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Mainstream, Vol XLVI, No 21

Mounting Inflation and the Common Man

Wednesday 14 May 2008, by Ruddar Datt

The wholesale price index (WPI) touched the high level of 226.0 by end March 2008 as against 210.4 end March 2007 (1993-94=100) signalling a 7.4 per cent rise in the WPI during the year, the highest witnessed during the last ten years. It crossed the limit of the five per cent comfort zone specified by the RBI. Consequently, the UPA Government was upset due to the inflationary rise of prices.

Critics, however, raised issues about the flawed measurement of the WPI. The parliamentary Standing Committee on Finance, headed by BJP leader Ananth Kumar, recommended revised price indices, but the government has shown inordinate delay in adopting its recommendations. Similarly, in 2005, the Task Force headed by Dr Abhijit Sen, member, Planning Commission, recommended updating the base year, instead of continuing with 1993-94 as the base year, increasing the number of commodities and making changes in the weightage given to different commodities. Such changes would give a higher rate of inflation and thus, the government is holding back its revision of the WPI. The Committee had recommended 2004-05 as the base year.

However, there is a gap between the perception of the government and that of the ‘aam aadmi’ (common man) who is experiencing a much higher retail inflation. The government was experiencing a sharp rise in prices of foodgrains, especially rice and wheat and pulses, besides those of vegetables and fruits. The common man was experiencing double-digit inflation and, according to one estimate, about another 10 crore people have been pushed below the poverty line due to the impact of the recent price inflation.

The government tried to take shelter behind the plea that inflation in India was part of global inflation. During the short span of eight months between August 2007 and March 2008, the global price of coconut oil has risen by 61 per cent, groundnut oil by 71 per cent, maize by 54 per cent and Thai rice by 72 per cent, US wheat by 74 per cent, bananas by 76 per cent and sugar by 35 per cent. According to the World Bank data, between August 2007 and Mrch 2008, low and middle income countries have witnessed 73 per cent rise in the prices of agricultural products, 88 per cent in foods, 71 per cent in fats and oils, and 105 per cent in grains. But all this was cold comfort for the poor people and the plea of the government did not cut much ice.

To douse the anger of the common man, the government adopted the ‘fire fighting approach’ to tackle inflation. The following measures were announced:
- 1. Scrapped import duties on edible oils.
- 2. Banned export of basmati rice.
- 3. Reduced duty on maize imports from 15 per cent to zero.
- 4. Extended ban on export of pulses for one year.
- 5. Banned export of edible oils.
- 6. Withdrew export incentives in steel and cement.

The principal objective of the government was to make available supply of foodgrains, pulses, edible oils for domestic use and to facilitate the import of these commodities to reduce the impact of supply constraint. But these measures did not produce the desired effect.

Another problem is the wide gap in the prices of food items in the wholesale mandis as revealed by the figures of the Agricultural Produce Marketing Committee and those charged by retailers. The government should have set up distribution centres or used the PDS shops after making bulk purchases from wholesale markets and thus provided a competitive and countervailing structure to offer relief to the consumers but it has failed to do so. Such a firefighting measure would have mitigated the hardship for the consumers and tamed the middlemen who are making huge profits taking advantage of the prevailing scarcity.

Failure to Improve Growth Rate in Agriculture

BASICALLY, the present inflation, which is driven by the prices of foodgrains, pulses, vegetables and fruits, is not a demand-driven inflation, but is the result of the failure of the government policy on the agricultural front to raise output. It is the supply constraint that has fuelled inflation.

During the last four years of the UPA Government (2004-05 to 2007-08), production of foodgrains, especially rice, wheat, pulses, potato, has shown stagnation, whereas the population has been growing at the rate of 1.5 per cent per annum and reached a level of 1130 million. Overwhelmed by the GDP growth rates during 2004-05 to 2006-07, driven by high growth in industry and services, the government neglected agriculture. This is evident from the fact that public investment in agriculture, especially irrigation, stagnated to 0.4 per cent of the GDP during the four-year period (2002-03 to 2005-06).

Table 2: Investment in Agriculture to Total GDP
(1999/2000 prices) per cent of GDP
Public Sector Private Sector Total
2002/03 0.4 2.1 2.5
2003/04 0.4 1.8 2.2
2004/05 0.4 1.8 2.2
2005/06 0.5 1.8 2.3
Tenth Plan(Four Years
2002/03 to 2005/06) 0.4 1.9 2.3

- Source: Ministry of Agriculture, Agriculture at a Glance (2007)

There is a dire need to raise productivity in States where yield levels are low in agriculture. For the extension of seed-fertiliser technology to secure better yields, irrigation is a basic necessity. But facts stare us in the face that during 2000-01 to 2005-06, there has been very little increase in irrigated area, specially in two major crops, namely, rice and wheat.

Table 3: Irrigated Area Under Crops
million hectares
Rice Wheat Pulses Total Foodgrains
2000-01 24.6 22.7 2.7 53.7
2001-02 24.4 23.2 3.1 54.1
2002-03 21.3 22.4 3.0 50.2
2003-04 22.5 24.0 3.3 53.2
2004-05 23.0 23.7 3.3 53.6
2005-06 24.5 23.8 3.7 55.5

- Source: Economic Survey (2007-08)

As the data reveals, the irrigated area under wheat ranged between 23 to 24 million hectares and that under rice oscillated within the narrow range of 24-25 million hectares and that of pulses ranged between three to 3.7 million hectares during 2000-01 and 2005-06. This was the result of a fall in public sector investment during the post-reform period. There is a concomitant need for better utilisation of water, whether made available due to rains or melting of snow. This requires a major compaign for water-shed development so that the utilisation of water is significantly stepped up. This is specially important for regions which have sufficient rainfall. The two measures—extension of irrigation and watershed development—can trigger a second Green Revolution in poor and backward States, and also save the soil from the dangerous effects of waterlogging and soil depletion. Both will require substantial step-up of public sector investment. The government seems to have realised its mistake and is making efforts to raise the level of investment in agriculture.

Minimum Support Price for Farmers

ANOTHER problem which has affected agriculture is the Minimum Support Price (MSP) for farmers. Since the cost of production in agriculture is increasing, there is a need to increase the MSP for farmers. Till 2007-08 it was Rs 850 per quintal in case of wheat and Rs 745 per quintal for rice. It was alleged that the government is paying more for imports in the international market, but is not paying a higher MSP to its own farmers so that it can have more foodgrains for its buffer stocks. Only recently, the government has revised the MSP for wheat to Rs 1000 per quintal, but has not done so for rice so far.

Fuels, Cement and Steel

BESIDES foodgrains, other commodities which are exercising an upward pressure on the WPI are fuels, cement and steel. The price of petrol in the international market has reached an unprecedented level of $ 114 per barrel. Via the rise in transport cost, it pushes up the price level. But this is an exogenous factor on which the government has no control. Recently, there has been a diversion of certain foodgrains towards the manufacture of bio-fuels. This has resulted in pushing up the international prices of foodgrains by over 80 per cent, thus raising the cost of imported foodgrains. The diversion of foodgrains to bio-fuels is aggravating the supply constraint in the domestic economy as well. To mitigate the situation, the government should impose severe restrictions on the use of foodgrains for bio-fuels as a temporary measure till such period that foodgrains output growth is accelerated by the measures initiated to reach the target of agricultural growth four per cent per annum.

In the case of controlling the prices of steel and cement, the government has been dilly-dallying the action against cartelisation in these two industries. Experience the world over reveals that cartels are not tamed by issuing advisories. The tendency to exploit the market is so strong that industrial magnates refuse to listen. Grilled by the Opposition, Finance Minister P. Chidambaram stated in the Lok Sabha on April 16, 2008: I have no hesitation in repeating that cement manufacturers are behaving like a cartel. There are signs that even steel manufactures are behaving like a cartel... If they do not understand the gravity of the situation and behave responsibly, the government will not hesitate to take tough administrative measures.

It is really strange that when the country has created the Competitive Commission of India (CCI) in place of the MRTPC, the government did not ask the CCI to initiate action much earlier. It is bad policy first to allow much damage to be done, and take very belated action.

There appears to be divergence of views within the government. As against the Finance Minister’s strong view warning of tough measures against cartel-like behaviour by the steel and cement manufacturers, the Minister of State for Steel, Jitin Prasad, in a written reply to a query in the Lok Sabha stated:

The steel prices are determined by market forces, such as demand and supply and international prices. However, no evidence on cartelisation by steel companies in determining steel prices has been brought to the notice of the Ministry of Steel.

With such divergent views within the government, chances of breaking the cartels’ backbone appear to be bleak. The government, following the USA and European Union, should have used ‘the leniency principle’—an application of the ‘approver principle’ in the economic domain—to break the cartels. There does not appear a strong resolve by the government to do so. Even if the CCI initiates action suo moto, it will not be effective in view of the confusion within the government.

Ban on Futures Trading in Essential Items

THE alliance partners in the Congress-led coalition government have been voicing strong views on futures trading in essential commodities. CPM leader Sitaram Yechury pleaded for imposing a ban on futures trading of 25 commodities, since the Left maintains that large scale speculation in futures trading in grain has been the main factor responsible for rising prices. To quote Yechury:

The only way to insulate ourselves from international speculation is to reverse the process of liberalisation in commodity trade and prohibit futures trading in essential commodities.

But Sharad Pawar, the Minister for Agriculture, Food and Civil Supplies, is not convinced about the correlation between futures trading and increase in essential commodity prices. However, he conceded that ban on futures trading in rice did help to stabilise prices; but in urad and tur, it did not happen. The Minister would like to wait for the Abhijit Sen Committee to submit its report on the subject. It may be noted that in 2007, under pressure from its allies, the government had banned futures trading in wheat, rice, urad and tur.

The Abhijit Sen Committee has decided to take an escapist route and not provide an answer to the question of banning futures trading. As Dr Abhijit Sen mentioned, “the evidence we have found is not unambiguous. Based on data that we have analysed, it is neither possible to say that future trading in agricultural commodities leads to price rise in the spot market, nor is it possible to say that there is no impact”. (Business Line, April 24, 2008) The Committee could have, on balance, drawn some conclusion, but preferred to run with the hare and hunt with the hound.

According the terms of reference of the Committee, it was set up “to study the impact of future trading on commodity prices and suggest measures to minimise such impact”. There is enough scope in these terms of reference to express an opinion on the ban on futures trading of essential commodities as a measure of minimising the impact of futures trading on commodity prices.

It is really strange that Ministers within the government voice divergent views on the question of controlling price rise in essential commodities. To be effective, the government should bring about a clear policy to control inflation after due deliberation within the Cabinet. It should state the short-term measures to alleviate the suffering of the common man and also state the long term measures to increase supplies of essential commodities, most notably foodgrains. Among the short term measures to augment supply, the government announced the import of one million tonnes of edible oils and its subsidisation at the rate of Rs 15 a litre for sale through the public distribution system. Also 15 lakh tonnes of pulses are being imported to mitigate the situation.

To sum up, it is vitally necessary to build a market information system which should reflect the changes in the prices of essential commodities accounting for 60 to 70 per cent of the expenditure of low income groups. For this purpose, revision of the price indices is essential after considering the recommendations of various committees. Secondly, there is a need to take timely action so that the hardship of the common man by way of erosion of his income with sharp increase in the prices of essential commodities, can be reduced. Thirdly, the government should give top priority to the development of agriculture. Fourthly, the government must take measures to reduce the use of multi-crop land for non-agricultural purposes, like Special Economic Zones. Last, but not the least, efforts should be made to undertake a second Green Revolution, with a special focus on the agriculturally backward States. The country should follow a policy of self-sufficiency in food and essential commodities. That way lies the hope for the common man and progress towards inclusive growth. In this connection Prashant Goel concludes: The sustainable way out of the current mess is to increase food production and productivity and this cannot come without right prices. If the farmer does not get remunerative price for his produce, even the loan waiver package may not deliver. Given our large arable land and favourable climate, and rising global food prices, a proper policy framework could ensure that India becomes the world’s food bowl. (“Food Inflation offers an opportunity”, Economic Times, April 18, 2008)

The author, a well-known economist, is a Visiting Professor, Institute of Human Development, New Delhi.

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