rising inflation

8/7/2019 Rising Inflation

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Rising Inflation:

A Timely Warning to Address Structural Elements

GRK Murty



All of a sudden, Indian economy finds itself in a quandary: on the one

hand, the rising inflation is already hovering around 7% and threatening

to shoot up with the high rise in the prices of vegetables, fruits and

onions (around 82%), calling for demand-side checks—obviously,

reining in of money circulation that is currently growing at 15% year-on-

year, which is of course, growing at a pace lower than the nominal

growth rate of the economy—and on the other hand, slowing down of

industrial production to an 18-month low of 2.7% in November that is

demanding pump priming the economy to maintain growth momentum

at or around 8-9%, plus the rising concern at the mounting subsidy bills

and the resulting widening fiscal deficit. And, it is the balancing of these

counter-demands that is today challenging the wit of the government

and its policy makers.

Amongst these growth constraints, it is the rising food inflation that is

driving everyone, both the consumer and the government, crazy. The

steep rise of 59% in vegetable prices pushed the food price index to a

whopping 18.32%. The rise in inflation is, of course, not confined to

agricultural products alone; it even spread to mineral and petrol prices

which have gone up by 30.6% and 25% respectively. Nonetheless, as

the food articles have a weight of 14.34% in the overall wholesale price

index, any further rise in them is sure to upset the inflation estimates.



Incidentally, global food prices too have gone up by 30% over the last

year, mostly due to the fall in production, which again is the outcome

of changing weather, diversion of land use from food grain production

to biofuel production, etc., and this in itself is a sure pointer to what is

in store for the future.

Whilst on this, it is essential to bear in mind what the expert

committee set up under the chairmanship of Rangarajan to examine

the implications of the proposal of the National Advisory Council—that

proposed legal entitlement to subsidized food grains to both ‘priority’

and ‘general’ households, covering 72% of population under the first

phase starting from 2011-12, and 75% in the second phase in 2013-

14—has got to say. It opined that the recommendations of the NAC

need to be ‘calibrated’: one, owing to non-availability of food grain;two, the potential of such large procurement (63.98 million tons in the

first phase and 73.98 million tons in the second phase) being pretty

high to distort the open market food prices, that too, when all this

requirement has to be necessarily sourced from the domestic

production, not through imports as it would be much more costlier and

undependable; and three, it entails ‘large subsidy implications’ that can

stretch to anywhere around Rs 85,584 cr under the first phase and Rs

92,060 cr under the final phase.



Fairness or no fairness of the recommendation aside, it reveals a

truth: we need to do something solid to fix up the supply-side

constraints relating to food products—move away from overplaying

on/blaming seasonal elements and address immediately the structural

elements that we have been conveniently underplaying for all these

years. Secondly, any shortfall in agricultural output could only lead to

serious distortions in the economy, for no civilized nation growing at an

annualized rate of 7-8% can afford to let half of its population go with

no food security, that too, indefinitely, while better nutrition is “a

necessary prerequisite for economic development.”

After all, agriculture, by itself, is a risky vocation. Globalization has

only made it riskier. Given our inability to provide food-security to the

populace, the government must do something concrete on theagriculture front. No shortcuts will do. Various reports have earlier

indicated that there is tremendous potential for increases in

production—all that it calls for is creation of institutions and right

policies to build and supply appropriate technologies to farmers

coupled with timely credit and right price for their output that

incentivize farmers to produce more.

Given the nature of our agricultural markets—localized, fragmented

and thin physical markets, because of which the flow of price



information remains slow and mostly limits itself to influential market

manipulators—what is simultaneously required to be done is: create a

market infrastructure that can effectively transmit market information

to all concerned well in time. Such free flow of information to

producers, consumers and policy makers, coupled with creation of

storage facilities in the countryside, transparent and flexible trade

policy, and removal of state-level regulations that can pave the way for

creation of a pan-India market for agricultural commodities, will

cumulatively not only minimize the price volatility, but also

disincentivize hoarding by traders—a known element behind every

price volatility.

In this regard, there are a few who, of course, advocate that multi-

brand retailing be thrown open to foreign investment so that requisitetechnology can flow into food-production infrastructure. There is also a

counterargument: this can be aimed at even by domestic corporates

that are already engaged in retailing business. Whatever be the

argument, one thing is certain: Indian agriculture needs all-round

modernization. What, after all, needs to be done is, both private and

public players must chip in to make agriculture a thriving profession;

else India will continue to reel under malnutrition, who knows how

long.

rising inflation

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