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Economic Highlights
Mounting Inflation
WORRY ABOUT GROWTH, NOT PRICES
By Dr. Vinod Mehta
Former Director, Research, ICSSR
New Delhi, March 27, 2008
Having dipped below four per cent, the rate of inflation has
again surpassed the five per cent level. Some economists fear
it may go over six per cent. The increase in prices have come
at a time when there has been some slowdown in the growth of
the domestic manufacturing sector and the fear of worldwide
recession especially in the US, which may affect our exports
and indirectly affect the growth of the economy in general.
This is indeed a very difficult situation for the government
in power especially when elections, both in some States and
the Centre are due. If the choice is between growth and
inflation, it makes sense to choose the former and ignore the
latter. For inflation can be tackled through short term
measures like imports in weeks or months, but if we lose the
growth momentum it will take years to regain it. It has taken
almost 50 years to raise the growth rate by about three times
from almost three per cent (the so-called Hindu rate of
growth) to nine per cent today.
Inflation strains the budgets of families with fixed incomes
and erodes their real incomes, whereas higher growth impacts
the entire economy. It brings in more revenues to the
Government, leading to creation of more productive assets and
jobs. Therefore, an ideal situation would be when the growth
rate is higher and rate of inflation modest. But, in real life
we seldom get such ideal situations. The Governments of the
day have no option but to manage with whatever options are
available at that particular point of time.
One thing is quite clear -- if the rising prices, especially
of daily necessities are not controlled, the ruling
party/coalition is bound to suffer at the elections. We seem
to be facing the same situation as we did during the same
period last year. The rate of inflation which was about 5.5
per cent in January 2007 had increased to 6.5 per cent in
February 2007. Inflation after having come down to 4 per cent
is going above 5 per cent today.
What can we do? There is no magic wand to control or bring
down the rate of inflation overnight as the people would like
it to be. There is always a time lag; steps taken now will
have the desired effect a month, or two, or even three months
later. Besides, even if the Government does not take any
corrective measure, inflation will slow down when the supply
situation improves.
Even though inflation is an apolitical phenomenon, it is
loaded with serious political implications for the government
in power and more so when elections are due. The problem,
however, is that the Government either tends to find
scapegoats where none exist or takes inane measures which it
too knows will not control inflation overnight. The banning of
future trading in certain agricultural products is one such
example where there is no statistical evidence to suggest that
the spurt in prices of agricultural products is because of it.
Though future trading in agricultural products was banned last
year, it has not lead to any fall in the prices of these
products.
Similarly, banning of export of certain products or allowing
freer import of certain agricultural products will show an
impact after a few months. By that time the arrival of rabi
crop in the market would have started dousing the inflationary
pressures. Today, the international prices of essential
commodities are higher than the domestic prices. Does it make
any economic sense to import them to fight inflation?
Inflation in most of the developed countries is by and large
due to money expansion with the Central Banks trying to
control it by raising interest rates and restricting credit
growth. For a central bankers inflation occurs when too much
money is chasing too few goods. Thus, inflation can be brought
under control by simply restricting growth of money supply.
Conscious of the inflationary pressures, the Reserve Bank of
India (RBI) has restricted the growth of money supply, but the
Finance Minister wants to lower interest rates to keep the
growth rate from going down. As it is, both the borrowing and
lending interest rates are still high. As a result credit
offtake will be less and savings in terms of tenure deposits
will increase. But it is unlikely that there will be any let
up in the rate of inflation. However, any further increase in
interest rates can adversely affect the growth rate.
Now, it is for the Government, and not the RBI, to ensure that
inflation is brought under control. This is so because the
main reason for the increase in the price level is the
mismatch between the demand and supply of essential
commodities. This mismatch has not occurred overnight but has
been gradually developing over the past few years. For
instance, the acreage under food crops has been shrinking,
productivity of agricultural crops is stagnant; there is still
no freer movement of agricultural products within the country.
In short, nothing has been done to increase the supply of
essential commodities. The Government will have to take
certain decisions now so that the prices of essential
commodities remain relatively stable over a longer period of
time.
Thus there is need for large investments in the agricultural
sector and rural infrastructure. This also calls for raising
agricultural productivity by providing farmers with improved
seeds and other inputs, timely credit, chain of cold storages,
market information and so on. In the past 50 years’ volumes
have been written on this aspect, but the need is to implement
them. Can one ask if there is any blue print for this?
Since agriculture requires massive investment it may not be
possible for the government to do it alone. We know that
outlays on agriculture have been going down. For example, till
the Fifth Plan, the outlay on the agricultural sector was 16.7
per cent, and it came down to 11.3 per cent in the Tenth Plan.
The Private sector will have to be roped in if we have to
provide a big push to this sector. But to get the private
sector to invest in a big way, we may need to change our land
laws so as to allow contract farming on a big scale. It may be
a good idea to give waste lands to the private sector so that
they can develop these to produce agricultural products.
Apart from increasing investments in the agricultural sector
and improving rural infrastructure including supply chain,
there is an urgent need to develop techniques to detect
impending shortages much in advance, say at least eight to 10
months ahead before they assume alarming proportions. In other
words the Government must have a system in place to monitor
production and availability of essential commodities on a
daily basis, on both regional and national level with an
inbuilt warning system to indicate an impending shortfall in
supplies of certain commodities. This will help the Government
to take timely measures to check the sneaking inflation. For a
country like India, it should not be difficult to develop a
customized software for this and put the system in place.
The simple point is that inflation or price rise cannot be
checked over night, it can be done only by ensuring adequate
regular supplies, or what economists call supply side
management. Therefore, there is no point in sacrificing growth
to control inflation. Instead, at this point of time the
growth rate should be guarded while making efforts to control
price rise. ---INFA
(Copyright India News & Feature Alliance)
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