her husband have been living in the slum since 1999, they have not been issued a BPL card so far. They, however, have voter ID cards.

Kishore Samal, a farmer in Ranapur village in Jajpur district, has a similar story to tell. “Buying onions has become a thing of the past. How can a farmer like me buy essential items at such high prices when I don't get the right price for the paddy I produce in my fields?” he asks. “With the prices rising by the day, sugar, potato and pulses are getting out of our reach,” says Samal whose paddy crop was badly damaged by the unseasonal rains in the first fortnight of December.

Jatadhari Rout, a marginal farmer in Karamanga village in Jagatsinghpur district, says he is not aware of the measures the governments at the Centre and in the State are taking to help the poor cope with the price rise. “These days I rarely go to the weekly haat in our area to buy essential items,” says Rout. “The bus fares have also increased manifold in recent months, making it difficult for us to travel long distances. The government should take some serious measures to check the prices.”

“How can poor people like us live when the government has not been able to do anything to control the prices of onion, sugar, rice and pulses? I doubt whether the government is doing anything to help us cope with the situation,” says Shankar Sahu, a daily wage labourer from Bahadalpur village, 16 km from Bhubaneswar.

Sahu comes to work in the city every day on his bicycle as he says he cannot afford to travel in a bus. “Almost every essential item costs high,” says Sahu, explaining his difficulties. The lack of a BPL card has added to his family's burden.

Prafulla Das in Bhubaneswar

What people say: WEST BENGAL

Annapurna Das, 55, of Baman Ghata village in South 24 Paraganas district does not mince her words when she speaks about the price rise. “I have three little grandchildren, and it is after four months that I could buy a small quantity of fish for them. Nothing is left for us, the poor. Things are getting increasingly expensive, but my sons' wages remain the same,” she says.

She has four sons who work sometimes as unskilled industrial labourers and at other times as farm hands. With ten mouths to feed, Annapurna recently had to sell some of the jewellery and utensils to keep things going. “We are now compelled to eat less and try to ensure that at least the children get a full meal. But it is getting harder by the day,” she says. The argument that inflation is a sign of prosperity and that rising prices are an indication of increasing consumption puzzles her.

In the same village live 22-year-old Nirmal Sardar and his wife. A graduate, Nirmal works as a mason, earning Rs.3,000-3,500 a month. He sends half this money to his parents and three younger siblings living in Sandeshkhali. His father, once a farmer, is too old to work and it is on Nirmal's income that all five have to survive. The Centre's arguments, he feels, might hold true for the salaried class, but not for the wage earners.

Samarjeet Dubey, 28, and S.K. Pervez, 40, are self-employed; they supply chemicals to some units in the Leather Complex at Bantala, 20 km from Kolkata. “Till about a year ago we could make some investments, but now we have no savings,” says Dubey. Pervez, who has three teenaged children, says it is a struggle just to live with dignity, let alone comfort. “My monthly income is Rs.9,000 and my expenditure is Rs.12,000. There is the children's education to think of, and school fees have increased. So we have to curtail our food and other expenses.”

Both Dubey and Pervez have had to cut down on all recreational expenditure. “We cannot spend anymore during festivals, nor dine out with the family. We cannot even take the children out for a vacation,” says Pervez. With the recent hike in petrol prices, he has been thinking of selling his two-wheeler. As for the Centre's argument that inflation is a sign of prosperity, Dubey says, “That holds true for one section of the people who are getting richer.”

In the busy Dalhousie area of Central Kolkata, Praveen Mehta, 28, sits all day long on the pavement, selling peanuts. He travels every day to his corner of the footpath from his house in Bandel, in Hooghly district, around 43 km from Kolkata. He is unmarried and has no dependants. “A year ago, I had a daily net profit of about Rs.50. But now it has come down to an average of Rs.10. People have begun to think twice before buying even peanuts,” he said.

The escalating prices of essential commodities have also narrowed down his daily diet. “Practically everything is now unaffordable for me, so I simply make do with lentil and some vegetables,” he says.

Suhrid Sankar Chattopadhyay in Kolkata

Frontline, Volume 28, Issue 03, 29 January-11 February, 2011, http://www.frontline.in/stories/20110211280302400.htm

Tagged with: Inflation



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