Inflation in India


The people of India have been greatly troubled by the rising prices, especially of essential commodities, for almost a year. The wholesale price index (WPI) that officially measures the level of inflation rose by 3.98 per cent during the last financial year (April 2005-March 2006), but, this year, indications are that it may go up by almost 8 per cent by the time it comes to a close. During the week ending 27 January, it recorded an increase of 6.58 per cent and during the following week it climbed to 6.73 per cent. Thus the rate of inflation has crossed the ceiling (5.5 per cent), fixed by the Reserve Bank of India. The upward journey of the rate of inflation can, on no account, be linked to random factors like wars, internal troubles, the failure of the monsoon and so on. In fact, lately, the price of oil has been going down in the international market. The government has also brought down the retail prices of petrol and diesel.

 In recent weeks, the government has slashed the import duties on essential commodities. Food items, steel, cement, etc. now attract less import duties. Besides, the export of wheat has been banned. Yet, the rising trend of prices continues unabated. The increasing prices of pulses, food grains, fruits and vegetables, meat, eggs, milk and milk products have forced most of the working population that is not, partially or fully, compensated by an increase in dearness allowance or a rise in wages and salaries because of their bargaining power. Consequently, an overwhelmingly large part of the population is forced to reduce its consumption of these items, which is sure to affect their health adversely because of the reduction in the intake of nutrients.

It needs to be noted that, in January 2007, food prices were 10 per cent higher than what they were a year ago. Again, in January 2006 they were 7.6 per cent more than what they were in January 2005. The price of wheat, which is the staple diet of most of the population, has risen by 12 per cent. The most troublesome situation is as regards edible oils whose prices have gone up by 43 per cent and the reduction in excise on them has not made any difference.

The Reserve Bank of India has deployed monetary policy instruments to contain the expansion in money supply to ease the pressure of demand. It has raised an important short-term rate of interest by 0.25 per cent. Yet there is no difference in the situation.

There are, broadly three views on the present upward trend in prices and the measures to contain it. An influential section is trying to put the blame on extraneous factors. To make it clear, let us quote from a recent report from The New York Times (February 10): “Government economists attribute rising food prices in India to global factors like a poor harvest in Australia, the growing use of crops to produce ethanol and a higher cost of diesel for tractors.” Obviously, the government is neither responsible for rising prices nor capable of bringing the situation fully under control!

There is another viewpoint that regards the rising prices as a result of overheating. For a number of years, the rate of economic growth has been rising and, at present, it is more than 9 per cent per annum. Long bygone are the days of the so-called Hindu Rate of Growth. The economy has been liberated from the shackles of the Nehruvian model and thinking. Thanks to economic reforms by the present Prime Minister, as finance minister in the 1990s. Those reforms, it seems, have exhausted their potential. The symptom of this is that productive capacity cannot be further expanded till further reforms are initiated. At present, the aggregate demand is more than the aggregate supply in the economy. This imbalance is causing the relentless rise in the inflation rate. This problem cannot be tackled by administrative action such as public distribution and dehoarding. Monetary policy instruments are also not going to be very effective. The Reserve Bank’s “surveys show that practically all of India’s manufacturers are operating at full capacity, as consumer demand has risen first and companies have been slower to respond. Many factory expansions and new factories will be ready in 18 months to two years…as a transitional period of the economy” (Ibid).

To expand the existing productive capacity and create new ones; the government must attract capital both foreign and indigenous. To this end government rules and regulations must be relaxed, pension funds must be allowed into the stock market, banking laws must be altered, capital market must be fully liberalized including making the rupee fully convertible on capital account and the so-called outdated labour laws must be discarded. The leadership of the ruling coalition is advised to stand firm and not give in when the Left parties oppose such reforms. Investors must get unrestrained right to hire and fire workers.
Infrastructure is utterly inadequate. Roads, railways, electricity, water, health and basic education facilities are totally insufficient. To increase them and make them qualitatively better, the government should give up its monopoly and hand over the development work fully to the private sector or enter into some sort of partnership with it. The steps initiated by the government to modernize airports with the help of the private sector are in right direction.

There are people like P. Chidambaram who think that one should not lose heart but be elated at the rising prices because they are the consequences of higher rates of economic growth. In the short run some sections of the society may suffer but in the long run India will be prosperous and become one of the three largest economies of the world. Its political clout in international politics will increase. It will be both feared and respected worldwide. This is the demand of nationalism.

But the fact of the matter is different. To make it clear, without comments, let us quote from Thomas L. Friedman’s very popular work on globalization: ‘Manmohan Singh was India’s Finance Minister when his country decided in 1991 to abandon decades of statist, quasi-socialist economics and don the Golden Straitjacket. Sitting in his office in the summer of 1998, he spoke to me of the loss of control he felt once India embarked on this route.

““We learned that there were advantages to having access to international capital markets, [but] the government’s ability to deliver and control shrank the more it opened to the world. If you operating in a globalized economy, perceptions of other participants matter much more—whether they are right or wrong. Then you have to take those perceptions and make them an important input into your decision-making… We have a world where our fates are linked, but [India’s specific] concerns and aspirations don’t get taken into account. It brings a lot more anxiety. If you are operating an exchange-rate policy, or monetary policy, your policies become an adjunct of what Alan Greenspan (then chief of Fed Reserve) does. It reduces your degree of freedom, even in fiscal policies. In a world in which capital is internationally mobile, you cannot be out of line with others’ wages. It has reduced the maneuverability…’” (The Lexus and the Olive Tree, p.108).

In view of what was stated by the present Prime Minister to Friedman, the government cannot do much on any lasting basis as regards the prices. The problem is that the people of this country will go by the dictum of Keynes that, in the long run, we all will be dead. They cannot wait till the promised golden age dawns.

The chairperson of the UPA and the Left parties know this very well. That is why they have pressurized the reluctant functionaries of the government to initiate measures to check prices. Certain organizational steps are being initiated to control the price situation. The forward trading in food items is going to be kept in abeyance. It seems the argument that one of the ways to ease the price situation in fruits and vegetables is to allow FDI in retail trade has been put in the cold storage at least for the time being. In India, 40 per cent of fruits and vegetables get rotten because the existing small retailers have neither refrigeration facility nor the means of swift transportation. Obviously, the third viewpoint takes into account the capacity of the people at large to oust the government at the hustings. One may ponder over the defeat of the Congress and its the then finance minister in the elections in 1996. Obviously, the hype created about economic reforms did not go well with the electorates. If it gets repeated in the near future, one should not be surprised.

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