Issue 64 Vol III, May 31, 2008

F O C U S

Rising  prices: preaching makes no sense
Gobind Thukral

FINALLY our big government in Delhi has discovered why there is such uncontrollable inflation. “High inflation was largely due to rising global crude oil and commodity prices”. This was the assessment made by Prime Minister Manmohan Singh and Finance Minister P Chidambaram and Deputy Chairman Planning Commission Montek Singh Ahluwalia on May 19. Two other decisions emerged from this meeting.

There was no possibility of further drastic administrative measures by the government to rein in inflation. The government should not be over-reacting. It is true that inflation has already crossed 8 per cent mark, highest since 2004. The number of people below poverty line has increased by another two crore or so.  The common man was suffering the most because of food prices rising each day. But any more measures. Any more fiscal and administrative decisions will go against the grain of a liberalising economy. Price controls, export bans and restriction on commodities futures trading were termed as knee-jerk reactions.

Prime minister was not in favour of price controls or other such measures since it sent wrong signals about India, a reforming country, to international investors. The government should hike subsidies on edible oils and other agricultural commodities, if need be, than take market-unfriendly actions. Ahluwalia who is an all important advisor to the government did not favour measures such as invoking the Essential Commodities Act work. Apparently the big industry and trade are exerting their pressure and they want government money as subsidy to have a merry good time.  But this spells bad time for the ruling Congress as they are not the voters.

It clear from what emerged from this meeting that government has no clear idea of what it should be doing and what it should not be. It has already taken measures which the prime minister and his advisors now oppose. And, now contrast this thinking what the government has been telling the parliament. Finance minister Chidambaram had said the government was determined to take all measures to contain inflation with the cooperation of the industry if possible, and without it, if necessary. During a debate in Parliament in April, he regretted states not taking adequate measures to force traders to comply with the stock limit norms under the Essential Commodities Act. Under the Act, states can restrict the quantum of essential food grains like wheat, rice, pulses and edible oils that a trader can stock.

Republic of hunger

As far as fighting inflation is concerned prime minister’s preaching makes no sense. Economic history tells us that crude oil prices when they rise, they rarely come down.  It is also true that price of petrol and diesel lead to higher prices of goods and services. Government has to take measures to absorb this rise. For example Malaysia, a country that got freedom from the British yoke ten years after India has been able to control inflation. It makes huge income from its public sector units and ploughs back to the help the common man. China does the same. In India prices last week recorded a new high. Prices of fruits and vegetables went up by 3 per cent, coffee 6 per cent, maize 4 per cent, spices and masoor by 1 per cent each. Atta, coconut oil and khandsari have turned costlier.

Woes of the United Progressive Alliance government do not end here. There is a marked slow down of economy. Industrial production increased by just 3 per cent in March 2008, the lowest in six years. For the entire year 2007-08, the growth rate is estimated to be 8.13 per cent, more than 3 percentage points below the previous year’s figure of 11.6 per cent. In the recent past, strong performances by both industry and services had made possible a GDP growth of 9 per cent. The decline in industrial growth will result into more unemployment and unrest. Can the UPA afford it when elections around the corner.

In fact, this growth story being touted around has a false ring. It is full of anomalies. The annual rate of growth in the services sector has averaged around 15 per cent during the past few years. Since services account for more than one-half of our gross domestic product, an annual rate of growth of 15 per cent in this sector itself ensures an overall GDP growth of 7.5 per cent. Even if agriculture and industry together grew at an annual rate of 3 per cent, it would still be possible to attain an overall rate of 9 per cent. What is actually happening is something similar. Output of services has taken off, industrial growth is expanding, but at a lower pace. It is agricultural, mainstay of over 65 crores people is frighteningly lagging behind.

Service sector expanding at a fast pace, but it does not provide employment for more than 20 per cent of the nation’s working force.  Agriculture and allied sectors are the source of livelihood for close to two-thirds of the working population. Since the annual rate of growth in agriculture is round 2.5 per cent, it means very low per capita income and if we take into account rising population, it is a dismal picture. Whatever income growth is taking place in agriculture is not getting spread equally. Arable land was unevenly distributed at the time of independence. Things have worsened over the past sixty-odd years. Almost 40 per cent of those dependent on agriculture do not own any land at all. This segment of mostly farm workers, remain outside the range of growth.  Many of them do not find any work for most of the year. There is no real increase in their wages.  Any benefit of growth in agriculture is apparently cornered by the owners of relatively big-sized land holders.  This account for 30 per cent of the rural population now living below the poverty line.  Never mind the heady rate of growth, about three-quarters of the nation continue to be poverty-stricken.  Our country for them is a ‘republic of hunger’. If there is no price control, Mrs. Sonia Gandhi and Manmohan Singh should forget the Congress coming back to power. It is as clear as the day.

The steps so far

• Edible oil exports banned

• DEPB benefits on steel, cement withdrawn

• Duty cut on palm oil imports, non-basmati rice exports banned, pulse exports ban extended to March 31, 2009

• DEPB benefits on basmati rice withdrawn

• Cement exports banned

• Benefits withdrawn for milk

• Cash reserve ratio hiked 50 basis points

• CRR hiked another 25 bps to 8.25 per cent

• Duty cut on steel, skimmed milk imports; ad valorem export duty imposed on steel products, basmati rice

• Futures trading banned on potato, soya oil, chana, rubber

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Inflation negating growth
Vinod Anand

FOR the last few months, India has been facing serious inflationary pressures.  There has been a trend of steadily rising prices in general which, if not checked, would result in diminishing purchasing power of the nominal sum of money and to the number of people the poverty line.

As we know, inflation is measured in terms of an index number. It is a single number which gives the average value of a set of related items, expressed as a percentage of their average value at some basic period. Index numbers are classified into three groups on the basis of the types of items they are calculated for. These are: Price Index Numbers (like, the retails price index, the wholesale price index), Volume Index Numbers, and Value Index Numbers. According to the available data, the Wholesale Price Index (WPI) has reached a high a 7.83 percent (1993-94 = 100). This is the highest level witnessed during the last ten years. According to the Reserve Bank of India, the comfort zone is just five percent. This so called comfort zone raises a query. Why and how 5 percent? Why not less than that? In fact, even five percent is too high for a growing economy like India. There is no doubt that a little bit inflation is a must for a sustainable growth, but it should not be as high as five per cent. At eight per cent it could be disbursing en enter “a discomfort zone”.

There are many “evils” of inflation.

(1) There is always a possibility that a slow rate of inflation may accelerate and become galloping inflation (also called rapid inflation or inflationary spiral). The consequences of which could be serious. In this situation, prices rise so rapidly that money quickly loses its value, and people also lose confidence in the monetary system. Look at the situation in Zimbabwe, where the rate of inflation is 100,000%. It is a classic case of how inflation can make life hell for people. It is a country which is dotted with malls filled with goods, but no customers.

(2) Inflation may also lead to undesirable redistribution of income. For example, those whose money income rises at a slower arte than the rate of inflation lose, and those whose money income rises at a higher rate than the rate of inflation gain, and those whose money income change infrequently ( like those of pensioners) may become vary badly off.

(3) Inflation may discourage saving sine the real value of the sum saved falls through time.

(4) In the sphere of international trade, exports decrease and imports increase, leading to declining national income. The balance of payments difficulties also become severe.

(5) High arte of inflation can also be anti-growth. High inflation leads to low saving, low investment, and then to low growth.

There are two theories of the causes of inflation: The Cost-Push Theories and The Demand-Pull Theories. According to the former theories, inflation is caused/created and sustained by increases in costs of production, and these increases are independent of the state of demand. The most common source of cost-push inflation is the power of the trade unions to gain wage increase. This is well analyzed in the famous “Bargaining Theory of Wages”. The critics of this theory argue that if wages and prices increase at times when the aggregate demand does not rise sufficiently, this would lead to unemployment, lower level of national income, and lower level of related economic activities. As a result, deflationary effects would occur, and the process of inflationary pressures would stop. Cost- Push inflation, therefore, is a temporary phenomenon, and it only leads to recession (short period), and not to depression (long-period). The demand-pull inflation arises when aggregate demand for goods, services, and resources is in excess of aggregate supply. This could lead to depression. Demand-pull theories of inflation include the issues of the influence of the money supply on the price level. Solutions to this problem of inflation include monetary and fiscal policies, and also direct intervention in the markets to restrain price and wage increases. The real difficulty is to work out a trade off between the costs of inflation and the costs of avoiding it in terms of higher unemployment, lower output of real goods and services etc.

In India, the causes of recent inflation are both cost-push and demand-pull. The Government and its concerned authorities like, The Reserve Bank of India and the various ministries have to find a way out to control the inflationary pressures.

Besides, The Government should

• not mix politics with economic policies (monetary and fiscal) to control the rising rate of inflation; [ it is impossible to avoid in an election year]

• remember that the drawbacks of inflation can be eliminated by following anti-inflationary policies. The best short-run way out is to raise interest rates a number of times, and also increase the amount of money commercial banks need to set aside in reserves many times, and to tighten monetary policy further, with more reserve requirement ratio hikes and more heavy-handed controls over bank lending;

• distinguish between core( due to domestic reasons) and non core inflation (due to international reasons like fuel prices) to work out an appropriate strategy to rectify the situation;

• cater for the poor and low- income groups by controlling the price rise of essential commodities; and

• give top priority to the development of the agricultural sector.

Once all this is done, the rising inflation will disappear with time, and we will be back to a normal situation.

[The author was formerly placed at the University of Allahabad as Professor and Head of Economics. He was also a Fellow at the Indian Institute of Advanced Study in Shimla.]

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Politics as commodity
Gobind Thukral

THE Congress Party and its president Mrs. Sonia Gandhi look haggard. The Party has been losing one after the other election. It lost Punjab, Kerala, Himachal Pradesh, Uttrakhand, and Meghalaya. It has now been outwitted by the BJP in Karnataka.  It is worried about the elections in Rajasthan, Chhattisgarh and Madhya Pradesh where the BJP is ruling, Maharashtra and Andhra where the opposition is making efforts to snatch power from it. The Congress has to face general elections in May next year.

Why is the shine it wore four years back when it came to power through a coalition building under United Progressive Alliance wearing so thin. Economy has done well. It has been growing around 9 per cent during the last four years and is expected to be around 7.5 per cent this year. Only in February when the finance minister presented his budget, the Congress looked in pink of its health. The government’s coffers are full with Rs.602, 935 crore in its kitty. It is spending Rs.658, 119 crore during 2008-9. The annual plan expenditure is approximated at Rs.243, 386 crore.  Non-Plan expenditure is figured out at Rs.507, 499 crore. It can afford to spare over Rs 71,000 crore as debt relief for the farmers. It has already marked huge money for rural employment. Following the Sixth Pay Commission recommendation for its 40 lakh employees and pensioners its   wage bill be  around Rs.79 billion  during the next fiscal year with an additional one-time burden of Rs.180 billion. It has raised dearness allowance by six percent in January and it cost Rs.38.5 billion in fiscal 2008-09.

The UPA has paid a record Rs 1000 per quintal as the minimum price for the wheat grower and is expected to increase the procurement price in October for paddy. Rice and wheat production has set new records. Total agriculture crop production is projected to increase at 229 million tonnes. Wheat was estimated a record level of 77 million tonnes. Production of nine major oilseeds was 28.2 million tonnes, higher by 16 per cent, while cotton production was estimated at 23.2 million bales, rise of 2.5 per cent. The total farm sector growth, however, is around 2.4 per cent which is not good.

So why are people angry and not voting the Congress? One reason is the ever rising prices, particularly the food products. The poor and the middle classes have been hit hard and the government is offering not hope. Second is the unchecked swell in corruption besides government inefficiency and apathy. Third is this higher growth has not created many jobs. It is largely the service sector with 15 per cent growth rate that is boosting. If there was a similar boost in agriculture and manufacturing sectors, India’s growth story would have been very different.

At another level as Karnataka elections showed, the party is in bad shape all over. Congress has gained in seats and its percentage of share of votes [34.59 %] is more than of the BJP [33.86%]. But it could not translate this into seats.  That may be the fault of our electoral system.

 Some Congress men are blaming selection of candidates, failure to name its chief ministerial candidate and the campaign machinery for the defeat of the Congress in Karnataka.  They forget that when it comes to issues of national security, macroeconomic management and decent governance, the credibility of the Centre is at rock bottom. People are not expecting much from the spiralling prices, what disturbs them is the government’s continued appeasement of big industrialists and multinational traders and  all in the name of investment. The government is seen weak on terrorism and threats to the security of the citizen.

What is worse Mrs. Gandhi has developed cold feet while managing her party that is now either full of cronies and hypocrites. For example, contrast two states, Punjab and Haryana. There were three assembly by-elections in Haryana. Since the government under the leadership of chief minister Bhupinder Singh Hooda is performing well on economic and administrative front, outwitting Punjab by many yards, the Congress could win two seats of Gahanna and Indri by handsome margins. It lost Adampur to former Congress leader and chief minister Bhajan Lal who won 11th time this year. His margin of over 71,000, however, was reduced to less than 25,000. His new party lost its maiden effort to throw any challenge to Mr. Hooda who has emerged as an unchallenged leader. Even strong campaigner like   former chief minister and Lok Dal leader Om Parkash Chautala has tasted defeat in all the three constituencies. Here also, some Congressmen were seen sabotaging the party.  Lesson one for the national leadership is performance and an image of seasoned gentleman leader. There was no one leader in Karnataka and former chief minister S.M. Krishna who was made to resign as governor of Maharashtra was not even contesting. BJP had well oiled machine and a clear leader.  Mrs. Gandhi had earlier messed up Himachal and Punjab by relegating the incumbent chief ministers, Virbhadra Singh and Capt. Amarinder Singh. Same happened in Gujarat.

Punjab presents a classic case where the Congress is busy destroying itself. Not a day passes when Mrs. Rajinder Kaur Bhattal or Capt. Amarinder Singh and their supporters do not lash at each other in public. Mrs. Bhattal whose capacity and capability is too limited occupies two positions, the state party presidentship and the leader of the opposition. Her daily antics only amuse the people and make the chief minister Parkash Singh Badal more comfortable in his seat. There is hardly any opposition.  No one had n any doubt that the Akali candidate from the Amritsar seat would not win, yet Mr Badal through earning reprimands and fines from the Election Commission and by messing up provided the Congress an opportunity, yet it  could gain little. It lost as expected by huge margin. Its selection of the candidate was wrong and campaign full inner party bickering. Yet there is little that the Mrs. Gandhi would be doing about Punjab. She may find it later it too tough to deal with one or the other group.

Sonia Gandhi’s conservative impulse and a timid approach to men and matters are at the root of present state of Congress. She is unable to spell out definite clear goals. Her agenda gets diluted. This was visible when she chose not to lead the government four years back. There is no well recognised lead team at the center or in states. It is all messy and putting one leader against the other only weakens the party, particularly when the NDA is throwing up a big challenge.  Congress is dysfunctional, dreary and unexacting. Can the present leaders correct this messy situation is perhaps asking too much.

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Nepal: Birth pangs of a new republic

IN a landmark political transition, on the night of MAY 28 200, Nepal dumped monarchy and embraced republican rule as its newly-elected lawmakers voted overwhelmingly to abolish 240-year-old royal regime and declared itself as a "secular, federal democratic republic". It was drum beats allover Nepal and flowers and greetings marked the end of royalty.

In South Asia, only Bhutan still has a king who is proving more democratic than even the republicans. The country had elections only two months back and an elected government is in place.

It was the culmination of ten year long struggle by Maoists that cost the country 13000 lives and untold suffering to the Maoists cadres to get rid of crooked, brutal and nasty rule. There were too many countries and too big forces, all ganged up in maintaining an exploitative system that kept the Himalayan country in poor shape.  No longer now.  Major conspirator, as usual, in this case was the United States of America.

The 601-member Constituent Assembly, that met at the Birendra International Convention Centre amid tight security, passed a motion by 560-4 votes to declare the country the world's newest republic.

More than a lakh people were present outside the Constituent Assembly when the motion to declare Nepal a republic was passed.  Lawmakers and a large number of diplomats, senior government officials, journalists and civil society members were present at the CA meeting venue. The government has declared May 28 and 29  as public holidays to celebrate the  historic republic declaration.

Yet all was not as smooth as it looked at the end of the day. The CA meet was scheduled for 11 in the morning and celebrations erupted to welcome the republic. But as the meeting did not take place till 8 p.m., the crowd outside the Convention Centre was agitated and hurled stones towards the building. Police fired teargas to control the crowd; a policeman and a civilian were injured. Security has been stepped up in the city since morning.

The motion declared Nepal will be secular, federal, democratic republic nation. No longer Nepal is a chauvinistic Hindu kingdom and King Gyanendra now just a common citizen. He has lost all political and administrative and cultural powers. The king and the royal family members will enjoy the rights that are meant for any common man.

Much before that historic decision, there was hectic political parleys among the major political dispensations, the Nepal communist party Maoists, Nepal Congress and two other communist parties and smaller grouping. The crucial CA meeting was postponed twice to enable sorting out of differences among the political parties on the issue of creating the post of President who would be the head of the State and supreme commander of Armed Forces. The Prime Minister will be the executive head.

The political parties have already agreed to create a post of President, armed with the powers of imposing emergency and carrying the title of the Supreme Commander of the Nepal Army. There is also a provision for Vice President in the amendment. President will be the Supreme Commander of Nepal Army and will have powers to declare emergency.

Koirala, who tabled the motion, said, "Nepal has entered into a new age. Such a historical occasion comes once in a lifetime of the nation. The Nepalese people's 60-year old dream to write their Constitution by themselves has come true today. Mutual cooperation and trust is powerful than any other weapon, and we need to maintain the same spirit of cooperation, coordination and trust in days to come for prosperity and development of the country."

Koirala in his address conceded that since CPN-Maoist being the largest party, it will now head a national government. The other key issues including formation of a new government and election of the President will be done in a few days.  The erstwhile King Gyanendra will have 15 days to vacate the Narayanhiti Royal Palace, which will soon be turned into a public museum.

The CA will now amend the Constitution and elect a President, along with a new Prime Minister. The political parties are yet to agree on the process to elect the President.

According to the agreement reached among the parties, the President will be the patron of the Constitution and the supreme commander of the army. He will also have the authority to impose emergency rule on the recommendation of the Cabinet.

Though the candidates for President and Prime Minister have not been named, it is almost a foregone conclusion that Maoists will get premiership and the Nepali Congress, President. The other two largest parties — Communist Party of Nepal (UML) and Madhesi People’s Rights Forum — will bag the posts of CA chairman and Vice-President.

Much more important issues would be the economic resurgence. Over 50 per cent are very poor and illiterate. Nepal lacks infra structure like roads, electricity, education and health services. A fractured polity does not offer much hope. First requirement is a politically stable, friendly with neighbours and with nitpicking India at anyone’s behest.

The Shah dynasty ruled unified Nepal for the last 240 years, yet it had been in the throne of the Gorkha kingdom since 1559. King Prithivi Narayan Shah initiated the unification drive in 1742 and conquered the Kathmandu Valley in 1768.

The story of the dynasty is a saga of much tragedy. In the years after the unification of the kingdom, which was fragmented into more than 60 tiny principalities, the dynasty was marred by internal feuds, betrayals and killings.

The people’s faith in monarchy was shattered after the June 1, 2001 Royal Palace massacre that killed King Birendra and his entire family. However, it was King Gyanendra seizure of power on February 1, 2005 that triggered a chain of events, culminating in the declaration of the republic.

The People’s Movement in April 2006, jointly declared by the mainstream parties and the Maoists, who had waged a decade-long insurgency, forced King Gyanendra to give power back to people.

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