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LATEST NEWS UPDATES | Rising prices: What is the govt doing? by Paranjoy Guha Thakurta

Rising prices: What is the govt doing? by Paranjoy Guha Thakurta

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published Published on Sep 29, 2009   modified Modified on Sep 29, 2009

The spectre of inflation has returned to haunt India. It is not even six months since the United Progressive Alliance (UPA) government returned to power but its inability to control food prices is arguably its single biggest failure till now. The inflation rate will eventually come down sometime in the (hopefully) not-too-distant future and the government will surely take credit for bringing prices down as and when that happens. But the near-term appears rather bleak.

Unfortunately for the majority of people in the country, food prices are expected to continue to rise in the coming months. Those in positions of power and authority may not be particularly bothered as the spurt in inflation has come quite early in the tenure of the UPA-2 government. But this government’s management of the country’s food economy clearly remains inadequate and this deficiency is guaranteed not to increase the popularity of the ruling coalition.

Many believe that the haphazard way in which the country has exported food products (in particular, dal, and also rice and wheat to an extent) over the recent past, has been less than prudent. One example would suffice: in the course of calendar 2006, exports of onions surged by over 60 per cent while retail prices at home shot up by around 150 per cent. Managing food supplies, calibrating exports and imports and coordinating the activities of at least three important ministries — agriculture, commerce and finance — is not simple.

Add to this, corruption and the scenario becomes murky. The outcome of the official inquiry into the rice export scam is awaited. During 2008, at a time when there was a ban on its exports, consignments of non-basmati rice from Indian found their way to a clutch of African countries — ostensibly as "humanitarian aid" — through a selected group of exporting firms. Curiously, some of these consignments were diverted through Europe.

Since elections to the Maharashtra Assembly are round the corner, a section within the Congress in the state has vent its ire against Union agriculture minister and Nationalist Congress Party (NCP) leader Sharad Pawar for his alleged inability to keep sugar prices low during the festive season. Mr Pawar’s defence of his track record in Krishi Bhavan has not been particularly convincing since the country is now preparing to import sugar. His biggest challenge is to balance the interests of farmers and consumers. After all, he is both agriculture minister as well as minister for consumer affairs. This particular balancing act is not easy in the best of times — it is certainly tougher than managing cricket in the country.

The Congress and the NCP will fight the elections together. Past bickering will be forgotten. Both parties are quite happy that Raj Thackeray’s Maharashtra Navnirman Sena will cut into the votes of his uncle and cousin’s party, the Shiv Sena. And, as always, crocodile tears will be cynically shed for the plight of the proverbial aam aadmi but little will be done to alleviate the hardships of ordinary households as their real incomes get sharply eroded on account of high food prices.

Even official data indicates how alarming the situation is. For the week ending September 12, the rate of inflation as measured by a point-to-point comparison of the wholesale price index (WPI) stood at 0.37 per cent against 0.12 per cent in the previous week, after having remained in negative territory for 13 weeks. But this hardly tells one the real story for the WPI is an economy-wide index covering as many as 435 commodities.

If one looks at the disaggregated figures, the true picture emerges. Even within the WPI, prices of primary food articles jumped by over 15 per cent while prices of vegetables shot up by a huge 45 per cent. The home-maker is naturally sceptical if she is to go by what is often called "headline" inflation figures measured by the WPI.

The governor of the Reserve Bank of India (RBI) Duvvuri Subbarao recently remarked that the annual rate of inflation as measured by the WPI could go up to 5.2 per cent by the end of March 2010. The deputy governor of the RBI, K.C. Chakrabarty, has said this figure could be six per cent by the end of the fiscal year. What is not clear is how much of the rise in inflation would be driven by high food prices, but if current trends continue (and one hopes it will not), the scenario ahead appears particularly dismal.

The monster of inflation is not easily tamed because it is a consequence of a variety of factors, some of which cannot be easily quantified, such as psychological expectations. A combination of two broad sets of factors — described by economists as "demand-pull" and "cost-push" factors — contribute to inflation. The drought, the rise in rural incomes on account of (among other things) the rise in minimum wages given under the National Rural Employment Guarantee Act and the higher minimum support prices for wheat and rice given to farmers, are among the factors that have contributed to the current rise in food prices.

The artificially low WPI rate of inflation is a consequence of a statistical aberration, what economists call a "base effect" since the rise in the index was at a high of nearly 13 per cent in August 2008, the highest level in 13 years, that is, since May 1995, the last year the current Prime Minister had served as finance minister in the P.V. Narasimha Rao government. (In August 1991, three months after Manmohan Singh became finance minister, the WPI inflation rate had hit a high of around 17 per cent.) The high inflation rate in 2008 was to a great extent driven by high energy prices since India imports three-quarters of the country’s total requirements of crude oil and petroleum products.

If there is one economic phenomenon that affects the lives of everybody, it is inflation. Irrespective of their ideologies, all economists agree that inflation is like a tax on the poor as it results in an indirect transfer of resources from the poor to the rich. Inflation shrinks the real incomes of the underprivileged while the incomes and profits of the affluent rise. When inflation is driven by high food prices, it becomes a double tax on the poor because the poor spend a relatively much higher proportion of their total incomes on food unlike the rich.

The Asian Age, 28 September, 2009, http://www.asianage.com/presentation/leftnavigation/opinion/op-ed/rising-prices-what-is-the-govt-doing.aspx
 

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