A N A L Y S I S

Winter of Despair as Prices Rise
Gobind Thukral

ON July 29 last year our Finance Minister P. Chidambaram had faced complete isolation as the entire opposition, but even supporting parties from the Left walked out from Lok Sabha protesting against the steep price rise. Chidambaram also drew flak from Congress backbenchers. They said it was becoming increasingly difficult to face the public who were reeling under the impact of high prices. It is more than six months and some explanations and chest beating; the Congress government had done little to check the price rise. It is winter of discontent. At best the minister had done only shoddy job by slashing some import duties, costing the government a loss of Rs 3,000 crore in revenue but little respite to the consumers, particularly those crores of poor.

As the minister explained "demand pull inflation" was inevitable in an economy that was growing at eight per cent. He assured, “The Government had adopted a combination of fiscal, monetary and supply actions that would bear fruit in the near future”.  But for all these months as price soar, the government precariously did little to control the steep price rise. It has made the people more miserable. The central government has also tried to pass the buck to states to control the prices. Chidambaram has been declaring from time to time, “The Chief Ministers had the power to issue control orders under the Essential Commodities Act with Central permission.”

It is strange at one level the present government argues about the inevitability of the price rise and at another level wants the chief ministers to control the prices through some archaic laws that have never worked. It has only indulged in subterfuge to confuse the nation on a vital issue like prices. The government now wants the prices to control themselves.

Consumer prices have definitely increased in the recent past such that the annual rate of inflation at present is even beyond 7 per cent. Movements in the Wholesale Price Index (WPI) show that the recent rise has been sharpest in the case of food articles, including food grains and pulses. While farmers do not gain, the middlemen and the speculators in commodities make merry. For some commodity groups such as pulses, prices rose by nearly 33 per cent.

More than any other purely economic issue, inflation has always been a pressing socio-political concern in India. The reason for this is a vast majority of people do not have incomes indexed to prices. They are d are therefore directly and adversely affected when prices shoot up especially of necessities. Since money wages and the incomes adjust to rising prices only with a lag, their real incomes get eroded over time. So inflation has direct consequences for income distribution.

Chidambaram argues price rise is due to three factors and asserts that the two of these are completely out of government’s control. The first factor is the cost-push effect emanating from the hardening of world commodity prices, such as oil and other fuels, minerals and metals. With world prices in these increasing, it is only to be expected that domestic prices to rise. However, the fact is that global oil prices have been falling in recent times and are now below the levels they stood at even one and a half years ago. Experts argue, “The same is true of most agricultural commodities and of some imported minerals and metals. So cost-push inflation because of higher import prices is unlikely to explain the rise in prices since June 2006.”

As far the demand-pull effect of higher economic growth that puts pressure on available supplies and leads to a temporary rise in prices. Since there is evidence that rapid growth in some sectors has put pressure on raw material supplies and consequent rise in prices. Yet this is not an inevitable phenomenon. Chinese economy has grown very rapidly for the past three decades and still had only moderate inflation.  With 10 per cent growth in real terms, the inflation rate is only 1.4 per cent. China imports more than India does for manufacturing sector. Somewhere either there is confusion at the level of ministers or they are not honest in the approach to control inflation. Higher growth should not mean higher inflation.

Another factor listed by our honourable minister is "supply shocks". The mismatch between demand and supply in commodities like wheat, pulses and sugar was listed another reason. He said the output shortfalls of these crops led to a temporary rise in prices, and that this increase would get mitigated once supplies were enhanced, for instance, through imports.  It is a clever ploy and shows utter mismanagement. Crop failures are the result of policy failures. Since we started the reform process in 1991 we have spared little money for agriculture sector as well as small-scale industry. Both have suffered because of the callous attitude and misreading in Indian economy. Why allow speculation and hoarding? Procurement declined as the Food Corporation failed to lift to procure and perhaps deliberate under pressure from the ministers and the public distribution system was ignored and starved of supplies. Procurement declined by nearly 40 per cent compared with last year, and wheat stocks fell by 20 per cent to less than 7 million tonnes. The government was forced to import wheat at prices several times higher than what it was willing to pay to the farmers. It is the story for pulses too. The price rise continues unabated. This happens when you forget the needy and the poor.

Again there is only knee-jerk response. In the past months, the Reserve Bank of India’s has increased its discount rate three times. Now is it tough for the small borrowers to get bank credit. The stock market continues to be unreasonably excited. The real estate market is overheating – land and the house prices have shot up many times. There is hardly any control. One does not understand this steep rise and no action when we have an economist as prime minister. We need Rafi Ahmed Kidwai and not Chidambaram to control inflation.

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