yojana inflation
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AUGUST 2010 A DEVELOPMENT MONTHLY RS 20
ISSN-0971-8400
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YOJANA August 2010 1
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August 2010 Vol 54
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C O N T E N T S
YOJANA August 2010 1
MANAGING INFLATION IN THE POST-CRISIS ENVIRONMENT .....................................................5 Subir Gokarn
INFLATION IN INDIA: TRENDS, CAUSES AND POLICY OPTIONS ...............................................................10 N R Bhanumurthy
FOOD INFLATION IN INDIA: CAUSES AND REMEDIES ......14 Ramesh Chand, P Shinoj
THE INFLATION CHALLENGE TO POLICIES .........................19 Shashanka Bhide
INFLATION EPISODES IN INDIA ...............................................22 Manas Bhattacharya
INFLATION: MYTHS, REALITIES AND A POLICY AGENDA .....................................................................25 V Shunmugam, Debojyoti Dey
INFLATION AND STATE OF THE ECONOMY ..........................30 K R Sudhaman
HOW MONETARY POLICY IMPACTS STOCK PRICES ..........33 Ajay Goyal
ANALYzING INFLATION............................................................37 Avanindra Nath Thakur
MEASURING INFLATION ...........................................................41 Shivkumar Biradar
NSS FOR SOCIAL ASSET CREATION .......................................47 P V Basheer Ahammed
LIVELIHOOD FOR THE MARGINALISED ...............................54 J Cyril Kanmony
BIODIVERSITY AND ITS CONSERVATION .............................57 Arvind Singh
SHODH YATRA RETROFITTED CAR FOR THE PHYSICALLY CHALLENGED............................................62
BEST PRACTICES EDUCATION FOR ALL : A LESSON FROM JAGJAGI KENDRAS.....................................64 Sujata Raghavan
DO YOu KNOw? ........................................................................66
J&K wINDOw ...........................................................................68
MACROECONOMIC AND MONETARY DEVELOPMENTS IN 2009-10 .....................................................69
NORTH EAST DIARY .................................................................71
2 YOJANA August 2010
The Union cabinet recently approved a symbol for the Indian Rupee. It was necessary considering
the fact that the Indian economy is integrating fast with the global economy and India is emerging
as a prime investment destination worldwide. The symbol will standardize the expression for Indian
Rupee in different languages, both within and outside the country, and serve to distinguish the Indian
currency from those countries whose currencies are also designated as Rupee or Rupiah, such as Pakistan,
Nepal, Sri Lanka and Indonesia.
Designed by Shri D. Uday Kumar, the symbol was selected through a public competition among resident
Indian citizens. The jury was headed by Deputy Governor, RBI.
The symbol will be included in the “Unicode Standard” for representation and processing of text, written
in major scripts of the world to ensure that it is easily displayed/printed in the electronic and print media
as all the software companies provide support for this Standard. Encoding in the Unicode Standard will
also ensure encoding in the International standard ISO/IEC 10646
The symbol will also be included in the Indian Standards, viz. 13194:1991 – Indian Script Code for
Information Interchange (ISCII) through an amendment to the existing list by the Bureau of Indian Standards
(BIS). The ISCII specifies various codes for Indian languages for processing on computers along with the key-board layouts. After encoding of the symbol in the Unicode Standard and National Standard,
NASSCOM will approach software development companies for incorporating the Rupee symbol in their
operative software, as a new programme or as an update, to enable the computer users worldwide to use
the symbol even if it is not embedded on the keyboards (in a similar manner, we use the Euro symbol,
which is not embedded in the keyboards in use in India).
The symbol will be used by all individuals/entities within and outside India after its incorporation in
`Unicode Standard’, ‘ISO/IEC 10646’ and ‘IS 13194’. q
A Symbol for the IndIAn rupee
YOJANA August 2010 3
Inflation episodes in India have been frequent during the pre-liberalisation period. A crushing combination of persisting shortage of practically all types
of goods allied with an expansionary monetary stand meant, in simple words,
too much money chasing too few goods. That phase fortunately came to an end as
India entered an era of fast growth and reduction in administrative controls on prices
of most goods since the early nineties. There have been periods of inflation since then, but those came with specific causes and responded fast to policy changes.
The inflation this time around that began towards early part of 2008-09 has proved tougher to eradicate. The causative factors at the initial stages were the
sudden boom in global commodity prices which transmitted to the Indian economy.
The simultaneous spike in real estate prices complicated the efforts to contain the
general price level in the economy. The RBI responded with a series of interest rate hikes but those came to
an abrupt end as the global economy went into a tailspin. Between chasing inflation and plummeting growth rates, the central bank chose to address the latter in the second half of 2008-09. This phase too came to an
end, sometime in May-June of 2009.
The gradual accumulation of steam in inflation was now again led by commodity prices, but this time the push came from domestic causes. The government to its credit over the last few years has pumped in
additional purchasing power in rural India through the NREGA and other better directed schemes. So the
impoverished ends of villages are now demanding a better life chance, meaning more food. This is one of
the reasons why food inflation refuses to go away. The supporting factor in the current episode is the steeling of prices in the manufacturing sector as demand
conditions have improved. Real estate prices especially in cities like Delhi, Mumbai, Pune and Jaipur are
already back to their pre-downturn level and threatening to rise further.
To finance the demand for credit from the corporate sector the RBI has got to expand the money supply at a faster clip. The expanding pace of growth of GDP, plus inflation is a shorthand calculation of how much credit needs to grow to feed an expanding economy. But that pace of credit growth is a recipe for further
inflation. So the combination of factors makes it extremely likely that inflation will persist for some more time.
Meanwhile finance minister Pranab Mukherjee has said inflation will ease soon and as early as August. The optimism is based on the prices prevailing in the economy at the same time last year. He is also pinning his
hopes on a bumper kharif harvest that will bring down prices.
The myriad phases of inflation will be explored in the various articles we have collated from the top experts
in the field. We hope you enjoy the same. q
YOJANA August 2010 3
About the Issue
4 YOJANA August 2010
InflAtIon bASIcS
Inflation may be caused due to several economic factors:
l When the government of a country prints money in excess, prices increase as there is too much money in circulation chasing too few goods.
l Increase in production and labor costs have a direct impact on the price of the final product, resulting in inflation.
l When countries borrow money they have to cope with the interest burden. This interest burden may result in inflation.
l High taxes on consumer products can also lead to inflation.
l Demand pull inflation is when the economy demands more goods and services than what is produced.
l Cost push inflation or supply shock inflation is when non availability of a commodity would lead to increase in prices.
The problems due to inflation would be:
lWhen the balance between supply and demand goes out of control, consumers could change their buying habits forcing manufacturers to cut down production.
lInflation can create major problems in the economy. Price increase can worsen poverty, affecting low income household,
lInflation creates economic uncertainty and is a dampener to the investment climate, slowing growth and finally reducing savings and thereby cutting consumption.
lThe producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.
lManufacturers would not have an incentive to invest in new equipment and new technology.
lUncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.
YOJANA August 2010 5
Management of current inflation
requires both supply-side and
demand-side approaches.
Monetary policy has addressed
the latter with a gradual, calibrated
set of actions on both interest
rates and liquidity management
Managing Inflation in the Post-Crisis Environment
INflATION
The Growth Backdrop
The Indian economy weathered
the global crisis of 2008-09
quite well. Even as much of the developed world is still quite some distance from its pre-crisis
growth rate, several emerging
market economies (EMEs) have
made up the lost ground relatively
quickly. As indicated in Chart 1, India saw its growth rate decline
from 9.4 per cent in 2007-08 to a
trough of 6.7 per cent in 2008-09.
There was a modest recovery in
2009-10 to 7.4 per cent, with the
second half of the year showing a
slight improvement over the first. The outlook for the current year
is generally more positive, with
several forecasters projecting
growth to be around 8.5 per cent.
While this is still somewhat short
of the pre-crisis performance,
The author is Deputy Governor, RBI.
there is a widespread perception
that, with the several capacity
constraints that the economy
faces, more rapid growth than
this would quickly trigger strong inflationary pressures.
Inflationary Pressures
R e g r e t t a b l y , t h o u g h ,
inflationary pressures have been visible in the economy even in the
early stages of the recovery. Chart
2 indicates that the turnaround in
headline inflation, as measured by the overall Wholesale Price
Index (WPI) began in June 2009.
This was clearly a period in which
the recovery was in its very early
stages, with the economy growing
at an annual rate of around 7.5
per cent, significantly below the pre-crisis rate. It was logical to
attribute the rise in the inflation rate to supply-side factors.
Subir Gokarn
POlICy STANCE
6 YOJANA August 2010
The validity of this inference
is evident from the same chart.
The prices of primary articles
began to rise in March 2009 but
the rate of increase accelerated
s h a r p l y a r o u n d A u g u s t . A
significant contributor to this
was the rapid escalation in food
prices as a consequence of a weak monsoon. Later in the year, as
prospects of a global recovery
looked brighter, commodity
prices continued to rise. The
combination of rising global
commodity prices and domestic
food prices contributed to
a sustained increase in the
inflation rate for primary
articles until April 2010.
There has been a plateauing
since then. This is partly
attributable to a global
softening of commodity
prices, as uncertainties
about the sustainability of
the recovery have arisen.
If this continues, it will
help to reverse the trend in this
component of the index. But, the
most significant cause of reversal
is likely to be a moderation
in food prices over the next
few months in response to a
reasonably good monsoon.
The other supply-side driver
of inflation in recent months has been energy. The inflation rate for the fuel component of the
WPI began rising in June 2009.
Though it remained in negative
territory until October 2009, the
rise itself contributed to a rise
in the overall inflation
rate. From October 2009
onwards, fuel inflation has been positive and
rising quite rapidly.
In short, the Indian
economy has clearly
seen a spurt of inflation, significantly driven by
supply-side factors in
a period during which
growth was relatively
s l o w . P r e v a i l i n g
wisdom on mone ta ry
policy suggests that supply-
side pressures, particularly if
they are temporary in nature,
are not effectively tackled by
conventional monetary measures,
which are more directly aimed at
reining in demand. Apart from the
temporariness of these supply-
side factors, the overall state
of the economy should also be
considered. The same wisdom
argues that, if the economy is at or
close to full capacity utilization,
monetary actions in response
-15
-10
-5
0
5
10
15
20
Apr-0
7Ju
n-07
Aug-07
Oct-0
7De
c-07
Feb-08
Apr-0
8Ju
n-08
Aug-08
Oct-0
8De
c-08
Feb-09
Apr-0
9Ju
n-09
Aug-09
Oct-0
9De
c-09
Feb-10
Apr-1
0Ju
n-10
Per c
ent
Chart 2: WPI Inflation and its Major Components
Overall WPI Primary articlesFuel group Manufactured products
9.2
7.6
5.9
7.3 7.6
0123456789
10
2007-08 2008-09: H1 2008-09: H2 2009-10: H1 2009-10: H2
Perc
ent
Chart 1 GDP Growth
Source: Central Statistical Organisation.
YOJANA August 2010 7
to supply-driven inflationary
pressures may be appropriate.
While they will not directly
address the cause of the inflation, by signaling a willingness to
compress demand, they will
rein in expectations of inflation spiraling out of control.
The fact that the economy was
still growing at a relatively slow
pace in the second half of 2009-10
implied that there was some slack
still available in capacities across
sectors and that the threshold
for strong monetary actions had
not yet been reached. However,
monetary assessments at that time
could not be made independently
of the very drastic measures that
had been taken when the global
crisis precipitated in September
2008. Those actions took the
monetary position, as reflected in the repo and reverse repo rates and
the cash reserve ratio (CRR) quite some distance from what would
be considered normal levels. Even
in the early stages of recovery,
therefore, every opportunity to
revert these instruments to normal
needed to be exploited. I shall
return to this point a little later in
the article.
The Rising Significance of Demand
Coming back to the inflationary situation, while a significant
proportion of the rise in the
inflation rate over the past year can be attributed to supply-
side factors, demand pressures
became visible in early 2010.
While it is difficult to identify a perfect measure of demand-side
inflation - what is conventionally referred to as “core” inflation - a practical measure that reflects the underlying forces to an extent
is the sub-component of the
manufacturing component of
the WPI, which excludes food
products. Chart 3 displays the
pattern of this sub-component
“ N o n - f o o d M a n u f a c t u r i n g
Inflation”
As growth slowed in 2008-
09, this indicator also moved
downwards. It actually went
into negative territory for a few
months, before turning marginally
positive in December 2009. While
this turnaround was clearly not
indicative of any rapid build-up of
demand pressures, the fact that it
had happened was a signal that the
business cycle had bottomed out
and growth was on its way back
up. However, after that rather
sedate start, this indicator began
to accelerate rather rapidly in the
early months of 2010. At the time
that this article was written, the
numbers for June 2010 had just
been released; this indicator had
risen to 7.3 per cent.
The inflation rates that the
economy is now experiencing,
both from the supply and the
demand sides, are clearly a
matter of great concern. It is
incumbent on the government
and the central bank to use all
the means at their disposal to rein
inflation in. In this effort,
monetary policy has two
specific objectives: (i)
to prevent the spillover
of supply-side pressures
into a more broad-based
inflationary process and
(ii) to moderate demand to
levels consistent with the
capacity of the economy to
meet it without provoking
price increases.-4
-2
0
2
4
6
8
10
12
Apr-0
7Ju
n-07
Aug-
07
Oct
-07
Dec-
07
Feb-
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Apr-0
8
Jun-
08
Aug-
08
Oct
-08
Dec-
08
Feb-
09
Apr-0
9
Jun-
09
Aug-
09
Oct
-09
Dec-
09
Feb-
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Apr-1
0Ju
n-10
Per c
ent
Chart 3: Non-food Manufactured Products Inflation
8 YOJANA August 2010
Monetary Policy: Thought and Action
Let us look at the thinking
and actions on the monetary
front against the backdrop laid
out above. As already indicated,
drastic monetary actions were
taken during the last quarter of 2008, sharply bringing down both
the policy rates and the CRR.
Looking back on this period, it
can be reasonably argued that
these measures contributed to
the stabilization of the economy
and the relatively small impact
of the crisis by infusing massive
amounts of liquidity into the system. The fiscal stimulus, which came in various forms during the
same period, helped by directly
creating demand in a situation
in which private demand was
sluggish. Without these combined
interventions, the outcome would
almost certainly have been far
worse. The monetary stance
remained in a critically supportive
mode until October 2009, when
the first steps to move towards a normal position were taken.
Table 1 lists all the monetary
actions taken from then until July
2, 2010.
Four key concerns have
influenced the sequence and magni tude of the monetary
actions listed in the table. First,
even while the Indian economy
has recovered quite rapidly from the slowdown, there is persistent
global uncertainty. Emerging
market economies (EMEs) have
generally done quite well in coming out of the crisis, but a
major part of the global economy
- the US, the UK, the Eurozone
- is not only showing only very
modest signs of recovery, it is
also manifesting new stresses,
partly as a result of the huge
build-up of sovereign debt, which
governments used to support their
various fiscal stimulus packages. Over the past few weeks, optimism
about a sustained, even if slow,
global recovery, has been giving
ground to concerns about another
imminent slowdown. One thing
that we learnt from the events
of 2008-09 was that India is not
immune to global turbulence. Be
it through trade, capital flows
or a general sense of confidence about economic prospects, a
global problem quickly becomes a domestic one. Given these
linkages, the risks from the global
economy need to be taken into
consideration while formulating
domestic policy.
Second, the reality is that
the policy instruments are far
Table 1: Monetary Policy Measures Since October 2009
S. No.
Monetary Policy Instrument
Present Rate (%)
Change Since October 2009 (basis points)
Remarks
1 2 3 4 5
1 Reverse Repo Rate 4.0 +75 25basis points (bps) each in March, April and July 2010
2 Repo Rate 5.5 +75 25bps each in March, April and July 2010
3 Cash Reserve Ratio 6.0 +100 75 bps in January 2010 and 25 bps in April 2010
4 Statutory Liquidi ty Ratio
25.0 +100 October 2009
YOJANA August 2010 9
from being in a normal position.
As the economy recovers, it is
imperative that policy instruments
be brought as quickly as possible back to a position consistent with
the state of the economy. This
is essential for the management
of expectations as well as to re-
create the capacity to respond,
should another shock hit the
economy. But, as important as
it is to return to normal quickly, it is equally necessary to do so non-disruptively. The kind of
rapid and massive reductions
that were made to instruments
during the crisis simply cannot be
replicated in the reverse direction.
Growth i s p i ck ing up and
confidence gradually returning
to businesses and consumers,
but given the vividness of the
crisis, the process is still likely
to be vulnerable to both external
shocks and domestic ones. Rapid
transitions in the policy regime
might constitute one such shock.
In essence, on this consideration,
while rapid and drastic actions
are entirely warranted when
dealing with a crisis, managing
a return to normalcy requires a more gradualist and calibrated
approach.
Third, notwithstanding the
above two issues, the fact is that
inflation has taken hold, with both supply and demand pressures
contributing to it . Monetary
policy must respond. The table
indicates that it indeed has. Action
on rates and liquidity, through the CRR, began in January and has
continued at the measured pace
indicated earlier over the past six
months. One strong criticism of
the Reserve Bank’s approach has
been that it has been “too little,
too late”. I would submit that
the test of this is yet to come.
It is well-known that monetary
policy acts with a lag. It could
be anywhere between 6 and
12 months, even longer before
demand side pressures abate in
response to an action. Given this,
actions taken during January-July
2010 should start to show their
impact on inflation over the next 6 to 12 months.
The fact that the non-food
manufacturing inflation rate went up sharply during the first half of the year is in and of itself cannot
be attributed to the absence of
monetary actions during this year.
To address that, actions would
have had to be taken in the second
half of 2009. But, at that point
even the domestic recovery was
at best in its early stages and its
trajectory was quite uncertain. An anti-inflation stance in those
conditions would have been rather
risky.
Finally, as I have already
mentioned, an important lesson
from the crisis was the critical role
of liquidity in the financial system in maintaining economic stability.
The policy approach over the
past few months has been very
conscious of the need to balance
the exit from an abnormally high
liquidity situation, which the response to the crisis created with
the current liquidity requirements of both the public and private
sectors.
Conclusion
To conclude, the management
of current inflation requires both supply-side and demand-side
approaches. Monetary policy
has addressed the latter with a
gradual, calibrated set of actions
on both interest rates and liquidity management . The pace and
sequencing of the actions has been influenced by both persistent global uncertainties and the need
to support the domestic recovery.
This has required a balancing act between reining in inflationary expec ta t ions and adequa te liquidity in the domestic financial system. While the current rate of
inflation is a legitimate concern, the results of this policy stance should
become visible over the next few
months. q
(E-mail : [email protected])
10 YOJANA August 2010
As the choice is between high growth and high
inflation, one would suggest that even at the cost of India achieving slightly lower
growth, moderating inflation is crucial
Inflation in India: Trends, Causes and Policy Options
INflATION
S D E F I N E D i n economics text books, inflation is a sustained rise in the general level of prices of goods and
services over a period of one year. In other words, it indicates the percentage rise in the general prices today compared to a year ago. The rise (fall) in inflation means that purchasing power of money declines (increases). This measure is very useful in understanding the trends in cost of living and also in comparing the trends in major macroeconomic variables. From the policy point of view, particularly for the monetary authorities, tracking of inflation is quite essential in formulating necessary growth policies.
In the recent period, India has been witnessing very high inflation rates and this has become a serious policy concern as it could have adverse impact on both growth and welfare of the country. The recent data shows that the headline
A
The author is Professor, National Institute of Public Finance and Policy, New Delhi.
inflation in May 2010 is at 10.16%, against the RBI’s comfortable level of around 5%, as stated in the April 2010 Annual Credit Policy statement. In this context, here we look into the recent trends in the inflation rates (both headline and also the sub-components) and the main drivers of these high rates. In the end, some discussion on the policy options that might help in containing inflation would be specified.
Recent Trends
Before we look into the recent trends in the inflation rates, we need to understand the existing measures of inflation. As in any economy, India also has two broad estimates that cover the prices in wholesale market (which is called Wholesale Price Index (WPI)) and the retail market (Consumer Price Index (CPI)). Within CPI there are three sub indices that cover three groups namely industrial workers, urban non-manual employees and
N R Bhanumurthy
OVERVIEW
YOJANA August 2010 11
agricultural laborers. But there is no consolidated CPI for the whole economy. In the case of WPI, the index covers only the prices of goods and not the services, thus, making difficult for the policy makers and researchers in choosing the appropriate price index for target and also for research. However, WPI is the one that is tracked by the analysts and policy makers as the information flow is faster with WPI compared to CPI, which comes with a lag of two months. It is also generally assumed that any changes in the prices in wholesale market would eventually transmit (or pass-through) to the retail market. Hence, WPI might be a better indicator for tracking the general price level in the economy. However, a look at the graph below shows that the convergence between WPI and CPI inflation is quite weak, particularly during the high inflationary periods, and also takes a long lag. Thus, this divergence in price indices also results in divergences in the policy impacts as well.
The recent t rends in the inflation numbers show that India is experiencing high inflation situation since the end of 2009 and currently it is at an uncomfortable level of 10.16% in May 2010 and there are expectations that this would increase further. At the disaggregated level, one may note that the prices of both food and non-food and the fuel group are increasing sharply since the middle of 2009, while the inflation rate in the manufacturing sector was almost subdued at around 6% for a long time. As minimum rise in the inflation rate acts as an important incentive for the production activity,
this could have adverse impact
on the consumption and could
particularly affect the poor who are
largely not indexed in India. Based
on this, our own study in the past
have shown that the threshold (or
the optimal or tolerant) inflation for India is at around 4 to 4.5%. Policy makers (particularly the
monetary authorities) would try
to contain the inflation at around this range. Although India does
not follow the inflation targeting regime (where the inflation rate
should be controlled at a level fixed
by the legislation. For instance, UK
has fixed the inflation target at 2%), it is generally clear from the policy
statements (such as annual Credit
policy) that the Central Bank would
try to control the inflation once it crosses the ‘comfortable level’.
Causes for high inflation
As discussed above, currently,
in May 2010, the WPI inflation is above 10%. Monetarists, led by Nobel Laureate Milton Friedman
of Chicago School, across the
globe believe that ‘in the long-run,
Recent trends in inflation (in %, at disaggregated commodities level)Month All Primary
ArticlesFood Non-
foodFuel
groupManufacturing
Apr-08 8.04 8.85 5.54 10.99 7.02 8.07
Jun-08 11.82 10.56 5.93 17.09 16.27 10.60
Sep-08 12.27 11.59 7.72 16.97 16.59 10.93
Dec-08 6.15 11.15 9.95 9.35 -0.21 6.63
Mar-09 1.20 5.21 7.54 -0.88 -6.00 2.29
Jun-09 -1.01 6.52 10.89 0.12 -12.53 0.64
Sep-09 0.46 8.41 14.20 -3.56 -8.18 0.53
Dec-09 8.10 16.09 20.04 9.84 5.92 5.42
Jan-10 9.44 15.45 18.41 10.87 8.12 7.30
Feb-10 10.06 15.99 18.11 12.95 10.22 7.52
Mar-10 11.04 18.25 17.39 24.69 12.71 7.38
Apr-10 9.59 13.88 16.87 10.53 12.55 6.70
May-10 10.16 16.60 16.49 18.60 13.05 6.41
Source: Estimated from data available at RBI. All the data pertain to month-end information.
12 YOJANA August 2010
inflation is always and everywhere a monetary phenomenon’. This means that the money supply growth is the major determinant of inflation and in the long run higher inflation rate can be controlled only through tight monetary policy. But there are other competing schools, such as Keynesians, that say that money is not so important rather than the aggregate demand caused by private and government spending that determines inflation. Hence, Keynesians suggest that money is not the only one determinant of inflation. Money has a role only when its growth is higher than the economy’s capacity to absorb. There is also a view that explains ‘cost-push’ version of inflation, which is largely due to supply-shock that results in fall in aggregate supply. Overall, while there are many theories that explain the causes of inflation, based on enumerable empirical studies, relying on one school of thought might not be wise. In India also there were many studies on inflation determinants and their conclusions are quite diverse. As the behaviour of inflation is very dynamic the theoretical explanations of this behaviour could also be dynamic. Hence, this needs to be examined on a regular basis.
In the case of India, one may also need to note that within the WPI basket there are many commodities’ prices that are still administered by the government. For example, the prices of many of the food items, such are rice, wheat, pulses and edible oils, are still announced by the government through its Commission for Agrucultural Costs and Prices (CACP) that declares the Minimum Support Prices (MSP)
before the harvest session. In the fuel group also, until very recently the prices were administered and even now the prices of diesel and kerosene are regulated. In that sense, only two-thirds of the WPI consumption basket is determined by the market forces.
Looking at the table, one can derive that the current high inflation is caused by sharp rise in the prices of primary articles and the fuel group prices. The causes behind this rise are many. First, as we know, Indian agriculture still heavily depends on the monsoon, bad monsoon last year has crippled the agricultural output growth and, hence, resulted in rise in food prices. Secondly, the Government, to support the agricultural activities, has hiked the MSP on many important commodities atleast four times in the past three years. This has had a permanent shift upwards in the overall agricultural prices. Thirdly, there is also a rise in the overall cost of production due to rise in the labour costs, which has been attributed to labour shortages following the successful implementation of MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) in many of states. Fourthly, there is also a general rise in the world commodity prices (in particular, food and fuel prices) following the huge global stimulus packages that were warranted following global financial meltdown. These global prices appear to have passed on to domestic prices through commodity exchanges. Fifthly, the recent government’s decision to deregulate the fuel prices and do away with fuel subsidies has also resulted in inflationary
expectations. Lastly, in the post-Lehman collapse, the government, similar to other industrialized countries, has launched both fiscal and monetary stimulus programs. This has pushed the fiscal deficit (both centre and state) to nearly 10.8% of GDP in 2009-10. This could have also pushed the inflation from the demand side through rise in the aggregate demand with given output. Apart from all these factors, the current high inflation could also be due to very low base last year. For example, the headline inflation even upto September 2009 was close to zero with deflation in June 2009.
Overall, as the inflation numbers, similar to other macroeconomic var iables , have seen sharp volatility both at domestic and also at international level, the year 2010-11 could be a year of some macroeconomic stabilization.
Policy Options
High inflationary situation has created policy dilemma. As managing inflation is largely the responsibility of the monetary authorities, there were calls for the RBI to tighten the monetary policy. (RBI had followed accommodative policy by cutting the policy interest rates by 400 basis points, in the post-Lehman saga as part of stimulus program). But, as the economy was just recovering after the global slowdown, there were also apprehensions that any tightening at this juncture could restrain the economy from robust recovery. As India was experiencing increasing
inflationary expectations, the RBI
has decided to hike the interest rates
by 25 basis points in July 2010.
This is based on the judgment that
the demand side (or core) inflation is firming up within the headline inflation, which can be controlled only by monetary tightening.
As the inflation is not purely due to demand side reasons and
core inflation (estimated as non-food and non-fuel inflation) is
building up but only at around
6 to 7%, monetary tightening measure alone is not sufficient to contain this double-digit inflation. Fiscal and sectoral policies also
have vital roles. Reducing fiscal deficits is identified as one of the policy measures to achieve stable
inflation with growth. Towards
this, the Central Government has
already laid down the path for
fiscal stimulus reversal that could
contain aggregate demand-push
inflation. This year, the government has already shown its seriousness in
implementing other fiscal measures such as disinvestment to bring
down the deficits. But there are many other structural measures that
are needed. One such measure is
to bring in changes (or revamping)
in the current public distribution
system (PDS), which, given the
huge food stocks, could have been
a major channel through which
food inflation could have been
contained.
To sum, following both monetary
and fiscal stimulus packages, the Indian economy is strongly coming
out of the slow-down phase. But
the high inflation appears to create
dilemma for policy makers. As
the choice is between high growth
and high inflation, one would
suggest that even at the cost of India
achieving slightly lower growth,
moderating inflation is crucial as the cost of high inflation is much higher than the loss of growth.
This is particularly more so for a
country such as India, where the
people working in the unorganized
sector is very high and they are
not protected from the rising cost
of living. Further, as the trickle
down of prices is faster than the
trickle down of incomes for the
poor, controlling inflation could be prioritized. q
(E-mail : [email protected])
YE
-8/1
0/2
YOJANA August 2010 13
inflation is always and everywhere a monetary phenomenon’. This means that the money supply growth is the major determinant of inflation and in the long run higher inflation rate can be controlled only through tight monetary policy. But there are other competing schools, such as Keynesians, that say that money is not so important rather than the aggregate demand caused by private and government spending that determines inflation. Hence, Keynesians suggest that money is not the only one determinant of inflation. Money has a role only when its growth is higher than the economy’s capacity to absorb. There is also a view that explains ‘cost-push’ version of inflation, which is largely due to supply-shock that results in fall in aggregate supply. Overall, while there are many theories that explain the causes of inflation, based on enumerable empirical studies, relying on one school of thought might not be wise. In India also there were many studies on inflation determinants and their conclusions are quite diverse. As the behaviour of inflation is very dynamic the theoretical explanations of this behaviour could also be dynamic. Hence, this needs to be examined on a regular basis.
In the case of India, one may also need to note that within the WPI basket there are many commodities’ prices that are still administered by the government. For example, the prices of many of the food items, such are rice, wheat, pulses and edible oils, are still announced by the government through its Commission for Agrucultural Costs and Prices (CACP) that declares the Minimum Support Prices (MSP)
before the harvest session. In the fuel group also, until very recently the prices were administered and even now the prices of diesel and kerosene are regulated. In that sense, only two-thirds of the WPI consumption basket is determined by the market forces.
Looking at the table, one can derive that the current high inflation is caused by sharp rise in the prices of primary articles and the fuel group prices. The causes behind this rise are many. First, as we know, Indian agriculture still heavily depends on the monsoon, bad monsoon last year has crippled the agricultural output growth and, hence, resulted in rise in food prices. Secondly, the Government, to support the agricultural activities, has hiked the MSP on many important commodities atleast four times in the past three years. This has had a permanent shift upwards in the overall agricultural prices. Thirdly, there is also a rise in the overall cost of production due to rise in the labour costs, which has been attributed to labour shortages following the successful implementation of MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) in many of states. Fourthly, there is also a general rise in the world commodity prices (in particular, food and fuel prices) following the huge global stimulus packages that were warranted following global financial meltdown. These global prices appear to have passed on to domestic prices through commodity exchanges. Fifthly, the recent government’s decision to deregulate the fuel prices and do away with fuel subsidies has also resulted in inflationary
expectations. Lastly, in the post-Lehman collapse, the government, similar to other industrialized countries, has launched both fiscal and monetary stimulus programs. This has pushed the fiscal deficit (both centre and state) to nearly 10.8% of GDP in 2009-10. This could have also pushed the inflation from the demand side through rise in the aggregate demand with given output. Apart from all these factors, the current high inflation could also be due to very low base last year. For example, the headline inflation even upto September 2009 was close to zero with deflation in June 2009.
Overall, as the inflation numbers, similar to other macroeconomic var iables , have seen sharp volatility both at domestic and also at international level, the year 2010-11 could be a year of some macroeconomic stabilization.
Policy Options
High inflationary situation has created policy dilemma. As managing inflation is largely the responsibility of the monetary authorities, there were calls for the RBI to tighten the monetary policy. (RBI had followed accommodative policy by cutting the policy interest rates by 400 basis points, in the post-Lehman saga as part of stimulus program). But, as the economy was just recovering after the global slowdown, there were also apprehensions that any tightening at this juncture could restrain the economy from robust recovery. As India was experiencing increasing
inflationary expectations, the RBI
has decided to hike the interest rates
by 25 basis points in July 2010.
This is based on the judgment that
the demand side (or core) inflation is firming up within the headline inflation, which can be controlled only by monetary tightening.
As the inflation is not purely due to demand side reasons and
core inflation (estimated as non-food and non-fuel inflation) is
building up but only at around
6 to 7%, monetary tightening measure alone is not sufficient to contain this double-digit inflation. Fiscal and sectoral policies also
have vital roles. Reducing fiscal deficits is identified as one of the policy measures to achieve stable
inflation with growth. Towards
this, the Central Government has
already laid down the path for
fiscal stimulus reversal that could
contain aggregate demand-push
inflation. This year, the government has already shown its seriousness in
implementing other fiscal measures such as disinvestment to bring
down the deficits. But there are many other structural measures that
are needed. One such measure is
to bring in changes (or revamping)
in the current public distribution
system (PDS), which, given the
huge food stocks, could have been
a major channel through which
food inflation could have been
contained.
To sum, following both monetary
and fiscal stimulus packages, the Indian economy is strongly coming
out of the slow-down phase. But
the high inflation appears to create
dilemma for policy makers. As
the choice is between high growth
and high inflation, one would
suggest that even at the cost of India
achieving slightly lower growth,
moderating inflation is crucial as the cost of high inflation is much higher than the loss of growth.
This is particularly more so for a
country such as India, where the
people working in the unorganized
sector is very high and they are
not protected from the rising cost
of living. Further, as the trickle
down of prices is faster than the
trickle down of incomes for the
poor, controlling inflation could be prioritized. q
(E-mail : [email protected])
YE
-8/1
0/2
14 YOJANA August 2010
As area available for agriculture and
food production is going to shrink,
focus should be given on enhancing
the productivity of crops to keep
pace with growing demand for food
Food Inflation in India: Causes and Remedies
INflATION
NDIA HAD not faced double digit inflation in food during the last several years despite serious drought and
decline in food output in some years. The scene of food inflation has turned quite different after 2008. In most of the months year on year inflation remained close to or above 10 percent since mid 2008. This is causing a serious concern as expenditure on food accounts for more than 50 percent of total household expenditure in rural and 43 per cent in urban areas. Households in lower income categories spend much higher percentage of their budget on food compared to the higher income groups. This indicates that food inflation hurts more than any other commodity group and low income consumers are affected much more than high income consumers.
The reasons for food inflation can be grouped into two categories:
I
The authors are respectively Director and Scientist, National Centre for Agricultural Economics and Policy Research, Pusa, New Delhi
those which follow from changes in
global market and those which are
related to domestic economy. With
the increase in liberalization of trade
in agriculture since early 1990s
domestic food prices have been
strongly influenced by international prices. However, food prices in
India and international markets
have not behaved in the same way
after the year 2006. Global food
price increased by 26 per cent
during the year 2007 and reached
historical peak by middle of 2008.
In contrast to this, food prices in
India (refer to the whole sale price
index for food items that include
food articles plus food products,
with base 1993-94) increased by
less than 8 percent during 2007
and 2008. Further, monthly food
prices in global markets increased
by 20 percent between January and
June 2008 while India experienced
only 12 percent increase. This
difference in behavior of the
domestic and international prices
Ramesh Chand P Shinoj
ANAlySIS
YOJANA August 2010 15
has evoked serious concern because
of persistently high rate of food
inflation in the country and also raised several questions. Why food inflation in India is ruling
much higher than the inflation in international prices? Are Indian
prices lower than international
prices and closing the gap between
the two necessitates higher inflation in India? Has trade ceased to be
an important instrument for a
country like India in taming food
inflation?
In a count ry l ike Ind ia ,
which is largely food sufficient at aggregate level and where
trade to output ratio is not very
high, domestic factors matter
much more than global factors
in determining medium and long
term trend in prices. These factors
are numerous and they relate to
domestic demand, supply, food
administration, state intervention,
changes in market conditions.
Further, factors like demand
and supply depend upon many
variables like growth in income,
distribution of income, dietary
diversification, urbanization,
money supply, credit, technology,
and weather related variables, to
name a few.
Structure of Inflation
Dividing the commodities
included in WPI in two major
groups, viz. food and non food,
shows that rate of price increase
was higher in non food group
compared to food group during
January 2008 to October 2008.
After this food and non food
prices follow disparate trend.
There was a sharp fall in inflation in non food items whereas food
prices moved towards double rate
of increase. For about 9 months
from March - November 2009
WPI for non food prices was lower
than corresponding figures during 2008 which resulted in negative
inflation in non food prices. In contrast to this food price inflation in the same period increased
from 8 per cent to 20 per cent.
Because of negative growth in non
food inflation the overall rate of inflation remained close to zero in this period. After November
2009, prices of non food items
also started rising which pulled
up overall rate of inflation in
the country to double digit level
during February – March 2010.
There is some slowdown in food
inflation after December 2009, but food inflation still rules above 16 percent (May 2010).
Causes of Food inflation
Taking a closer look at food
inflation based on WPI over the last two years, it becomes apparent
that manufactured food products
have been contributing in a higher
proportion than primary food
articles towards rise in prices.
During May to July, 2008 when
the rate of overall inflation was at peak, the share of manufactured
food products in total food inflation was in the range of 55-60 per cent
(Figure 2). This higher share is not a
matter of surprise as manufactured
food products have a higher
weight in the overall index than
primary articles. However, it would
indeed attract interest if the case is
opposite as happening in the recent
months.
Lately, it is noticed that, primary
food articles are increasingly
outweighing manufactured food
products in terms of aggravating
food prices. Among the primary
articles, cereals, milk and meat
have higher share but rapid increase
in prices of pulses and fruits and
vegetables are also igniting food
inflation. To cite specific examples, the price of rice increased 12
per cent during January, 2008
to May, 2010 where as wheat
prices increased 7 per cent. Among
pulses, price of pegion pea rose
by 62 per cent and that of black
gram shot up by 105 per cent
during the same period. Price of
sugar, a manufactured food product Figure 1. Inflation in food and non-food commodities
16 YOJANA August 2010
increased steeply with an average
rate of inflation of 40 per cent
between January, 2009 and May,
2010. The fact that all these articles
are essential and irreplaceable
components of the daily diet of
an average Indian consumer adds
gravity to the situation.
Analyzing the causes
Supply side constraints and structural deficiencies
The steady increase in food
prices can be attributed to a variety
of long-term and short term causal
factors. The most important and
widely discussed is the demand–
supply imbalance in essential
food commodities. With a steady
growth in income of the people and
increasing urbanization, the demand
for food is rising consistently year
after year. The increase in earnings
of below poverty households from
programs like MGNREGA also
seems to be contributing favourably
to growth in food demand. On the
other hand, various supply side
constraints like stagnating area
under cultivation, and plateauing of
crop yields etc are posing limits to
production. The drought in the last
year caused by deficient south-west monsoon is an immediate reason for
supply shortfalls during later half of
year 2009 extended to 2010. The
country received around 25 per cent
less precipitation in the 2009 kharif
season in relation to long-term
average. As a result, production
of major food commodities got
affected leading to overall shortfall
in food grain production and other
major crops like oil seeds and
sugar cane. The shortfall in rice
production was around 20 per cent
with respect to the previous year
(Table 1). Wheat production was
less than targeted, but not lower than
that of previous year. Production of
oilseeds and sugarcane also suffered
a perceptible reduction.
At such instances of supply
shortfalls that lead to lower
accessibility of poor people to
food, the government often resorts
to enhanced delivery of essential
commodities from the buffer stock
through Public Distribution System
(PDS) and through open market
sales. However, in the present
situation, none of these mechanisms
seems to work efficiently. On
the one hand, the government is
grappling with high food inflation, on the other hand it grapples with
large volume of stocks much above
stipulated buffer stock norms. As
of 1st June, 2010 the stock of food
grains in the central pool rose as
high as 60 million tons whereas
the prescribed stock limit in July is
only 26.9 million tons. It is a matter
of double loss to retain such high
levels of stock, first due to excessive expenditure incurred on storage and
second, it remains inaccessible to
Figure 2. Contribution of various commodity groups to food inflation
Table 1. Production of major food crops and their shortfalls in recent years
Crop 2006-07 2007-08 2008-09 2009-10*
Rice 93.4 (1.7) 96.7 (3.5) 99.2 (2.6) 80 (-19.6)
Wheat 75.8 (9.2) 78.6 (3.7) 80.7 (2.7) 81.5 (1.0)
Cereals 203.1 (4.1) 216 (6.4) 219.9 (1.8) 197.6 (-10.1)
Pulses 14.2 (5.9) 14.8 (4.2) 14.6 (-1.4) 15.1 (3.4)
Total food grain 217.3 (4.2) 230.8 (6.2) 234.6 (1.7) 212.7 (-9.3)
Oilseeds 24.3 (-13.2) 29.8 (22.6) 27.7 (-7.1) 24 (-13.4)
Sugar cane 355.2 (26.3) 348.2 (-2.0) 285 (-18.2) 259 (-9.1)
Note: Figures in parentheses indicate per cent change from previous year; * Figures are provisional.
YOJANA August 2010 17
people thus contributing to rising
prices.
The International link
India almost insulated its food
sector from transmission of high
global food prices during 2007-08
through domestic intervention and
trade measures including export
bans. Such an effect is evident
from the price peaks witnessed in
global food prices in mid 2008.
The prices of most commodities in
majority of the countries remained
subdued in the first half of the year 2009 on account of contraction of
demand associated with recession
and financial downturn. Even
after a sharp fall in global prices
from the peak level during 2008,
the level of these prices in most
cases remained higher than prices
in India. This, when global prices
were falling, there was pressure
on food prices in India to rise to
come in a sort of equilibrium with global prices. This explains why
domestic food inflation remained high when global prices declined
after late 2008.
During 2009 -10 (June to
May), global food prices again
started showing up. FAO food
price index, which is a composite
of 5 major food groups, increased
by 17 percent since June 2009 till
May, 2010. The sharpest jump was
visible in sugar prices. FAO sugar
price index shot up from 233.1 in
June, 2009 to 375.5 in January,
2010 due to supply shocks in
Brazil. In the same period prices
of dairy products went up by 86
per cent and edible oils prices
increased by 11 per cent. All these
price changes are transmitted
in varying degrees from global
markets to the domestic markets
through various channels. Another
striking observation with long-
term implication is that the real
unit values of imports of major
agricultural commodities are
seen to be rising during the last
ten years. The unit value of pulse
imports at 1993-94 prices in the
year 2001-02 was Rs. 8833 per
ton which increased to Rs. 10781
per ton by 2008-09. Same trend
was observed for wheat, sugar and
vegetable oils too. This has long-
term implication in terms of taking
the domestic prices to higher
levels over a period of time and
reflects the supply side constraints at global level. It is observed
that some part of food inflation in India is due to integration of
domestic price trends with global
price trends. However, the current
crisis appears to be more due to
domestic factors than external
reasons
Forward trading
Forward trading and speculation
in food commodities is said to
be another factor fuelling food
inflation. A common notion is
that during shortages, the futures
prices of commodities remain
very high and the traders take cue
from these prices to decide on the
spot prices. Even though essential
food grains are out of the purview
of forward marketing, percolation
of price effect from other food
and non-food commodities in
the forward markets cannot be
ruled out. However, there is no
conclusive study so far to either
accept or refute the hypothesis
that futures trading leads to
inflation. Abhijit Sen committee appointed to look at the matter
maintained that “current evidence
available does not provide any
conclusive evidence whether there
is any casual relationship between
futures trading and rise in prices
of agricultural commodities”.
However, it is to be noted that
their report does not rule out
the possibility of futures trading
contributing to inflation either.
Managing food inflation
Several initiatives have been
taken by the government and the
central bank to contain general
inflation. The RBI has tightened
its monetary policy by making
upward revision in its key policy
rates several times in last one
year period. However, monetary
policy has very limited role
to counter inflat ion in food
commodities which is essentially
caused by supply side constraints
and the underlying deficiencies
are chronic in nature. Food
commodity driven inflation has
become a persistent phenomenon
and the corrective measures
involve concerted efforts over
an extended period of t ime.
With public investments already
hiked substantially in the recent
years, there is now a need to pay
attention to improve efficiency
of such investments. As area
available for agriculture and
food production is going to
shrink focus should be given on
enhancing the productivity of
crops to keep pace with growing
demand for food.
18 YOJANA August 2010
Overhauling the PDS is another corrective
measure which can be undertaken in the medium
term. Piling up of food grains in the granary beyond
the stipulated levels is an avoidable proposition.
Resorting to open market sales at specific intervals would help in both relieving the granary of excess
stocks and checking the build up of prices in the
domestic market simultaneously. It is also logical to
widen the scope of PDS by including more essential
commodities like pulses, edible oils and sugar, to
provide some protection to the poor against food
inflation. However, it is not clear whether expansion in PDS coverage to include more items is helping
in reducing food inflation or it is adding to food inflation because of rise in subsidies and leakages in our delivery system.
Resorting to food imports can help in checking
domestic prices to make up the supply shortfalls,
provided imports are planned on time. Our
past experiences with wheat imports give
ample evidence of imports turning costlier with
international prices moving up with India’s
decision to go for import. We need to develop a
system for getting advance information on demand
and supply imbalances and tune our trade policy
accordingly.
As an immediate remedy, all steps to prevent
hoarding and speculation in food commodities have
to be expedited. The states should be proactive to
forego some taxes on account of interstate transport
of commodities at least for the time being till the
prices reach normal levels. Downward revision of
state-specific customs and excise duties on diesel may also help bring down the prices of inputs used
in agriculture.
In essence, measures to control inflation
in general, and food inflation in particular, can be classified as immediate remedies and medium- and long-term remedies. Immediate remedies are
more like treating the symptom leaving aside the
causes which requires long-term visioning and
planning. q
(E-mail : [email protected] [email protected])
YE
-8/1
0/3
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YOJANA August 2010 19
The coincidence of food and fuel
led inflation episodes may be a matter of
chance but they draw attention to the need for a longer term perspective on
these key sectors
The Inflation Challenge to Policies
INflATION
H E H I G H r a t e o f
inflation is destabilizing f o r t h e i n d i v i d u a l
households, businesses
and the economy as a
whole. Double digit inflation brings down the purchasing power of
households at least in the short-
run as income levels do not rise so
quickly for most people. After a relatively long period of moderate
price inflation, we have experienced now two episodes of high inflation. We have had double digit annual
rate of inflation based on consumer price index (CPI) for industrial
workers since July 2009 until
May 2010. While inflation rate
has been unusually high in the last
five months, even when measured using the wholesale price index, it
is important to note that there has
been sharp volatility in the inflation rate over the last two and a half
years covering the period from
January 2008 to May 2010. The
price situation has changed from
T
The author is Senior Research Counsellor, NCAER.
high inflation to negative inflation and then back to high inflation
during this period. In both the cases,
international price shocks were
important determinants although
the domestic supply constraints in
the form of effects weak monsoon
were more prominent in the latter
half of 2009-10. The demand
side factors were an important
influence in the first episode of
recent inflation, prior to the global economic crisis: there were large
capital inflows requiring active interventions by the RBI to manage
exchange rate volatility.
An important feature of the
inflation episodes of 2007-08 and 2009-10 is that its bite was through
the increase in the prices of essential
commodities: fuel and food. The
impact, even when limited to
two segments of the consumption
basket, has been widespread. The
international markets also played
a positive role in keeping inflation limited to some sectors rather than
Shashanka Bhide
PERSPECTIVE
20 YOJANA August 2010
full blown transmission across
sectors. The drop in the prices of
commodities as the global economic
crisis intensified gave some time for Indian consumers to bear the food
inflation. The current inflation has also occurred at a time when the
markets have had much greater
role to even out the supply demand
mismatches. After all, the trade
policies are now relatively freer
than ever before, exchange rate is
more flexible, domestic markets
are more competitive and monetary
policy is more geared to deal with
inflation. Without these features the impact of inflation may well have been more intense.
It is not that there were no
demand side pull factors during this
period. There was a strong fiscal stimulus or an expansionary fiscal policy in the works to offset the
decline in private sector demand
during the period of global crisis.
The monetary policy was liberal
to provide enough liquidity to the system when there was increased
risk aversion among the lenders.
Some of this loose fiscal and
monetary policy positions may
have had some lagged inflationary impact.
Thus, both international and
domestic dimensions of the
economy were influencing the price scenario. The policy response has
had to address both these factors.
It was necessary to ensure that
the essential commodities were in
adequate supply but at the same time it was necessary to align demand to
the emerging medium term to long-
term supply potential.
In the period before the global
economic crisis of 2008-2009,
there was a sharp increase in the
prices of food commodities in the
international markets. The price
of petroleum crude rose from $70
per barrel in July 2007 to $140
in August 2008. These enormous
price increases were attributed to
the heightened pace of economic
growth, especially in China and
India. The high energy prices also
began to shift crop areas from
grain production for food to grain
for energy. However, as the global
financial markets crashed in 2008 and world trade slumped, the price
of petroleum crude dropped to
$40 per barrel by December 2008.
There were concerns of deflation at the time, which is no less a policy
challenge as inflation. The crude oil prices began to rise gradually
and by March 2010, they are at
$80 per barrel. The transmission
of international prices to domestic
prices in the petroleum sector is
controlled by the price policy of the
government with respect to petrol,
diesel, kerosense and LPG.
Commenting on the rising rate of
inflation in the second half of 2009-10, the economic survey for 2009-10
said, “Apprehensions of shortages
in agricultural production due to a
deficient south-west monsoon this year are mainly responsible for
increasing inflation”. The Survey expected overall food inflation to decline after its high level of 19.77
per cent in December 2009.
Between January 2010 and May
2010, the overall annual inflation rate measured by the Wholesale
Price Index (WPI) has remained
at about 10 per cent in each of the
five months. We may note that
between March and June 2009, the
WPI based annual inflation rate
was actually below 2 per cent. This
low rate of inflation had actually continued right upto November
2009 when the inflation rate rose to 5.5 per cent. The volatility is
evident from these numbers. The
role of specific drivers of inflation is evident when we consider sector
specific prices. As we noted earlier, food and fuel prices have remained
the drivers of both upward and
downward changes in the overall
price index during 2008-10. This
pattern points to greater role of
the supply demand imbalances in
these sectors rather than an overall
general demand led inflation. The rise in food and fuel prices would
transform into a more general price
rise especially if global markets are
not offsetting these changes.
The consumer price index (CPI
for Industrial Workers) has been
in double digit growth for an even
longer period, from July 2009 to
May 2010. The CPI assigns higher
weightage to food items than is the
case with WPI. Whichever way
one looks at the price scenario it
reflects sharp rise in the price level in the last 6-8 months. The rise in
the prices of pulses, vegetables
such as potatoes, food items such
as sugar, the group of eggs, meat
and fish and milk has been very steep. To the extent that some of this
increase is on account of temporary
setbacks to supplies due to the poor
monsoon of the last year, the policy
response has to focus on ensuring
that the markets are competitive and
safety nets such as the PDS operate
efficiently. Access to international
markets should remain freer.
YOJANA August 2010 21
It has been often said that
we need consistent and stable
trade policy regime so that trade
decisions are taken by the suppliers
and consumers on a longer
term perspective. In the case of
agricultural produce, particularly
food products, our approach
has been one of self-reliance.
Although it is necessary to expand
domestic production capacity, it is
also necessary to have access to
international supplies and provide
markets to domestic producers.
What is needed is improvement in
productivity so that our producers
remain competitive in international
markets.
The need for a longer term view is
also evident in the case of petroleum
products. The coincidence of food
and fuel led inflation episodes may be a matter of chance but they
draw attention to the need for a
longer term perspective on these
key sectors. An effective safety net
of PDS at affordable prices for the
poor is beyond doubt necessary.
But it is also necessary to avoid the
situation where grain in stock has to
be disposed of in the international
markets at unremunerative prices.
The bountiful stock of grain
when prices are rising steeply is
paradoxical. Resources such as
land need to shift to sectors where
there are supply failures and not
be tied down to specific sectors. More vegetables need to be grown
and they are presumably harder to
import.
The petroleum sector presents
an equally difficult challenge. Demand for energy will keep
rising sharply over the medium
to long term. We need policies
that incentivise more efficient
use of energy. Inability to target
subsidies effectively- as in the case
of kerosene and diesel- implies
inefficient use of these resources. Given the essential nature of these
energy sources, there is a need for
an effective safety net for the poor.
But subsidising consumption can
become unsustainable proposition
very quickly if the supplies do not improve quickly enough. Deregulation of fuel prices when
they are highly subsidised does
imply a steep increase in prices.
But this measure is more likely to
yield more sustainable outcomes.
There is also a need to be more
transparent about the need for
high taxes in the petroleum sector.
Without the measures to improve
efficiency in the use of energy high taxes would become a source of
revenue for the government.
The inflation episodes of the recent two years have highlighted
the delicate balance of supply and
demand in the two crucial sectors:
food and energy. Adequate stocks of foodgrain with the government
have proved important buffer
against insecurity. In the case of
energy the more secure balance
of payments position has been a
source of security. The short-term
policy measures have focused on
managing liquidity and reducing the scope for speculation and
hoarding. But we also need longer
term measures to improve supply
systems so that the economy
can respond quickly to resolve supply-demand mismatches and
minimize the vulnerability to
inflation. q
(E-mail : [email protected])
YOJANAForthcoming
IssuesSeptember 2010
Yojana will bring out an issue on Sports Development in India
October 2010 The October 2010 issue will focus on Food Security
September 2010&
October 2010
22 YOJANA August 2010
While India’s vulnerability to international
prices has evidently increased and it
can hurt the poor severely, a long
term strategy would need to be in place to modernise and strengthen India’s agriculture sector
Inflation Episodes in India
INflATION
R A D I T I O N A L LY,
INFLATION in India has
primarily been caused by
supply shocks; drought
and consequent increase in food prices, or (and) increase
in oil prices reflecting hikes in the international prices of crude oil.
Once in a while demand pressure
also manifests in inflation. The
most common example cited is that
of the increase in the pay of civil
servants in the wake of awards by
the Pay Commission; that of the
Fifth Pay Commission is stated to
have been felt in the escalation of
prices in 1998-99; and the impact
of the Sixth Pay Commission
was manifest in 2008 and 2009.
Inflationary situation may worsen if the domestic and external factors
that contribute to escalation of price
level overlap in the same period.
T
The author is Economic Advisor in the Ministry of Tourism, Govt of India
To recall, inflation in 1979-81 was caused by supply shocks created
mainly by a combination of the hike
in global oil prices and the drought,
affecting adversely the domestic
agricultural sector.
In the early years of the 90s, India
experienced double digit inflation. A major trigger of inflation around this period was a sharp rise in the
value of oil imports due to rise in
world oil prices in the wake of the
gulf crisis. This was the period
when agriculture performed poorly
for several years adding to the
supply shocks. The problem was
exacerbated by high fiscal deficit and increase in the money supply.
A steep devaluation in the wake of
economic reforms also made import
costlier.
The policy response to the
crisis took the shape of tightening
Manas Bhattacharya
lOOKINg BACK
YOJANA August 2010 23
of the monetary policy, capping
the issue of ad-hoc treasury bills
by the government restraining
thereby government borrowing
and liberalising imports to ease
shortages.
In the decade starting with 2000,
India did not experience double-
digit inflation. The peak inflation during this decade was between
8 to 9 per cent. Till 2007-08, the
highest annual average inflation
experienced was 7.2 per cent, and
this was in 2000-01. In that year
too it was driven by the ‘fuel,
power and lubricant’ group, which
experienced 28.5 per cent increase
in the average annual inflation.
The next high inflation year was 2008-09, when the average annual
inflation was 8.41 per cent. This was driven by a steep rise in the prices
of primary articles, which rose
by 10.06 per cent. There was also
unprecedented increase in the prices
of manufactured products; it rose by
8.10 per cent, a height, which was
never attained in this decade. Fuel
prices were high, but not very high.
It may be noted that 2008-09 was a
recession year. After experiencing
more than 9 per cent GDP growth in
three preceding consecutive years,
growth fell to 6.7 per cent in 2008-
09. Interestingly, several factors
coincided during this period. First,
primary sector growth slumped
from 4.6 per cent in 2007-08 to
1.6 per cent in 2008-09. Second,
the first instalment payment of the
Sixth Pay Commission was released
adding to the demand pressure; and
third, there was steep increase in the
volume of import combined with
increase in import prices. The unit
value index of import increased
from 210 in 2007-08 to 239 in
2008-09. The volume index of
import also increased from 218 to
262 (Base year 1999 -2000 = 100).
There was also steep increase in the
Minimum Support Price (MSP) of
Paddy, which increased from Rs.
645 per quintal in 2007-08 to Rs. 850 per quintal in 2008-09. As per the Economic Survey 2008-09 of
the Government of India, in 2008-
09, the MSP in almost every crop
had witnessed increases of about 30
per cent or more.
Within the primary articles,
food inflation was 8 per cent, the highest in the last five years, the inflation of non-food articles was also high at 11.2 per cent, the
second highest in the last five years and the inflation of minerals at 34.9 per cent was also the second highest
in the last five years. Within the manufactured product group, food
products have one of the highest
weights, which experienced steep
inflation of 10 per cent, the highest in the last five years. Similarly, the product group chemicals and
chemical products, which have the
highest weight in the manufactured
products group, had experienced
7.2 per cent inflation, the highest in the last five years. The basic metals alloys and products group
experienced 14.4 per cent inflation, the second highest in the last five years. A unique feature of this inflation is that so many product groups simultaneously experienced
pressure on their prices. Globally,
the spurt in the prices of crude
oil, minerals and metal related
products impacted domestic prices
in India significantly. Inflationary pressure in India reached its peak
at 12.8 per cent in August 2008 and
gradually eased thereafter and the
trend broadly corresponded with
the trend in global inflation.
The annual average inflation
for 2009-10 was a low 3.6 per
cent. However, this should not
camouflage the fact that inflation remained hardened in primary
articles. Average inflation in
primary articles was 10.62 per
cent. Overall inflation was low due to negative inflation in fuel, power and lubricant category and positive
but low inflation in manufactured products. Around this time the
domestic administered prices of
petrol and diesel were revised
upward and made effective from
July 2009.
In 2009 -10, year-on-year
inflation was the lowest (and
negative) in August 2009 and
started picking up thereafter.
Inflation gradually rose from 0.5 per cent in September 2009 to
9.9 per cent in March 2010. This
was primarily driven by inflation in primary articles. The second
24 YOJANA August 2010
instalment payment of the Sixth
Pay Commission was released in
October 2009 bringing in demand
pressure in the market. October
2009 was also the turning point
for the global food prices to start
rising. The period coincided with
deficient monsoon, floods in some of the southern states, decline
in agricultural production and
consequent expectation of shortage in the domestic market.
Year-on-year inflation in April 2010 was 9.59 per cent; inflation in primary group of articles was
13.88 per cent; 12.55 per cent
for the fuel and power group and
6.70 per cent for the manufactured
group. In the month of May 2010,
the overall year-on-year inflation was 10.16 per cent. The inflation of the primary articles was 16.60
per cent; fuel group exhibited
13.05 per cent and manufactured
products registered 6.41 per cent
inflation.
In India inflation is measured in terms of the Wholesale Price Index
(WPI) and it has tracked global
prices well. It may be noted that the
international practice of measuring
inflation is by the Consumer Price Index (CPI). In India, CPIs are
computed separately for industrial
workers (CPI-IW), urban non-
manual employees (CPI-UNME)
and agricultural (rural) labourers
(CPI-RL). The coverage in terms
of number of items included in
the basket for computation of the
CPIs is much less than that of
the WPIs. The base years for the
CPI are 1982 for the industrial
workers, 1984-85 for the urban
non-manual employees and 1986-
87 for the agricultural labourers.
In comparison, the base year
for the WPI is 1993-94. The
inflation, if measured by the CPIs is subject to the qualification that it has less number of items under
coverage and has older base years
and therefore may not capture
the changes in the production
and consumption patterns over
time adequately and therefore the impact of changes in prices on
consumer welfare. Nonetheless,
the Economic Survey, 2009-10 of
the Government of India shows
that the food inflation from April 2008 to December 2009 have been
tracked in a similar fashion by all
the three indices, WPI, CPI-IW and
CPI (rural labour).
It would be of interest to study
the most recent trends in food
prices as evident from the CPI-IW
since it has much higher weight on
food items than the WPI has on
primary articles. Food prices are
critically driving inflation these days and have significant impact on poverty. This index shows
that the food inflation reached its peak in December 2009 at 21.29
per cent and thereafter it started
declining gradually reaching 16.03
per cent in March 2010. This
might partly be a reflection of the
fact that international prices have
also started softening. One can
therefore look for a cooling off in
prices to stay if the forthcoming
monsoon does not betray.
The government generally
adopts a se t of regula tory,
administrative and economic
measures to combat inflation.
In 2009-10, the set of measures
included monetary tightening,
liberalising import, reducing import
duties on food items, removing
levy obligation of imported sugar,
imposing ban on export of non-
basmati rice, edible oils and pulses
(except kabuli chana), using
Minimum Export Price (MEP)
to regulate exports of onion,
suspending futures trading in rice,
urad and tur, imposing stock limit
orders in the case of paddy, rice,
pulses, sugar, edible oils and edible
oil seeds, distribution of imported
edible oils to states at a subside
prices, distribution of imported
pulses through Public Distribution
System (PDS) at a subsidised
prices and higher allocation for
distribution of wheat and rice to
states etc.
While India’s vulnerability to
international prices has evidently
increased and it can hurt the poor
severely, a long term strategy would
need to be in place to modernise
and strengthen India’s agriculture
sector. The reform in this sector has
so far been slow and sluggish. q
(E-mail : [email protected])
YOJANA August 2010 25
Commodity derivatives can
indeed emerge as the most effective hedging avenue for Indians, for
risks arising out of runaway inflation and price volatility
Inflation: Myths, Realities and a Policy Agenda
INflATION
FRONT-PAGE news
i tem on July 8 in a prominent business daily said it all: Maverick chef Sanjeev Kapoor is reportedly cooking up
recipes and modifying existing ones in his repertoire – to fight the food price inflation battle in the kitchen. Indeed, the current runaway inflation in India, while not historically unprecedented, is definitely unusual on at least two counts: one, despite the government trying all ammunitions up its sleeve, high inflation has been ruling the roost continuously for more than two years now. Second, the current persistent inflation is ironically coinciding with the greatest global recession and its (hopeful) recovery since the Great Depression; in other words, while most countries are looking to control deflation, India seeks to do just the opposite - reign in inflation.
what does not cause inflation
What explains the current runaway inflation? Reasons are
A
The author are Chief Economist and Economist, respectively, with the Multi Commodity Exchange of India Ltd., Mumbai.
galore – from drought-induced food grains supply shortage to increasing money supply and rising international prices of most commodities, spilling over to consumer prices. As is apparent and well-publicized, it is indeed a combination of all these factors that is contributing to inflation currently. We look at some of these factors in the next two sections. What is not so apparent and is actually the favorite whipping boy is the commodity futures market – its role in stoking the fire of inflation. As a result, banning futures trading is often the first knee-jerk reaction of these constituencies; though the expert committee that looked into any possible connection between commodity futures and inflation could not find any. In this section, we seek to bust the myth of causality between high commodity prices and futures trading, providing the following seven clinching evidences to the contrary:
Fact # 1: As shown in Table 1, the weight of futures-traded food
V Shunmugam Debojyoti Dey
VIEWPOINT
26 YOJANA August 2010
commodities in the Indian wholesale price index (WPI) is rather small, less than 5 percent, which is even less than the combined share of two commodities not traded on futures exchanges – sugar and rice. Hence, even if there were to be futures trading-induced price rise, its impact on general food price inflation would be negligible.
Fact # 2: As Table 1 shows, for the futures-traded commodities that are the most significant in the WPI (wheat, maize, cotton, groundnut oil, together account for almost 4 percent in WPI), the volume of futures trade is very small vis-à-vis that of physical trade. Hence, it is highly unlikely, even theoretically, for such small volumes to have a significant impact on physical market prices.
Fact # 3: The price rise in the futures-traded commodities has
been much less than that in the non-
traded commodities. For example,
the spot price of Chana (also traded
in the futures market) increased by
less than 12 percent from December
‘08 to December ‘09, while the
prices of other pulses not traded in
the futures market – Tur, Urad and
Moong – surged by 61, 70 and 148
percent, respectively, in the same
period.
Fact # 4: Let us focus on
the price behaviour of a food
commodity, Tur, which was banned
for futures trading – comparing
the spot price movement between
the period when future trading was
active and when it was delisted. As
may be seen in Table 2, contrary to
the perception that futures trading
drove up prices, the reality is that
such trading actually helped reign in the price of Tur.
Both Facts # 3 and 4 are manifestations of the beneficial effects of a well-functioning futures market, which not only enables risk-averse individuals to pass on their risks to other market participants, but also brings in transparency, thus making it difficult for reckless traders and unscrupulous entities to drive up commodity prices. The policy implication of this aspect is detailed in Sections 5 and 6
Fact #5: Exchange-disseminated (advance) price signals refer to wholesale market prices, while consumers pay retail prices. The margin between the two is determined by transaction costs, which include, among others, the risk premium added by traders on account of price volatility. To the extent that commodity exchanges provide transparency in transactions and help reduce price volatility, exchange-traded commodities typically lead to better prices for both producers and consumers by reducing the aforesaid margin at each level in the entire value chain. Indeed, the commodities that show the highest price volatility in India are typically not exchange-traded. For example, a comparison of average daily volatility of Tur, Urad, and Chana (see Table 3) clearly shows that the average daily volatility in Tur and Urad (not traded in futures) was much higher than that in Chana, which has a futures market. Their volatility got further magnified during the last kharif when the monsoon played truant, demonstrated by the price volatility in the monsoon period of mid-June to mid-October 2009.
This clearly shows that futures trading can contain ‘price volatility’ – the major cause behind ‘hoarding’. Stricter administration of anti-
Table 1: Share in wPI and ratio of futures to physical market volumes of select agricultural commodities
Commodities Share in wPI
Futures Volume Vs
Spot Volume
Commodities Share in wPI
Commodities traded on Commodity Futures
Exchanges
Commodities not traded
on Commodity Futures
Exchanges
Wheat 1.38408 2.9% Garlic 0.05905
Maize 0.18561 2.7% Moong 0.11225
Barley 0.02734 25.8% Urad 0.09619
Gram (Chana) 0.22365 639.7% Tur (Arhar) 0.13466
Coffee 0.08188 198.9% Sugar 3.61883
Raw Cotton 1.35674 7.8% Bajra 0.11044
Groundnut seed 1.02883 0.0% Jowar 0.22189
Rape & mustard
seed
0.58066 398.9% Tea 0.15739
Soyabean Oil 0.17838 298.0% Onions 0.09372
Rice 2.44907
Source: Ministry of Commerce of Industry; Exchanges’ websites; Directorate of Economics & Statistics: Department of Agriculture & Cooperation; NHRDF; CMIE India Harvest. Volume figures pertain to December, 2009
YOJANA August 2010 27
hoarding measures can only address the malaise i.e. ‘hoarding’ but does not attack the main cause for hoarding i.e. price volatility. Allowing the futures market to develop and mature will address the cause of hoarding through reduction in price volatility, as argued further on in the article.
Fact #6: India is a net importer of commodities such as soybean oil and crude palm oil and, thus, relies on international prices for these commodities. If futures prices in Indian commodity exchanges do show a spurt in these prices, which also gets reflected in spot prices, they merely mirror high international prices (Table 4). Besides, adverse currency movements also make imports costlier. If the Indian prices were higher, the arbitragers always had the opportunity of buying from low selling physical markets, carry over and then deliver on commodity exchanges.
Fact #7: A spurt in futures prices
can actually be used as a correct signal of impending shortages and administrative measures taken to augment supply, accordingly. For example, when (in 2009) sugar prices in the international markets jumped over 127 percent, the domestic price rose by only 79.6 percent (see Table 4), thanks largely to the measures taken by the Indian government to augment supply.
What caused inflation
If the futures market did not cause the recent bout of inflation, what did? Any attempt to analyze the reasons for price rise in India, especially in agricultural commodities, should follow an understanding of the fundamental supply-side dynamics of these commodities, much of which are specific and peculiar to India. Supply of most staple commodities is prone to large fluctuations owing to diversities in cultivation ecosystems, exposure to agro-climatic shocks such as moisture stress, major diseases
such as late blight. These affect production and lead to consequent volatility in prices, as explained below in two commodities – potato and sugar.
Potato prices slumped in the 2007-08 marketing season to as low as 2 Rs/Kg due to huge production of over 31 million tonnes, a record. Late blight in the next growing season across major growing areas critically affected production, delayed market arrivals and increased prices. Potato price inflation got a further shot in the arm with a huge price rise in other vegetables and the consequent consumer switch to potatoes.
Sugar price inflation, on the other hand, was largely attributed to the cyclical effect of commodity–price relationship. After two consecutive years of bumper production, huge inventory and consequent low prices, domestic sugar market in the 2008-09 marketing season witnessed shortages, thanks to a 44% decline in production, leading to price rise. The production decline, in turn, was owing to a shift in acreage away from cane to food crops, where farm gate prices saw better realization over the past two years and the Minimum Support Prices (MSP) of these crops were also supportive. Poor rainfall in this and subsequent season also contributed to diversion of land to less water-intensive crops.
As these instances show that extraneous factors causing supply-side shocks are primarily responsible for current inflation. Yet, one of the erroneous policy responses to inflation was banning of futures trading in several commodities. In fact, the prices of such commodities did not decline following the ban. On the contrary, prices of some of
Table 2: Tur – Percentage change in prices during different time periods
Duration Status % Increase in Prices
Oct 2001 to May 2004 (32 months) Pre futures trading 32.5%
Jun 2004 to Jan 2007 (31 months) During futures trading 6.5%
Feb 2007 to Dec 2009 (35 months) Post delisting 86.6%
Source: CMIE India Harvest, Data for Delhi market
Table 3: Average daily volatility in spot prices – traded vs not traded - on Indian Commodity Exchanges
CY 2009 June 16 to October 16, 2009Commodity traded on Commodity Futures Exchanges
Chana (Gram) 1.39% 1.54%Commodities not traded on Commodity Futures Exchanges
Tur 7.00% 11.60%Urad 6.40% 10.90%
Source: CMIE India Harvest; data for Delhi market
28 YOJANA August 2010
these commodities e.g. sugar and potato, afflicted with acute supply shortages, continued to rise at an increasing rate. The fact is: futures only help predict future prices and, therefore, act as a market signal for future availability. To that extent, they can aid in taking policy measures to respond to the impending supply situation well in time. Hence, there is actually a need to strengthen the institution of futures markets, if only to receive timely signals for future availability of commodities.
A demand-side interpretation of inflation
As the above analysis clearly proves, it is not only that there is no evidence of causal links between the future market and inflation, but prices in this market also tend to rise more moderately, which gets reflected in similar moderation in the price rise in the spot market as well. Independent observers, economists and even the Abhijit Sen Committee, appointed by the Indian government, corroborated the absence of any causal link. The reasons for inflation were multifarious, the supply-side issues of which have been briefly discussed above. Immediate policy response to inflation has been scarce little on the supply side, not just because the issues fall in the realm of structural bottlenecks inherent in the Indian economy, but also because in a
globalised economy as ours external shocks get quickly transmitted into the national economy. Therefore, an emphasis on demand management is critical, especially because it seems to contribute substantially to inflationary pressures and constitute the ‘doable dos’. Expansionary fiscal and monetary policies in the backdrop of the global recession of 2007-09 may have contributed to high inflation, but even the years preceding the recession witnessed significant accommodative fiscal and monetary conditions, leading to creation of the first principles of inflation: “too much money chasing too few goods”.
Truth be told, there was a loose monetary policy in tandem with expansionary policies of most nations during the boom years of 2003-2007. The US, for example, kept interest rates at just 1 percent for years after the 2001 recession. This made the already spendthrift Americans to spend much more than they earned, creating a huge US trade deficit and corresponding trade surpluses in emerging economies, including India. Besides, inflation in the US economy was kept down by outsourcing economic activities to low-wage nations like India. This created another set of conditions for high growth in India where prices assets such as stocks and housing increased at unprecedented rates. The Reserve Bank of India,
together with the public sector-dominated banking ecosystem, did take proactive steps to nip the formation of asset bubbles in the bud. Yet, money supply grew concomitantly, in part also because the RBI had to prevent the rupee’s appreciation coinciding with huge forex inflows during the boom period.
When money supply exceeded the absorptive capacity of the economy, aggregate spending outpaced aggregate production and, thus, prices surged to signal that growth needed to be tamed. But policy action to slow growth is a politically difficult decision in India which is struggling to attain rapid growth on a sustainable basis. Yet, growth in the aggregate measure of India’s broad money supply, or M3, was 12 percent in 2004-05, which increased to 21.7 percent in 2006-07, before moderating slightly at 18.6 percent in 2008-09 (Source: Economic Survey).
Ironically, in the aftermath of the Great Recession, the countries whose loose monetary policy was partially responsible for the financial crisis culminating in the recession had to continue with the same policy to thwart a full-fledged depression. Thus, while the US Federal Reserve maintained an interest rate of less than 2 percent for the greater part of the boom years, it is forced to keep it at near-zero levels currently to provide liquidity to an economy striving to come out of recession. In India, in addition to a loose monetary policy, we saw a slew of expansionary fiscal policies during the same time, the biggest of which (viz. Sixth Pay Commission Implementation and the National Rural Employment Guarantee Program) were not
Table 4: Percentage change in futures prices in international markets
Commodities Exchange CY 2009
Soybean Oil (CBOT) CBOT (CME) 20.2%
Sugar (Raw) NYBOT (ICE) 127.4%
CPO Bursa Malaysia 48.4%
Cotton NYBOT (ICE) 54.6%
Source: Bloomberg
YOJANA August 2010 29
even linked to the recession. What monetary authorities in these nations failed to note was that when the resultant inflation co-exists with policy-induced low interest rates, a regime of very low or negative real interest rate is created. This makes the real money supply much higher than the stock of nominal money supply, further stoking up the inflationary fire. A Merrill Lynch study found that a 1 percent fall in the real interest rate increases commodity prices by 17 percent over 10 months. Thus, expansionary monetary policy creates inflationary pressures even indirectly through negative interest rates.
Hence, authorities in India are currently fighting inflation through a monetary squeeze, even if it means slowing growth, Monetary tightening is deemed necessary now more than in the previous months, as inflation has spilled over from food to non-food items and industries are showing signs of growth at rates exceeding what current capacity permits.
Commodity derivatives: an effective inflation hedge
The above is a one-shot demand side view of the economy that is facing inflation in recent times. Characteristically, policies aimed at effective demand management have been employed to rein in this monster. However, monetary policies cannot address the supply-side of the market, which actually is the raison d’etre of the price rise that we are witnessing currently. Besides, monetary policies are more effective as policy ‘signals’ for setting expectations of market participants, rather than creating or controlling availability of real goods and services, and effect markets
only with a lag. Additionally, when commodity price increases are transmitted from markets overseas, or are caused by extraneous factors such as a monsoon failure, there is little that domestic monetary policy can do. Hence, it is a combination of monetary and fiscal tightening which can prevent inflation from attaining unmanageable proportions and avert its spill-over from one sector to another.
At the micro level, while inflation cannot be prevented by individuals and corporate entities, its effect on them can be minimised by a powerful inflation-hedging device that has received scant attention from all the stakeholders – the institution of commodity futures market. It has gained huge popularity in emerging economies like India and China where exchange-traded commodities are available to consumers and producers to hedge risks arising from a possible galloping inflation. As examined and proven in paras above, not only futures-traded commodities have suffered less from inflationary effects but their price volatility also has been muted compared to other commodities. Indeed, suitability of commodity derivative products and large requirements of numerous price hedgers have meant that commodity futures have proven to be an effective de-risking instrument for many market participants.
Yet, many risk-hedging products, such as options and indices, which can be appropriately tailored to meet the risk appetite of diverse corporates are currently not permitted in India. Similarly, participation by financial institutions and foreign entities is also not permitted in our markets, though their entry could provide
the much-needed depth, liquidity and popularity to the commodity derivatives market. This market in India is still guided by the Forward Contracts (Regulation) Act, 1952, which was enacted in the backdrop of wartime shortages, a context far-removed from the realities and demands of today’s economy. With a ‘strong regulator within a liberal policy environment’, which is the avowed objective of Indian economic liberalization agenda, commodity derivatives can indeed emerge as the most effective hedging avenue for Indians, for risks arising out of runaway inflation and price volatility.
Conclusion and outlook
Many observers opine that the persistent inflationary tendency in the Indian economy over the last several months is a long-term phenomenon, a result of rapid economic growth, rising incomes of a youthful population, stagnating agricultural production and supply capacity falling short of demand. Hence, it is imperative to take long-term visionary initiatives to moderate inflationary pressures and absorb the price shocks before they hit the real economy. Monetary management and fiscal policies such as price controls and quantitative restrictions can only prove to be effective as short-term solutions. An innovative policy regime must necessarily include items such as strengthening of institutions which absorb and prevent price shocks from impacting the real sector: the institution of exchange-traded commodity derivatives. It is time the opportunities thrown open by globalization are harnessed in designing an innovative policy
framework towards this end. q
(E-mail : [email protected] [email protected] )
30 YOJANA August 2010
With demand picking up there
will be inflationary pressure. But the
wearing out of low base effect and good farm output this year
will help in moderating it
Inflation and State of The Economy
INflATION
NFLATION IS something which nobody is happy about. It is like a tax and hits the poor the hardest. Inflation means the rate of
increase in prices over a period of time, say a week or a month. It is measured for food and other primary articles, fuel and manufacturing. If one says inflation is coming down it does not mean that prices are coming down. It means that the rate of increase in prices was less. In India Inflation is measured in terms of wholesale price index unlike in the developed nations where inflation is measured on the basis of consumer price index, which reflects the retail prices. There will always be some amount of inflation in a growing economy. Also as per classical economic theory a small dose of inflation is good for a growing economy as it has a multiplier effect on growth.
In India, high inflation in 2009 and the current year 2010 is mainly due to the fact that the country
I
The author is Economic Affairs Editor Ticker News
faced severe drought resulting in fall in summer Kharif food grain output. This pushed up inflation to an unprecedented level and food inflation touched nearly 20% in December 2009 after which it began to fall. Food Inflation was mainly due to supply constraints, which started easing with the arrival of winter Rabi crop and seasonal factors tapering off. But what was more problematic was food inflation spreading to other areas resulting in overall inflation going into double-digit. Inflation in May this year was at 10.16% and it is expected to be high in June as well because of the recent fuel price hike. The government decided to carry forward an unpleasant reform measure to decontrol pricing of petrol and move towards decontrolling diesel prices. The Government could no longer wait as state-owned oil companies were bleeding because of under-recovery due to subsidised fuel prices particularly, that of kerosene and cooking gas. So, government
K R Sudhaman
OVERVIEW
YOJANA August 2010 31
freed pricing of petrol due to which price of petrol went up by Rs 3.50 per litre. Diesel, whose pricing too would be eventually decontrolled, was increased by Rs 2.00 per litre. Kerosene was increased by Rs 3.00 a litre and LPG Rs 35 a cylinder. Despite the increase in fuel prices, under-recovery of state-owned oil marketing companies Indian Oil, Bharat Petrleum and Hindustan Petroleum is likely to be Rs 53,000 crore this financial year.
June Inflation is likely to be up by 0.9% because of the fuel price hike. But what is significant is that inflation which has been partly high because of the low base effect, is expected to fall with the wearing off of the base effect. Also fuel price hike may push up inflation in the short run but in the long run it will lead to demand contraction, thereby helping in moderating inflation. The low base effect is also likely to wear off from June as around this time last year inflation started rising. Inflation is measured year-on-year. Due to global recession in 2008-09, inflation was unusually low and at times negative during that period. As Inflation is compared with what it was in the previous year, the inflation this year has got magnified or exaggerated because of the low base effect.
With the low base effect wearing off from June this year inflation will begin to fall and as Reserve Bank and Government had projected, it is expected to be around 5-6% by the end of this financial year 2010-11. With good monsoon projected this year, food output is expected to be good. The Planning Commission Member incharge of agriculture, Abhjit Sen had indicated that farm output would grow by 5-6%.
India has one of the highest food grain stocks this year, estimated at around 60 million tonnes. So unlike last year, food inflation is not expected to be high this year. The high inflation from the middle of last year will bring into play the high base effect which will help further in inflation being lower than what it would have been otherwise. Significantly, last year, despite comfortable food grain stock of about 44 million tonnes, wheat and rice prices were high as the government could not take a decision to subsidise further to release these food grains in the public distribution system at lower prices. This is because of the fact that the government already had high food subsidy bill and was not in a position to give more subsidy to food with fiscal deficit mounting to 6.6% of GDP in 2009-10 due to the fiscal stimulus package provided to ward off the impact of global crisis on Indian economy. Strangely this resulted in food grain stock going up by 7 million tonne in a year when production fell due to poor monsoon.
Another factor for inflation has been that Minimum Support Price for various agricultural crops has been increased substantially in the last few years. This has no doubt put more income into the farmers’ hands, but at the same time it has pushed up the prices of agri-products. Indian wheat prices are much higher than global wheat prices, which are ruling around $170-200 per tonne. This means that landed price of imported wheat is around Rs 10-11 per kg whereas Indian wheat sent from Punjab to southern city like Chennai costs Rs 13-14 a kg. This has resulted
in a peculiar situation where flour mills in south India prefer to import wheat rather than buy wheat from Punjab or Haryana. Also carrying and storage cost of food grain is also contributing to higher price of Indian food grains.
Government has therefore embarked upon an ambitious plan to provide food security to over 50-70 million families below the poverty line. After Right to Education through Education for All and Right to Work through National Rural Employment Guarantee Programme, food security would be the third major initiative of the Government for the social uplift of the poor. The food security legislation is in process of formulation. Under the programme all below poverty line families will be provided 35 kg of food grain every month at Rs 3 a Kg.
A significant development is that nobody is complaining about inflation now. This is because the purchasing power of people has gone up, particularly in the rural areas because of the higher minimum support price and National Rural Employment Guarantee Programme.
But what is worrying now on the inflation front is that it has spread to manufacturing, particularly with growth picking up in the face of economic recovery. Last year Reserve Bank pursued an easy and accommodative monetary policy and the government came out with two or three rounds of fiscal stimulus package to minimise the impact of global crisis on the Indian economy. The easy monetary policy and the fiscal stimulus were together aimed at demand revival to
32 YOJANA August 2010
help the sagging growth. Lowering of Cash Reserve Ratio several times from 9% in 2008 to 5% by early 2009 had brought-in nearly Rs 4 lakh crore liquidity into the banking system. Cash Reserve Ratio is the percentage of the deposits that commercial banks park with the central bank. This is an instrument that is used to suck out or release liquidity into the banking system. This instrument is used to control money supply and thereby Inflation. Now the CRR is 6%. With the economic recovery and growth, inflation has surged to double-digit forcing Reserve Bank to tighten its monetary policy.
Reserve Bank would perhaps want to suck out more liquidity from the system with surging capital flows. It would be keen to move back to normal levels. But at the moment temporarily liquidity position is slightly tight because of a little over Rs one lakh crore payout on account of the 3G and broadband spectrum auction. This tight liquidity position will change shortly and Reserve Bank may then start hiking CRR, perhaps in its quarterly review of monetary policy in July end.
There will also be hardening of interest rates to ensure as Reserve Bank hikes key policy rates to contain inflation. With May inflation at 10.16% indicating non-food items have contributed higher prices, the central bank is of the opinion that inflation is now generalised and demand-side pressures are evident. Therefore, Reserve Bank on July one took yet another “baby step”, as RBI Governor D Subbarao calls, to tame inflation by rising repo and reverse repo rates by 0.25%. Repo is the interest rate at which
the central bank lends banks in the short term. Reverse repo rate is the one at which banks deploy surplus funds with RBI. Repo and Reverse Repo rates are also called key policy rates or overnight rates. After the July 1 hike, Repo rate is 5.50% and Reverse Repo rate is 4%. In the annual monetary policy in April, Reserve Bank hiked Repo and Reverse Repo rates by 0.25% to 5.25% and 3.75% respectively These are clear signals that the key policy rates have to brought back to pre-2008 normal levels. There could be further hike in key policy rates and CRR in July policy as well.
RBI kept CRR untouched now saying “easing liquidity and raising rates at the same time may seem inconsistent. However it should be noted that the liquidity easing measures have become necessary to manage what is essentially temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit (from accommodative monetary policy) which remains focused on containing inflation and anchoring inflationary expectations without hurting growth.”
Reserve Bank and the Finance Ministry have a tough task ahead in balancing inflation and growth as both are equally important. With the economic rebound, India’s GDP growth was 7.4% in 2009-10 as against 6.7% in the previous year, which witnessed sharp deceleration in growth from over 9% in the preceding year due to global financial crisis. Now growth is picking up and it is expected to be around 8.5% in the current financial year and would
go back to high growth of 9% next year (2011-12). There are surging capital inflows, FDI is expected to go up to 35 billion dollars this year. Infrastructure spending is increasing and it is expected to be over $1 trillion in the 12th five-year plan beginning 2012-13 from $500 billion in the 11th five-year plan ending 2011-12. Exports are picking up and are expected to touch $200 billion this year. These are signs of economy on rebound, which is the second fastest growing economy in the world after China. India is expected to overtake in growth in the next 2 or 3 years. Aware of these fast developments Government has already started withdrawing from the fiscal stimulus. Fiscal consolidation is crucial for containing inflation. The fiscal deficit, which shot up to 6.6% of GDP in 2009-10, is to be brought down to 5.5% of GDP in 2010-11 and to 4.1% of GDP in the subsequent years. With the Rs 1.06 lakh crore bonanza from 3G and broadband spectrum auction in May and June, containing fiscal deficit is not going to be a problem this year.
But Inflation is going to be an issue with growth picking up. The only dampner to growth could be the European debt crisis which may slowdown exports and capital inflows. With demand picking up there will be inflationary pressure. But the wearing out of low base effect and good farm output this year will help in moderating it. Reserve Bank is ever watchful and has been swift enough to take timely monetary action to contain inflation without hurting growth
momentum. q
(Email: [email protected])
YOJANA August 2010 33
According to the interest rate
channel, tightening of monetary policy
leads to higher interest payments and to lower net
profits. According to the bank lending channel, monetary tightening reduces
supply of bank loans
How Monetary Policy Impacts Stock Prices
MACROECONOMICS
ONETARY POLICY
is a much debated
i s s u e t h e s e d a y s .
Central banks around
the world appear to
have begun tightening monetary
policy. Tightening of monetary
policy evokes a shrill protest from
financial markets and financial
press. This article shows how
monetary policy influences share prices.
Changes in the official policy rate (bank rate) influence asset prices such as bonds and equities. Equity prices may adjust in response to changes in the rate
of interest. This may occur since
equity returns are discounted by a larger or smaller factor, depending
upon the rate of interest. This
factor is called the discount rate.
When interest rates rise, the
M
The author is Assistant Professor, Jindal Global University.
discount rate may rise. When
interest rates fall, the discount
rate may fall. Monetary policy
changes may also impact the
future stream of cash flows.
According to Ioannidis and
Kontonikas (2008), monetary
policy influences stock returns in two ways. First, it influences the discount rate which may be taken
to be the weighted average cost of
capital. Secondly, it influences the future stream of cash flows.
Impact of monetary policy on the discount rate
The capital structure of a firm may be assumed to include debt
and equity. Thus, the weighted average cost of capital or the
discount rate may be defined
as the weighted average of the
after tax cost of debt and equity
Ajay Goyal
RESEARCh
34 YOJANA August 2010
(Ross, Westerfield & Jordan,
2007, p488). Mathematically, the
weighted average cost of capital
may be expressed as:
Weighted Average Cost of capital (Wacc)
= Proportion of debt x After tax cost of debt
+Propor t ion of equity x Cost of Equity
Monetary t igh ten ing (an
increase in the policy interest
rate) may lead to an increase in
the after tax cost of debt while
monetary easing (a reduction
in the policy interest rate) may
lead to a decrease in the after
tax cost of debt. Thus, monetary
tightening should increase the
weighted average cost of capital
and monetary easing should
decrease the weighted average
cost of capital. The share price of
a given stock may be defined as the present value of future cash
flows discounted by the weighted average cost of capital. For a
given stream of cash flows, an increase in the weighted average
cost of capital would lower stock
returns and a decrease in the
weighted average cost of capital
would raise stock returns. The
weighted average cost of capital
may also be taken as a proxy for
the discount rate facing a firm. This is because the risks affecting
a firm which impact the discount
rate affect the cost of debt and
equity and hence the weighted
average cost of capital.
Monetary policy and the risk profile of a firm
Monetary tightening may
raise the risk facing a firm.
Consequently, equity owners and debt owners may raise cost of
supplying equity capital and debt capital. Loan capital becomes
m o r e e x p e n s i v e f o l l o w i n g
monetary tightening thus lenders
raise interest rates. Equity owners demand higher returns as the
required return rises following m o n e t a r y t i g h t e n i n g . T h e
required return or expected return is defined by the Capital Asset Pricing Model as follows:
Expected
Return
= Risk free rate
+ Beta x Market
Risk premium
Risk free rate is the rate of
return on riskless investment such
as treasury bills issued by the
Central bank. Beta of a security
is a measure of systematic risk.
It measures volatility of return
of a security in comparison to
volatility of market portfolio
such as FTSE 100 or S&P 500.
Systematic risk is the risk facing a
firm due to macroeconomic factors such as monetary policy changes,
exchange rate adjustments, oil
prices etc. Market risk premium
is the return required by financial investors over and above the risk
free rate.
The expected return is the
return required by shareholders to remain invested in the stock
and may also be expressed as the
required return. If investors do not receive the expected return
they may be tempted to sell the
stock, lowering the stock price.
The expected return is also known
as the cost of equity.
Monetary tightening raises the
risk free rate and beta which is the
systematic risk facing the firm.
The risk free rate rises because
the policy interest rate has risen.
The systematic risk may rise
because of increased riskiness
of firms. The riskiness refers
to the inability to meet fixed
and variable expenses. Hence,
monetary tightening raises the
cost of equity. Thus, monetary tightening may influence both
the cost of equity and the cost of debt. Similarly, monetary easing
may lower the risk facing a firm.
Consequently, equity owners and debt owners may lower the cost of
supplying equity capital and debt capital. Thus, monetary easing
lowers the weighted average cost
of capital.
Monetary transmission mechanism
YOJANA August 2010 35
This section highlights how
monetary policy is able to influence riskiness of stocks. This may also
help to explain heterogeneity in
industry and individual stock
returns. Two mechanisms have
been put forward to explain how
monetary policy influences the riskiness of stocks. These are the
interest rate channel and the credit
channel.
Interest rate channel
According to the interest rate
channel, tightening of monetary
policy leads to higher interest
payments and to lower net profits (obtained after subtracting interest
payments from gross profit) and cash flows of corporations. This is known as the cost of capital effect. If profits and cash flows are lower, then the expected share
price (present value of future
free cash flows discounted by
the relevant risk factor) would be
lower (Bean, Larsen and Nikolov,
2002 & Bernanke & Gertler,1995).
According to Mishkin (1995),
tightening of monetary policy
reduces the supply of money.
Since individuals have less money
to spend, they reduce spending
on equity. This lowers the price of equity and consequently stock returns.
Monetary t igh ten ing , by
raising interest costs, increases
the financial risks facing firms.
This is the risk of not being able
to meet interest and principal
payments on debt contracts
wi th f inanc ia l ins t i tu t ions .
Business risks may rise if firms are unable to meet operating
expenses. Monetary tightening
may induce a reduction in current
consumption and investment
expenditure. Households facing
higher borrowing costs reduce
c o n s u m p t i o n e x p e n d i t u r e .
Moreover, consumer confidence falls as lower expenditure in
the macro economy creates
recessionary fears. Reduced
investment expenditure may lead
to job losses. This contributes to
lower consumer confidence. If
both business and financial risks rise, total risk would increase.
In such a scenario, investors
would demand higher returns
for remaining invested in risky
stocks. Other things remaining
same, the required return can be obtained only if the current share
price falls. Share prices would fall
on expectations of lower future
corporate profitability (higher
wages and interest payments)
and reduced future consumer
spending.
A fall in the value of stock
indices may lower investor
wealth. This would in turn reduce
consumption expenditure. This
may, in the long run reduce share
prices even further. This is known
as the wealth effect.
Interest rate channel may help
to explain heterogeneity observed
in industry stock returns. Certain
industries involving huge capital
outlays on plant and machinery
rely on debt financing and are
more sensitive to interest rate
shocks. Further, industries such as
real estate and leisure experience
lower demand when monetary
tightening takes place. Thus, the
interest rate channel may help to
explain industry specific effects of interest rate shocks.
Broad Credit Channel
The broad credit channel
comprises of the bank lending
and balance sheet channel .
According to the bank lending channel, monetary tightening
reduces supply of bank loans.
This lowers investment spending
by firms and lowers total output
in the economy. The bank lending
channel affects small f i rms
adversely that would not be able
access other sources of credit.
However, companies listed on
the stock exchange may not
be affected. Listed companies
may be regarded as large sized
companies who may be able
to obtain credit on the best
terms and may not suffer from
credit rationing associated with
monetary tightening.
36 YOJANA August 2010
According to the balance
sheet channel, tight monetary
policy might adversely affect the
balance sheet of companies by
reducing cash flow net of interest
and reducing the availability of
collateral to obtain loans. Lower
cash flows reduce the net worth
of firms. Cash flows are lower
because interest burden is higher.
Secondly, tighter monetary policy
may reduce spending by the
banks downstream customers.
This would indirectly reduce
cash flows of firms even further.
Consumption spending fal ls
a s bo r rowing cos t s f a c ing
househo lds a re h igher and
consumer confidence is low.
Thus , households prefer to
substitute current consumption
for future consumption. The
credit channel does not operate
independent ly but works in
conjunction with the interest rate
channel. Weaker balance sheets
increase the external finance
premium (difference between the
cost of internal funds and external
funds) due to higher risks in
lending to f inancial ly weak
borrowers. Thus, the worsening
of borrower ’s balance sheet
worsens the availability of credit
and reduces investments. This
would further lower profits and
cash flows leading to a further
worsening of balance sheet. This
may not only lower equity returns
but also lower aggregate demand
and hence economic growth in the
long run. This would lower share
prices even further as share prices
may react to macro- economic
fundamentals. This is known as
the financial accelerator principle
(Bernanke and Gilchrist, 1999).
The external finance premium
rises for all firms but the size
of the external finance premium
is higher for smaller firms. The
size of the external f inance
premium depends on the net
worth of firms. Thus smaller,
younger and more financially
constrained firms may face a
higher external finance premium.
This is due to higher information
asymmetry in case of such firms.
Firms face different discount
rates consequent to monetary policy changes depending on
their risk profile. As a result
some firms, depending on their
risk profile may not be able to
obtain credit even at a higher
rate of interest. This may help to
explain heterogeneity observed
in individual stock returns to
monetary policy changes.
Acco rd ing t o t he c r ed i t
channe l v i ew o f mone ta ry
policy, firms that are subject to
a higher degree of informational
asymmetry would suffer a greater
decline in share prices. Smaller
firms, younger firms and more
financially constrained firms face
risks that are increasing in the
degree of information asymmetry
(Fazzari, Hubbard and Petersen,
1988). The risks facing firms
are the ability to cover fixed
and variable costs. According
to Arnold (2005), information
asymmetry may be defined as
a situation where one party to a
transaction has more information
with respect to the risk and
return than the other party. Thus
borrowers and owners may have
superior knowledge regarding
risk and return as compared to
lenders and investors. Information
asymmetry creates a wedge
between the cost of internal
and external finance (external
finance premium) due to higher
risk perception. External finance
premium which is a proxy for
the individual firm risk profile
rises in the event of monetary
policy tightening. Thus stock
returns which are present value
of future cash flows adjusted for
risk falls for younger, smaller
and more financially constrained
firms. Even unconstrained firms
may face a certain degree of
information asymmetry and they
too may experience volatility
in stock returns. However, the
heterogeneity lies in the different
degrees of stock return volatility.
Investors may sell high risk
stocks and buy low risk stocks
contributing to market volatility
(Bernanke, Gertler and Gilchrist,
1996). q
(E-mail : [email protected])
YOJANA August 2010 37
Targeting food inflation should not be viewed only as a matter of price stability but also in terms of food security for all, particularly for
those who are still vulnerable despite a high and sustained
growth rate of national income
Analyzing Inflation
INflATION
N A country like India
where more than two
thirds of its population
doesn’t have adequate means to ensure minimum
prescribed level of calorie intake,
any further rise in the prices of
food grains will have a disastrous
impact on their living conditions.
The rise in the prices of food
items which can be termed as food
inflation therefore should be the
prime concern of policy makers
of any developing country like
India.
Except for certain incidences in 1996-97 and 1998-99, inflation remained not only more or less at the desired a level but also showed stability within a small range. However, since 2008 the situation has changed as inflation has started fluctuating at relatively higher scale. Despite several f iscal and monetary initiatives, the government has
I
The author is a research scholar at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi
got little success in controlling
inflation.
Broadly, inflation in India is
measured under two indices:-
The Wholesale Price Index
(WPI) and the Consumer Price
Index(CPI). CPI is calculated in
four different ways, which are
CPI for Industrial Workers and
CPI for (UNME) in urban areas
and CPI for Rural Labour and
CPI for Agricultural Labourers
in rural areas. Although the
consumer price index reflects
the prices realized at the final
consumption level and is inclusive
of all market distortions such as
indirect taxes etc, the Whole
sale Price Index is used more
frequently for measuring the overall inflation because of its
simplicity in calculation and
regularity in the measurement
process.
Avanindra Nath Thakur
ANAlySIS
38 YOJANA August 2010
During 2009 ( from April to
December) the inflation based on
Wholesale Price Index has shown
a remarkable deviation from its
past behaviour. The years 2000-
01, 2004-05 and 2008-09 have
shown higher than five percent
of average annual inflation.
During 2000-01 the basic factor
behind inflation was the rise in
the international prices of fuel.
In 2004-05 along with higher
international fuel prices, rise in
the prices of manufacturing items
because of higher growth and
consequent rise in demand in the sector was responsible for overall
inflation. In 2008-09 the situation
was different as the inflation was
primarily due to the rise in the
prices of all the three items ( viz.
Primary articles, fuel etc. and
manufacturing items) including
food products. This was mainly
because of greater integration of
Indian economy with the global
market. However, the situation
was completely different in
2009-10. During this period a
substantial deviation between
the WPI and CPI was found and
this was more pronounced till the
end of the year 2009. In June,
July and August, 2009 the WPI
remained negative while all the
variants of CPI were well above
ten percent. This difference
continued till the end of the year
with some decline in the gap
during the later period.
The reasons for the differences
are quite evident. The major
driver of inflation in the four
variants of CPIs (viz. Agricultural
labour, rural labour, UNME and
industrial worker) was the rise
in the price of food items. The
weightage of food items have
been much higher in CPIs than in
the WPI. The weightage of food
items including processed food is
25.43% in WPI while this share is 46.20%, 69.15%, and 66.77% in CPI for Industrial Workers, CPI
for Agricultural Workers and CPI
for Rural Labour respectively.
Therefore any increase in food
prices has affected CPI much
more intensely than the WPI. The
year of 2009 was characterized by
a significant rise in the food prices
along with the massive decline
in the prices of manufacturing
goods on an average. Since in
the WPI the food items get lower
weightage and manufacturing
goods have higher weightage
therefore despite a significant
rise in the food prices the WPI
has shown negative inflation
during June, July and August.
On the contrary the CPI in its all
variants have shown an inflation
of around double digit due to
higher weightage to food items
than the manufactured items.
In the last three months of 2009
the gap between the WPI and
the CPI declined because of
rise in the prices of some of the
manufactured goods. During
December 2009 the WPI reached
as high as 7.31%.
Despite several measures
by the government inflation
continues to be high during
first five months of 2010. The
average inflation from January
to May remained above 10%. Although there has been slight
lowering of food inflation from
18.4% in January to 16.5% in May, nonetheless, the rise in the
prices of food items remained the
basic factor for overall high and
persistent inflation during this
period also.
Some of the major contributers
of food inflat ion are sugar,
pulses, rice, vegetables, milk
and tea. These items have shown
a significant rise in prices over
the entire period of time. The
estimated areas under sugarcane
a n d s u g a r c a n e p r o d u c t i o n
declined significantly from 2007-
08 to 2009-10. According to
the provisional estimates, sugar
production fell from 263 lakh
tonnes in the 2007-08 sugar
season to 146 lakh tonnes in
the 2008-09 sugar season. The
sugar industry is expect ing
production of sugar of 160 lakh
tonnes in 2009-10 sugar season.
However, the demand of sugar
is estimated to be around 230
lakh tonnes during the same
year. Therefore one third of the
demand of the sugar shall not be
met with domestic production
and this happens to be the most
important factor behind rise in
the price of sugar. Moreover,
high international price of sugar
has been the other important
factor that puts pressure on sugar
price. Furthermore, high level of
divergence of sugar for other uses
YOJANA August 2010 39
such as production of gur etc. has
also contributed significantly in
the rise of sugar price.
Similarly, kharif pulses after
touching high level of production
of about 6.4 mil l ion tonnes
in 2007-08, declined to 4.78
million tonnes (fourth advance
estimate) in 2008-09 and again
to 4.42 million tonnes ( first
advance estimate) in 2009-10.
Therefore increasing demands
with declining production is the
major factor behind the rise in
the prices of pulses in the recent
period. In the same line, the
production of rice fell by 12.93
million tones during the period
2008-09 to 2009-10 with ever
increasing demands of rice across
the vast areas of the country.
This has resulted in the rise of
the price of rice in the recent
period. Among vegetables similar
pattern is visible in cases of
potatoes, onions, tomatoes, peas
and brinjal which contributed to
the significant rise in the food
inflation.
Moreover, segmentation of
agricultural markets has played a
very important role in making price
a poor reflector of demand and
supply conditions. The prices of
various food grains substantially
differ across regions. The price
of rice in local market in eastern
region has been much lower than
that of in the southern region.
And similarly, the prices of
various vegetables also differ in
a very significant manner across
regions. The prime factor behind
this segmentation of markets
has been the lack of storage and
transportation facilities across
the production areas. Indeed,
the role of poor infrastructural
facilities has remained central to
this problem.
The ro le o f gove rnmen t
procurement policies has also
played an important role in
distorting the prices of different
food grains. This is so because of
two reasons:- firstly, procurement
o f spec i f i c f ood g r a in s a t
minimum supporting price raises
the demand for food grains during
the procurement period and leads
to the rise in market prices after
the shortage of available grains in
the market. Short term squeezing of surplus food grains through
government procurement, and
frequent hoarding of food grains by many of the intermediate
businessman result in an artificial
rise in prices. Since the release
of food grains through Public
Distribution System takes place
on a regular basis with certain
interval of time , the artificial rise
in demand and prices continue
for a longer period of time till the
season of new harvest. Secondly,
since the procurement of food
grains under the government has
been quite unequal for different regions, it also contributes
in fu r the r segmenta t ion o f
agricultural market in India.
Even though farmers in backward
regions are ready to sell their
products at a lower rate and
sometimes much lower than the
prescribed MSP in absence of
government procurement, it is
not able to counter the problem
of artificial rise in prices due to
the entire benefits accrued by
the middleman. So, they hoard
substantial amounts in order to
get higher profit and therefore
an artificial rise in demands and
hence price can not be avoided in
this situation.
The p r eva l en ce o f f o od
inflation is a matter of major
concern for several reasons.
Firstly, the government’s ability
to control inflation has remained
limited in case of rise in food
price. This is because, the rise
in the food prices comes from
supply side bottlenecks of Indian
agriculture. With a given level of
infrastructure it is very difficult
to raise the production of food
grains in a short period of time.
Secondly, any monetary approach
such as tightening of money
supply through the raising of
the various reserve ratios have
very limited or even negligible
impact on the lowering of the
demand of the food items as they
face almost inelastic demand.
Thirdly, food inflation in almost
all circumstances affects poorer
section of the society the most
and i t is one of the biggest
obstacles in achieving food
security in the country or even
in making an attempt towards it.
Fourthly, it is a problem having
more implications for future than
the present. This is because of
the fact that there is very little
40 YOJANA August 2010
possibility of increasing the
area under cultivation, given
the pressues of urbanization that
recent years have witnessed.
Moreover, the demand for food
will continue to grow as income
levels rise.
In recent years, the government
o f Ind ia has t aken severa l
initiatives to overcome supply
bottlenecks like the initiation of
Rashtriya Krishi Vikash Yojana
with an allocation of Rs 25000
crores during the period of the
11th Plan for the purpose of
raising the level of infrastructure
in the agricultural sector as a
whole and the National Food
Security Mission which has the
targets to raise the production
of rice, wheat and pulses by 10,
8 and 2 million tonnes by the end
of 11th Five Year Plan. The merit
of the latter scheme is that it takes
area approach and measures
based on local conditions which
are essential for making effective
implementation of the scheme.
Several immediate measures
have been taken in order to
control food inflation. Some of
them are reduction in import
duties to zero for rice, wheat,
pulses, edible oils, and sugar,
reduction of import duty on many
processed foods, releasing foods
to a certain extent from the Food
Corporation of India, subsidy
on imported pulses, banning of
the export of several food items
such as non basmati rice, edible
oils and pulses, suspension of
future trading in rice, urad, and
sugar etc. However all these
efforts though necessary and
effective, lack completeness and
sufficiency.
A long term approach to
eliminate supply side bottlenecks
in agriculture along with certain
short term measures are needed
to be undertaken on a priority
basis. Several other crops such
as sugarcane, vegetables,etc
should be included under the
National Food Security Mission
in order to raise the production
of these i tems to match the
demand in near future. Other
crops such as coarse cereals
including jwar, bajra etc should
be given emphasis in order to
enhance the production so that a
substitute for main food grains
should be available in sufficient
amount.
Urgent steps are required fo r inc reas ing ag r i cu l tu ra l
productivity. A time bound and
extens ive i r r igat ion sys tem
needs to be built on a priority
basis. Techniques for dryland farming need to be developed.
Agricultural research needs an
urgent augmentation of funds.
I n o r d e r t o b r e a k
t h e s e g m e n t a t i o n o f t h e
agricultural market in India,
a massive investment in the
rural infrastructure such as
development of road, railways,
communicat ion system, and
provision of storage facilities
etc. should be undertaken on
a greater scale. This should
be accompanied with more
rationalization of government
food grain procurement policies
in terms of balanced regional
approach.
There is a need to develop skill
of farmers in such a way that they
can improve their techniques of production as they usually lack
the knowledge of appropriate
proportion of seed, fertilizer and
timing of various methods used
in the farming processes.
Further, as there is continuous
rise in the cost of production in
agriculture any curtailment of
subsidy given to them without
prior provision of enhancing the
productivity would further raise
the prices of the products. Hence
any policy in this regard needs
proper attention.
Finally, small scale agro-based
industries should be promoted
at localized levels so that with
vertical integration at the local
level there would be a check on
the prices of processed food with
simultaneous provision of higher
quality employment in the rural areas.
Targe t ing food in f la t ion
should not be viewed only as a
matter of price stability but also
in terms of food security for all,
particularly for those who are still
in vulnerable despite a high and
sustained growth rate of national
income. q
(E-mail : [email protected])
YOJANA August 2010 41
CPI inflation is more important from the point of
view of controlling inflation, especially
in a country like India, where the existence of the
unorganized sector and incidence of poverty is
reasonably high
Measuring Inflation
INflATION
NFLATION REFERS to
percentage change in the
price of a set of goods and
services over a period of
time; it represents change in
overall price level in the economy.
If the inflation for a particular week is say 8%, it means price level has increased by 8% against the same week during previous year. Inflation is basically of two types- Cost-push
inflation and demand-pull inflation. Demand- pull inflation refers to
increase in the price level due to
demand being in excess of supply
in the short run. Cost-push inflation is due to autonomous increase in
the cost of components, including
labour and material costs.
When overall price level rises,
it erodes the purchasing power of
income, causes rise in the cost of
living and lowers the values of
savings. Savers and investors closely
track the link between inflation
I
The author is on the Faculty of the ICFAI National College, Solapur.
and interest rate, because higher
rate of inflation leads to negative returns on saving. It has severe
impact on poor through unequal distribution of income & wealth.
Higher inflation increases the cost of money and makes it difficult to maintain the competitiveness of
domestic industry in a liberalized
trading era.
Measures of Inflation in India:
The issues of measurement of
inflation has got a lot of attention in India. Presently, there are
different primary measures of
inflation - the Wholesale Price
Index (WPI) and four measures of
the Consumer Price Index (CPI)
- the CPI for Industrial workers
(CPI-IW); CPI for agricultural
labourers (CPI-AL); CPI for rural
labourers (CPI- RL) and CPI for
urban non-manual employees (CPI-
UNME). In addition to this, Gross
Shivkumar Biradar
DEBATE
42 YOJANA August 2010
Domestic Product (GDP) deflator provides implicit economy-wide
inflation. Inflation based on WPI is considered as representative figure for the whole economy.
Inflation Rate = [(Pt - P
t-1) /
Pt-1
] * 100
Where Pt = price indices of
current year
Pt-1
= price indices of previous
year
Wholesale Price Index (WPI)
As its name suggests Wholesale
Price Index (WPI) tracks wholesale
prices in India. WPI is the weighted
price index of a basket of goods
consisting of 435 commodities,
which are categorized under
three major groups: i) Primary
Articles; (98 commodities) ii) Fuel
power, light and lubricants; (19
commodities) iii) Manufactured
products; (318 commodities).
These three are again divided
into smaller sub-groups. WPI
is compiled on a weekly basis.
The Indian government has taken
WPI as an indicator of the rate of
inflation in the economy.
Table – 2: shows inflation by on overall series of WIP and groups
of WPI series. More volatility is
found in fuel group based inflation followed by primary article group as
compared to manufacture products
group.
Consumer Price Index (CPI)
Consumer Price Index is
measured on the basis of the change
in retail prices of a specified set of goods and services on which
a particular group of consumers
spend their money. It reflects the cost of living index condition for a
homogenous group based on retail
price. It actually measures the
increase in price that a consumer
will ultimately have to pay for.
India is the only major country that
uses a wholesale index to measure
inflation. Most countries use the CPI as a measure of inflation.
CPI = (Price of basket in current
year) / (Price of basket in base year)
* 100
Table - 01: Relative importance of commodities in wPI basket
Commodity Name weight Commodity Name weight
I Primary Article 22.03 III Manufactured Products 63.75(A) Food Articles 15.40 (A) Food Products 11.54
a. Food Grains(Cereals+Pulses) 5.01 (B) Beverages Tobacco & Tobacco Products 1.34
b. Fruits & Vegetables 2.92 (C) Textiles 9.80
c. Milk 4.37 (D) Wood & Wood Products 0.17
d. Eggs,Meat & Fish 2.21 (E) Paper & Paper Products 2.04
(B) Non-Food Articles 6.14 (F) Leather & Leather Products 1.02
a. Fibres 1.52 (G) Rubber & Plastic Products 2.39
b. Oil Seeds 2.67 (H) Chemicals & Chemical Products 11.93
c. Other Non-Food Articles 1.95 (I) Non-Mettallic Mineral Products 2.52
(C) Minerals 0.48 (J) Basic Metals Alloys & Metals Products 8.34
a. Metallic Minerals 0.30 (K) Machinery & Machine Tools 8.36
b. Other Minerals 0.19 (L) Transport Equipment & Parts 4.29
II Fuel Power Light & Lubricants
14.23 All Commodities 100.00
(A) Coal Minning 1.75
(B) Minerals Oils 6.99
(C) Electricity 5.48
Source: http://www.mospi.gov.in/cso
YOJANA August 2010 43
Table-02: Inflation based on groups of WPI seriesYear INFLATION RATE
BASED ON wPI SERIES
INFLATION RATE BASED ON PRIMARY
ARTICLES (wPI)
INFLATION RATE BASED ON FuEL POwER LIGHT &
LuBRICANTS (wPI)
INFLATION RATE BASED ON MANuFACTuRED
PRODuCTS (wPI)
1995-96 8.0 8.2 5.1 8.5
1996-97 4.6 8.4 10.4 2.1
1997-98 4.4 2.7 13.8 2.9
1998-99 5.9 12.1 3.3 4.4
1999-00 3.3 1.2 9.1 2.7
2000-01 7.2 2.8 28.5 3.3
2001-02 3.6 3.6 8.9 1.8
2002-03 3.4 3.3 5.5 2.6
2003-04 5.5 4.3 6.4 5.7
2004-05 6.5 3.6 10.1 6.3
2005-06 4.4 2.9 9.5 3.1
2006-07 5.4 7.8 5.6 4.4
2007-08 4.6 7.5 1.0 4.9
2008-09 8.4 10.2 7.5 8.1
Source: http://www.mospi.gov.in/cso
Table-03: Divergence between CPI and WPI Inflation
SR. PERIOD INFLATION RATE BASED
ON wPI SERIES
INFLATION RATE BASED ON CPI - Iw
SR. PERIOD INFLATION RATE BASED
ON wPI SERIES
INFLATION RATE BASED ON CPI - Iw
1 Jan-08 4.5 5.5 13 JAN-09 5.0 10.5
2 Feb-08 5.3 5.5 14 FEB-09 3.5 9.6
3 Mar-08 7.5 7.9 15 MAR-09 1.2 8.0
4 Apr-08 8.0 7.8 16 APR-09 1.3 8.7
5 May-08 8.9 7.8 17 MAY-09 1.4 8.6
6 Jun-08 11.8 7.7 18 JUN-09 -1.0 9.3
7 Jul-08 12.4 8.3 19 JUL-09 -0.5 11.9
8 Aug-08 12.8 9.1 20 AUG-09 -0.2 11.7
9 Sep-08 12.3 9.8 21 SEP-09 0.5 11.6
10 Oct-08 11.1 10.5 22 OCT-09 1.5 11.5
11 Nov-08 8.5 10.5 23 NOV-09 4.8 13.5
12 Dec-08 6.1 9.7 24 DEC-09 7.3 15.0
CPI inflation rate = [(CPIt– CPI
t-1) / CPI
t-1] *100
Where CPI t = consumer price
index of current year
CPI t-1
= consumer price index
of previous year
44 YOJANA August 2010
As mentioned earlier there are
four measures of CPI. Set of goods
and services for each CPI measure is
different based on the consumption
pattern of the particular group. For
example, for CPI for industrial
worker (CPI-IW), a basket of 260
commodities is tracked; for urban
non manual employees (CPI-
UNME), 180 commodities, for
agricultural labours (CPI-AL), just
60 commodities. Here again, each
commodity is given a different
weightage. For example, the CPI-
AL would give a greater weightage
to food grain than the CPI-UNME,
since a greater proportion of the
income of this group would go
towards the purchase of food grain.
CPI-IW has got a broader coverage
of set of goods and services than
others measures of CPI. That is
why CPI-IW is extensively used
as cost of living index in organized
sector. CPI is available on two -
monthly basis because of difficulty in data collection for various
categories of goods and services
from organized and unorganized
markets for the various measures
of CPIs.
Divergence between CPI and WPI Inflation • There is found to be divergence
between the CPI and WPI based
Inflation figures, as shown
in the Table 3 and Chart 1.
This divergence is due to the
following reasons :
• Food ar t ic les get larger weightage in CPI, varying
from 46% in CPI-IW to 69% in CPI-AL, but it has only
22.03 % weightage in WPI series. Hence, the CPIs are
more responsive / sensitive
to changes in prices of food
articles.
• Price of services - such as, educat ion, t ransport and
communication, medical care,
cable TV, house rent, recreation
and amusement services,
etc. has considerably higher
weightage in CPI-IW
• The fuel, power light and lubricants group has got a
significantly higher weightage
in the WPI (14.23%) than the CPIs (5.5 to 8.4%). Therefore, changes in international crude oil prices have a greater influence on WPI than on the CPIs.
• Base-year effect is also different for the two since base year for CPI-IW is 2001 where as for WPI series it is 1993-94.
• It is noted that, CPI-IW has recorded very similar trend as the food articles series of WPI despite the divergence of the overall series of WPI in the recent period (Table-4 and Chart 2).
Many economists today feel that WPI does not actually measure the exact price rise that a consumer has to bear, since it tracks wholesale prices. Further, the basket of commodities included for WPI computation were worked out in 1993- 94, and many items have become irrelevant since then since they are not used by consumers
any more. Revision of base year
is not being done as frequently as it should be done in an economy
Source: http://www.mospi.gov.in/cso
YOJANA August 2010 45
Table-4: Co-movement of Inflation Based on WPI (Food Articles) and CPI-Iw
SR. PERIOD INFLATION RATE BASED ON CPI-Iw
INFLATION RATE BASED ON wPI FOOD
ARTICLES
INFLATION RATE BASED ON wPI PRIMARY
ARTICLE1 Jan-08 5.5 2.1 4.9
2 Feb-08 5.5 3.4 7.3
3 Mar-08 7.9 5.9 9.9
4 Apr-08 7.8 5.5 8.9
5 May-08 7.8 5.7 9.5
6 Jun-08 7.7 5.9 10.6
7 Jul-08 8.3 6.0 10.8
8 Aug-08 9.1 6.9 11.4
9 Sep-08 9.8 7.7 11.6
10 Oct-08 10.5 9.9 12.4
11 Nov-08 10.5 10.3 12.1
12 Dec-08 9.7 10.0 11.1
13 Jan-09 10.5 11.0 10.7
14 Feb-09 9.6 9.4 6.9
15 Mar-09 8.0 7.5 5.2
16 Apr-09 8.7 8.6 6.6
17 May-09 8.6 8.4 6.3
18 Jun-09 9.3 10.9 6.5
19 Jul-09 11.9 14.2 7.6
20 Aug-09 11.7 14.1 8.0
21 Sep-09 11.6 14.2 8.4
22 Oct-09 11.5 13.0 8.7
23 Nov-09 13.5 16.7 11.8
24 Dec-09 15.0 19.2 14.9
Source: http://www.mospi.gov.in/cso
46 YOJANA August 2010
that is changing so fast. It also does not include services. In spite of this, India continues to use WPI for measuring inflation because there is only two week time lag in reporting WPI numbers whereas measuring the four kinds of CPI indices involves a huge time lag of about two months.
GDP Deflator:
The GDP deflator can be another means of measuring inflation. It is a measure of the level of prices of all new, domestically produced, final goods and services in an economy and is calculated as a ratio of Nominal GDP (GDP at current prices) to Real GDP (GDP at constant prices.) It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. It does not depend on a fixed basket of goods but covers the level of prices of an entire range of economic activities including domestically produced, final goods and services. The GDP deflator is calculated quarterly with a lag of two months since 1996. If the value of price deflator is 300 it means that the current-year price is three times the base year.
w P I I n f l a t i o n a n d G D P Deflator:
Table 5 shows the long term
relation between Inflation based
on CPI - IW, WPI and GDP Deflator
Suggestions
Reconstruct ion of wPI series: Series of goods which are used for WPI as representative should be revised . It should cover significantly higher number of commodities from both organised and unorganised sectors. There is also a need to supplement the new series of WPI with a service price index to improve its overall coverage. In addition to that, adoption of common base year for Gross Domestic Product (GDP) and WPI series would help to reduce gap of inflation data.
Comprehensive CPI:
A consumer pr ice index (CPI) is a measure estimating the cost of living conditions of different homogenous group of the population rather than the total population and is calculated on the basis of retail price changes of constant set of goods and services as per the spending pattern of the group of the population. However a wide based CPI for the country as a whole, including both goods & services, has greater relevance for monetary policy formulation.
It is advisable to implement the
suggestion given by the National
Statistical Commission in 2001
to form a single comprehensive
CPI by reshuffling the prevailing four CPIs. This would improve the
accuracy of computing inflation
data and help policy making and
track price movement. As per
IMF statistics only 24 countries
use WPI as measure of inflation, while 157 countries use CPI as a
measure of inflation as it catches the price change experienced by
the consumers. On this background
RBI had taken a step forward
and prepared a document on CPI
(Rural) and CPI (Urban) which
could be a representative CPI for
the country.
Conclusion:
The wholesale price index
provides an idea about the average
price level of goods traded in
wholesale market whereas the
consumer price index (CPI)
measures the final cost paid by
consumers. CPI inflation is more important from the point of view
of controlling inflation, especially in a country like India, where
the existence of the unorganized
sector and incidence of poverty is
reasonably high. Obviously, both
the indices have their own merits
and demerits. However, from the
conduct of monetary policy point
of view, right tracking of inflation for the country as a whole with
limited time lag is important. In
that sense CPI scores over WPI
that is why 157 countries out of
181 countries use CPI for tracking
inflation. Inflation figures quoted by government or RBI with regard to
WPI do not reflect the real picture - the real inflation as felt by the consumer would be significantly higher. q
(E-mail : [email protected])
Table-05: Long relationship of WPI Inflation, CPI-IW and GDP Deflator
Sr. No. Decades wPI GDP Deflator CPI-Iw
1 1981-82 to 1990-91 7.1 8.7 9.0
2 1991-92 to 2000-01 7.8 8.1 8.7
3 2000-01 to 2008-09 5.2 4.6 5.3
Source: http://www.rbi.in
YOJANA August 2010 47
Apart from personality
development of the volunteer, these projects seem to be economically
and socially viable, and can be encouraged as a
means for creating community assets
NSS for Social Asset Creation
COMMuNITy DEVElOPMENT
HE NATIONAL Service
Scheme was launched
b y t h e M i n i s t r y o f
Education and Youth
S e r v i c e s , G o v e r n m e n t o f
India in the year 1969-70 as a
student centered programme.
An associat ion of s tudents ,
irrespective of caste, creed,
colour, gender and politics, it
provides a common platform for
them to work with and among
people , to encounter socia l
realities, to develop a sense of
social and civic responsibility,
to acquire leadership qualities and democrat ic a t t i tude, to
develop competence required for group living and sharing of
responsibilities etc. It fosters
a creative interaction between
T
The author is Lecturer, P G Department of Commerce, P S M O College, Tirurangadi, Kerala.
institutions of higher learning
and the community.
As part of its activities, NSS
conducts a special camping
programme of about seven to ten
days in some adopted villages or
other areas. During this period
the programme officer and about
fifty senior volunteers camp
in the selected site and carry
on projects like construction,
repair and renovation of roads,
canals, dams, houses, water
reservoirs, play grounds, gardens,
etc. They also engage the local
people in discussions on topics
of current relevance, organize
talks, street plays and workshops
on issues relating to life style
diseases, yoga, palliative care,
entrepreneurial programmes,
AIDS awareness , and other
P V Basheer Ahammed
A STuDy
48 YOJANA August 2010
Table 1 : Profile of the sample unitsDistrict Name of College No. of NSS units unit Code
Kozhikode
Providence Women’s College 2 15, 116
zamorin’s Guruvayurappan College 2 18, 108
Govt. Arts & Science College 3 17, 107, 155
Farook College 3 21, 109, 140
Wayanad St. Mary’s College, S. Bathery 3 14, 159, 160
Malappuram
PSMO College, Tirurangadi 4 26, 74, 99, 131
MES College, Valancherry 3 91, 105,114
NSS College, Manjeri 2 29, 78
MEASS College, Areacode 2 73, 174
PalakkadNSS College, Ottappalam 1 36
Mercy College, Palakkad 2 6, 34
ThrissurChrist College, Irinjalakkuda 4 20, 49, 70, 147
MES Asmabi College, Vemballore 2 53, 95
Total 33
Table 2: Major Activities
Construction Projects
Items2004-05 2005-06 2006-07
kms. units engaged kms. units
engaged Kms. units engaged
Road 11 16 16 24 11.5 16
Check Dam 1 1 1
Water Reservoir (No.) 1 3
House (No.) 1 1 2 3
School Playground 2 5
Veg. Flower garden 2
Renovation Projects
ItemsNo. of units engaged
2004-05 2005-06 2006-07Canals 2 4 2
Roads 4 -- 4
Water tank, ponds, etc. 2 8 3
Premises of:
School 4
IPM 2 --
Juvenile Homes -- 2
Hospital (PHC) 2 2 2
Colonies 2
Panchayath Office 2
YOJANA August 2010 49
relevant issues. The programme
thus leads to creation of some
form of social asset .
A special camping programme
by one NSS unit costs the public
exchequer Rs.15000. With more than two million volunteers and
20,000 units in the country, the
total expenditure on this account
wi l l come to a round Rs .30
crores. The present paper tries
to assess the worth of the social
assets created by some of the
major projects (construction,
renovat ion and reclamat ion
works) done by selected NSS
units during their special camps
for three years in terms of cost
involved and benefit derived.
The study covers the special
camping projects of the NSS
un i t s under the Unive r s i ty
of Calicut, spread over five
districts – Kozhikode, Wayanad,
Malappuram, Pa lakkad and
Thrissur during the years 2004-
05, 2005-06 and 2006-07.
Table-1 shows the distribution
of sample units drawn from the
colleges in the five districts under
the jurisdiction of the University
of Calicut. Table-2 shows the
major projects undertaken by
these units.
In order to estimate the worth
of the assets generated, these
assets are presented in their
equivalent rupee terms, valued
on the basis of PWD schedule
of rates prevailing then. In the
case of construction of roads, the
earth work in hard soil is valued
under three segments – i .e. ,
Earth cutting @ Rs.756/10m3,
Earth filling @ Rs.1028/10m3
and Sectioning and consolidating
@ Rs.60.50/10m2. In the case of
renovation of old defunct roads,
they are valued at the rate of
sectioning and consolidation rate
only, i.e., @ Rs.60.50/10m2 (m3 =
length x width x height in metres,
m2 = length x width in metre).
In the case of water reservoir,
Table 3: Major Project – Construction of Road – 2004-05
Name of Colleges No. of units
No. of volun-teers
Length of roads in
kms
Estimated worth (Rs)
Cost involved15000pu
Benefit/ cost ratio
Incremental benefit/head
(Rs)
Farook College 3 120 2 2,95,740 45,000 6.57 2165(722%)
Govt. Arts & Science
3 131 2 3,07, 980 45,000 6.84 2051(684%)
NSS, Manjeri 2 100 2 2,91,660 30,000 9.72 2617(872%)
MES, Valanchery 3 150 1 1,56,030 45,000 3.47 740(247%)
PSMO, Tirurangadi 4 250 3.5 5,01,225 60,000 8.35 1705(568%)
NSS, Ottapalam 1 72 1 1,41,750 15,000 9.45 1669(556%)
Total 16 823 11.5 16,94,385 2,40,000 7.06 1759(586%)
50 YOJANA August 2010
Table 4 : Other Major Projects – 2004-05Name of College
No. of units
Nature of work Area Estimated worth of Asset
(Rs.)
Cost involved @ Rs.15000 pu
(Rs.)
Benefit/ cost ratio
Incre-mental
benefit (Rs.)
Providence
Women’s
College,
Calicut
2 Removal of weeds,
wastes and cleaning the
premises of Institute of
Palliative Medicine
10 Acres 60,000 30,000 2 : 1 129
(43)
Christ,
Irinjalakuda
4 Sectioning and
consolidation of surface
of old roads
4000
metres
72,600 60,000 1.21 : 1 63
(21)
St. Mary’s,
Sulthan
Bathery
3 Making water reservoir
for local people and
wild life
800 sq. metres
60,480 45,000 1.33 : 1 103
(34)
NSS,
Ottappalam
1 Construction of a tiled
house for a widow
500 sq.ft. 1,25,000 Nil* -- --
Cost of Asset created by
Volunteer input @ 40%50,000 -- -- --
MEASS,
Areacode
2 Renovation and
cleaning the surface of
canals
3000x1.5
metres
@ Rs.75/10m2
= 33,750
30,000 1.12 : 1 21
(7)
Total 12 2,76,830 1,65,000 1.68 : 1 115(38)
Figures in bracket indicate percentage incremental benefit per volunteer
Table 5 : Major Project – Construction of Road – 2005-06Name of College No. of units
engaged Length of
road in kms
Total Estimated worth (Rs.)
Govt. Expenditure @ 15000 per unit
(Rs.)
Benefit/ Cost ratio
Incremental benefit (Rs.)
Farook College, Calicut 3 2 2,87,580 45,000 6.39 : 1 1912(637)
Govt. Arts & Science, 3 1.5 2,13,645 45,000 4.75 : 1 1511(504)
St. Mary’s, Sultan Bathery 3 3.5 5,11,425 45,000 11.36 : 1 3110(1034)
NSS Manjeri 2 2.5 3,59,475 30,000 11.98 : 1 3295(1098)
MES Valanchery 3 1.2 1,95,038 45, 000 4.33 : 1 1000(333)
PSMO Tirurangadi 4 3 4,31,370 60,000 7.19 : 1 1857(619)
MEASS Areacode 2 .75 1,10,903 30,000 3.70 : 1 640(213)
Christ Irinjalakuda 4 1.5 2,21,805 60,000 3.70 : 1 809(270)
Total 24 16.00 23,31,241 3,60,000 6.48 : 1 1699(566)
Figures in bracket indicate percentage incremental benefit per volunteer
YOJANA August 2010 51
Table 6 : Other Major Projects – 2005-06
College No. of units
Nature of work Area Estimated worth of Asset
(Rs.)
Cost @ Rs.15000
per unit (Rs.)
Benefit/ Cost ratio
Incremental benefit (Rs.)
Providence
Womens
2 Removal of weeds,
wastes and cleaning
the premises of
Juvenile Home,
Vellimadukunnu
28 Acres 1,68,000 30,000 5.6 1749
(583)
zamorin’s
Guruvayura-
ppan
2 Renovation and
clearing the surface
of canal, Wyanad
3000 x
1.5 mtr.
33,750 30,000 1.13 63
(21)
Total 4 2,01,750 60,000 3.36 853(284)
Figures in bracket indicate percentage incremental benefit per volunteer
Table 7 : Major Project – Construction of Road – 2006-07
Name of College No. of units engaged
Length of road in
kms
Estimated worth (Rs.)
Govt. Expenditure @ Rs.15000
pu (Rs.)
Benefit / Cost Ratio
Incremental Benefit (Rs.)
Providence Women’s
College2 1 1,35,630 30,000 4.52
1224
(408)
Govt. Arts & Science
College3 2 2,79,420 45,000 6.21
2361
(787)
NSS Manjeri 2 2.5 3,61,515 30,000 12.05 3315
(1105)
MES Valanchery 3 1.5 2,34,045 45,000 5.201260
(420)
PSMO, Tirurangadi 4 2.5 4,02,315 60,000 6.71 1712
(571)
MEASS, Areacode 2 2 2,87,580 30,000 9.58 2117
(706)
16 11.5 17,00,505 2,40,000 7.09 1929
(643)
Christ, Irinjalakuda 4 4 72,600 60,000 1.21 63
(21)
Total 20 15.5 17,73,105 3,00,000 5.91 1541(514)
Figures in bracket indicate percentage incremental benefit per volunteer
52 YOJANA August 2010
it is valued at the hard soil
cutting rate, i.e., @ Rs.756/10m3.
Removal of weeds, wastes and
cleaning the premises, valued
at the rate of Rs.1.50 per square metre. Construction of tiled
house is valued at Rs.250 per sq. ft. and the volunteer contribution
in the form of labour is estimated
@ 40% of the estimated cost. Construction of concrete houses
are valued @ Rs.350 per sq.ft. and the volunteer contribution
@ 40% of the estimated cost. Renovation and cleaning the
surface of canals are valued at a
rate slightly higher than the rate
of sectioning and consolidation
of roads. i .e. , at the rate of
Rs.75/10m2.
Tables 3, 5 and 7 shows the
detail in case of road construction
for the years 2004-05, 2005-
06 and 2006-07 respectively
and Tables 4, 6 and 8 show the
same for other projects in these
respective years.
FINDINGS
The major findings of the
study are:
• In 2004-05, 16 units engaged in construction of village
roads with a total length
o f 11 . 5 k m s . T h e t o t a l
estimated worth of the asset
is Rs.16,94,385, leading to
a per unit contribution of
Rs.1,05,274. The benefit/
cost ratio is 7.06:1 and the
percentage increase in the
inc remen ta l bene f i t pe r
volunteer is 586%. 12 units were involved in other major
projects for 2004-05, the
total worth of assets created
was Rs.2,76,830, leading to
a per unit contribution of
Rs.23,069. Benefit / cost
ra t io 1 .68:1 , percentage
Table 8 : Other Major Projects – 2006-07
College No. of
units
Nature of work Estimated worth (Rs.)
Cost @ Rs.15000
pu
Benefit/ cost ratio
Incre-mental benefit
St. Mary’s, Sulthan Bathery
3 Construction of playground 4000 sq.m. cutting soil : 1000 sq.mts. @ Rs.756/10m3 + Sectioning 4000 sq.m. @ Rs.60.50/10m2 = 37800 + 24200
62,000/- 45,000 1.38 113(38)
Farook 3 Construction of two concrete houses @ 500 sq.ft. plinth area each, estimated cost Rs.350000, NSS input
1,50,000/- 45,000 3.33 771(257)
zamorin’s Guruvayurappan
2 Construction of a pond for water conservation 12m x 4m x 4m @ Rs.756/10m3
14,515/- 30,000 0.48 -163(-54)
Total 8 2,26,515/- 1,20,000 1.80 272(91)
Figures in bracket indicate percentage incremental benefit per volunteer
YOJANA August 2010 53
increase in the incremental
benefit is 38%.
• I n 2 0 0 5 - 0 6 , 2 4 u n i t s c o n s t r u c t e d n e w r o a d s
with a total length of 16
kms with estimated worth
of around Rs.23,31,241,
contributing Rs.97,135 per
unit. Benefit / cost ratio
6.48: 1, percentage increase
in the incremental benefit
per volunteer is 566%. For other major projects four
units contributed to an asset
creat ion of Rs.2 ,01,750,
r e s u l t i n g i n a p e r u n i t
contribution of Rs.50,438.
The benefi t /cost ra t io is
3.36:1 and the percentage
increase in the incremental
benef i t per vo lunteer i s
284%.
• I n 2 0 0 6 - 0 7 1 6 u n i t s c o n s t r u c t e d n e w r o a d s
of a total length of 11.5
kms, worth Rs.17,00,505,
contributing Rs.1,06,750 per
unit. 8 units created assets
worth Rs 2,26,515/-
• The government expenditure for sixteen special camps
comes to Rs.2,40,000 only
and hence, the overall benefit
/ cost ratio is 7.09:1. NSS
College, Manjeri has the
highest benefit/cost ratio
12 .05 :1 and Prov idence
Womens College, Calicut has
the lowest 4.52:1. The Christ
College, Irinjalakuda which
renovated old roads, has a
benefit / cost ratio of 1.21:1
as its valuation is at low rates,
compared to construction
works.
• The incrementa l benef i t per volunteer on an overall
basis is Rs.1,929 and the
p e r c e n t a g e i n c r e a s e o f
incremental benefi t over
cost per volunteer (Rs.300)
i s 6 4 3 % . T h e h i g h e s t incremental benefit is Rs.3315
(1105%) and lowest Rs.1224 (408%) for NSS College, Manjer i and Prov idence
Women’s College, Calicut,
respectively.
• The overall benefit / cost ratio of these projects is 1.80:1,
the highest being that of
Farook College 3.33:1 who
constructed two concrete
houses of 500 sq.ft. each and the lowest 0.48 : 1, that of
zamorin’s Guruvayurappan
College who constructed a
pond for water conservation
where the apparent worth of
the asset is calculated at low
rates when compared to other
construction works.
• T h e r e m a i n i n g u n i t s engaged in the renovation
and reclamation of ponds,
c o n s t r u c t i o n o f c h e c k
dams, cleaning of colonies,
workshop on jam and squash p r e p a r a t i o n , a w a r e n e s s
programmes, medical camps,
etc. These projects, due to
practical difficulties, are not
quantified in rupee terms.
Conclusion
National Service Scheme aims
at personality development of the
volunteer. Community service
is only a means by which the
volunteer acquires skills and expertise for the development
of his personality. Hence, it
is purely a student centered
programme where the major
focus is the student and his
personality and the benefits to
the society is only a by-product
of the process. Even so, the
study proves that the benefit
derived from the NSS projects
far outweigh the cost involved
in them. That is, apart from the
personality development of the
volunteer, these projects seem
to be economically and socially
viable, and can be encouraged as
a means for creating community
assets. q
(E-mail : [email protected])
54 YOJANA August 2010
The National Rural Employment Guarantee Scheme
has brought in a silent revolution in the rural areas
by providing stable employment to the
vulnerable and marginalised
Livelihood for the Marginalised
NREgS
HE MOST fundamental of all human rights is the right to life. Every person has the right to live a dignified life. A life of dignity cannot be ensured
by providing free food, clothes, medicine and other necessities but by providing a means of livelihood. The various employment generation programmes of the government, cu lminat ing in the present Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) is a recognition of this fact. The MNREG Scheme is the largest employment programme in the human history (Shah, 2008). Though the scheme was initially introduced in only 200 districts, it is now functioning in all the districts of the country. It has been introduced in a phased manner, phase-I, 200 districts (2006-07), phase-II, 130 districts (2007-08) and phase-III, all the remaining districts (April 2008).
I m p a c t o f N R E G S – A n Overview
The salient features of NERGS are livelihood security, right based
T
The author is Professor of Economics at Scott Christian College, Nagercoil
employment programme, demand driven, universal, participatory planning and implementation, good governance and more female oriented. The NREGS is providing livelihood security by providing 100 days of employment within 15 days of application to all people, who have applied for wage employment. If no work is provided within 15 days of application, the applicants will be eligible for unemployment allowance. The work should be given within 5 km radius from the applicant’s residence and the work site should have all basic facilities. The payment for the work must be made within 15 days. The workers are also eligible for medical aid.
The scheme has guaranteed wage employment to 4.47 rural households. During the past 3 ½ years 19.49 lakh works have been taken up under this scheme. The thrust areas of work under the scheme are water resource development and water conservation. It is, further, reported that 75 per cent of the works are irrigation related and so it will certainly enhance the productivity in agriculture.
J Cyril Kanmony
RESEARCh
YOJANA August 2010 55
The increase in productivity will eventually increase the dependency of people on agriculture and reduce the dependency on government sponsored employment schemes. It is also estimated that the additional flow of income is Rs.18,155 crore (Lakshman, 2009), (Prasad, 2009), (Roy, 2009), (Singh, 2009). Swaminathan (2009) points out that the employment generated is over 450 crore person days and the wage payment is over Rs. 35,000 crore while, Prasad, (2009) asserts that through this scheme, the government is pumping about Rs.30,000 crore every year into the rural economy Above all these, it is found that of these man days of employment generated, the major share is enjoyed by women and dalits and adivasis. The most benefited because of this scheme are the poorest and most marginalised communities particularly SC/ST or people below poverty line. The scheme has not only raised the scale of employment, but has also put an end to the exploitative practice of private contractors. India is experiencing employment growth after the phase of jobless growth during the 1990s only because of NREGS .Thanks to the programme, every week a huge purchasing power is being pumped into the rural economy. There an increase in the social capital as most of the work is directed towards assets creation It also increases saving of the people particularly the rural poor to a great extent.
According to Mathur (2007) 2.10 crore households were given employment to the extent of 90 crore person days in the year 2006. The total number of households sought employment was 2.16 crore. It means that 97 per cent of households which sought employment got wage employment on an average of 45 days in the year.
Khera and Nandini Nayak (2009) say 71 per cent of persons working under the NREG are SC/ST and 82 per cent are illiterate women against 52 per cent uneducated men. The minimum wages fixed in different states are different and so the wage payment under NREGS also differs from state to state. The highest wage, Rs.175 is paid in Mizoram. It is followed by Kerala, Rs.121, West Bengal Rs.104, Andhra Pradesh Rs.86 and Rs. 80 in Tamil Nadu .
Apart from these impacts the NREGS has also a strong positive impact on the social structure (Narayanan, 2008). High caste people are working along with dalits and tribals. They are working even in the lands of dalits as the land development works cannot be carried out in the lands of high caste people before the development works in the lands of dalits and tribes are exhausted. Thus, the National Rural Employment Guarantee Scheme not only provides livelihoods to the marginalised people but also
removes caste discrimination to a certain extent.
Performance of NREGS in Tamil Nadu and Kanyakumari District
In Tamil Nadu, 10 districts were covered with NREGS in the first phase and another 10 districts in the second phase. The remaining 20 districts including Kanyakumari district were covered in the third phase. The details regarding job cards issued, the person days of employment generated, total attendance, individuals employed and expenditure on water resources up to 01.03.2010 are given in Table No. 1
From the Table 1, it is seen that in Tamil Nadu, in total 1978.99 lakhs person days of employment were generated up to 01.03.2010. Of the total employment generated, 58.10 per cent is enjoyed by the SC/ST persons and women constitute 78.72 per cent. Certainly these are very encouraging aspects of the NREGS. However, only 7.68 per cent of the
Table 1:- Households, Individuals Registered and Individuals Employed in Tamil Nadu up to 01.03.2010
Category NumberHouseholds Demanded Employment 3616920
Households Provided Employment 3616920
Total Number of Households 10074512
Job Cards Issued 6212511(61.67%)SC/ST 2595065(41.77%)Person Days Generated 1978.99 lakhs
SC/ST 1149.77 lakhs (58.10%)Women 1557.91 lakhs (78.72%)Total Attendance (all) 1387.53 lakhs
Completed 100 Days 65.88 lakhs
Completed Above 100 Days 40.66 lakhs
Employment Completed 100 Days 132.79 lakhs
Total Availability of Fund 216824.88 lakhs
Total Cumulative Expenditure 138306.53 lakhs (63.79%) Expenditure on Water Resources 105958.21 lakhs (77.61%)
Figures in brackets are percentages to total.Source: www.nrega.nic.in, Tamil Nadu & Report, NREGS, Tamil Nadu – 2008
56 YOJANA August 2010
households have completed 100 days/above 100 days of work and only 63.79 per cent of the fund available is spent. Further, it is also estimated that 76.67 per cent of the total expenditure incurred is on water resources development and water conservation programmes. As a whole, the performance of the NREGS is good in providing employment and livelihood.
In Kanyakumari District NREGS has been implemented from April 2009 and very successfully so. The details regarding the expenditure made and households applied up to 01.03.2010 are given in Table 2.
Table No.2 shows that the job cards have been given to all those who registered for the wage employment. The share of persons
registered constitutes 20.71 per cent of the total population. It is a welcoming fact that 11,727 SC/ST persons and 46,792 minority persons have registered themselves under the NREGS. The respective percentage is 9.76 and 38.95. The percentage of SC/ST persons registered (9.76%) is more than the percentage of SC/ST persons to the total population (4.36%) while the percentage is less for minorities (44.47%). The number of women registered is 77,333. It constitutes 64.38 per cent of the total persons registered. The share of SC/ST women to total SC/ST persons registered constitutes 61.75, in absolute term it is 7,241.
T h e d e t a i l s r e g a r d i n g expenditure, works approved and completed, person days generated
and average wage paid are given in Table 3.
Table 3 clearly depicts that only 45.59 per cent of the total amount released is spent and only 30.74 per cent of the works sanctioned is completed so far. It is very important to indicate that the person days of employment generated in the district within one year and eleven months are 13,42,633. The average wage paid daily is Rs. 76 for the whole period. However, the average wage paid daily is only Rs. 73/- for the year 2009 and for the year 2010 (January 2010 to February 2010) it is Rs.88/-. From the facts and figures discussed above it is very clear that the National Rural Employment Guarantee Scheme has brought in a silent revolution in the rural areas by providing stable employment to the vulnerable and marginalised. In Kanyakumari District, it generated wage employment to the extent of 13,42,633 person days and on an average the number of days of works given in a year is 76 and the average wage paid is also Rs. 76/-. Thus, a person who works under NREGS is able to earn an income of Rs. 5776/- per annum. Certainly, it increases the standard of living of the marginalised people.
Though there are some defects in the implementation of the Rural Employment Guarantee Scheme, it helps to remove poverty from the rural areas, provides stable income to those who are ready to do manual work, grants some relief during the period of unemployment and under employment, avoids migration of workers from rural areas to town areas. In short, it is easy to infer that, the NREGS provides not only food security but also financial security to the rural masses particularly the poor and the marginalised. q
(E-mail : [email protected])
Table 2:- Households Total and Registered, Individuals Total and Registered in Kanyakumari District up to 01.03.2010
Category Number Total No. of Households 158889
No. of Households Registered 90053 (57%)Total Population 580021
No. of Persons Registered 120128 (20.71%)SC/ST Persons Registered 11727 (9.76%)Minorities Registered 46792 (38.95%)Women Registered 77333 (64.38%)SC/ST Women Registered 7241 (61.75%)Job Cards issued 120128 (100%)
Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010
Table 3:- Amount sanctioned and spent, works carried out, person days generated and average wage paid in
Kanyakumari District up to 01.03.2010Category Amount/Number
Released Rs.2225.81 lakh
Amount Spent Rs.1014.69 lakh (45.59%)Works Approved 462
Works Completed 142 (30.74%)No. of Persons days Generated 1342633
Average Wage Paid Rs. 76/-
Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010
YOJANA August 2010 57
Conservation of biodiversity is the
need of the hour for food, fodder, fuel,
timber and medicinal requirements
and also for the agricultural production,
ecological balance, and mitigation
of environmental pollution
Biodiversity and its Conservation
ENVIRONMENT
I O D I V E R S I T Y O R
Biological d ivers i ty
refers to the variety and
variability among genes,
species and ecosystems.
There are three levels of biodiversity
namely genetic diversity, species diversity and ecosystem diversity.
Genetic diversity is the genetic
variation within species, both
among geographically separated
populations and among individuals
within single population. This
genetic diversity is the result of
different modes of adaptation in
different habitats, which provides
organisms and ecosystems with
capacity to recuperate after change
has occurred. Species diversity
denotes the variety of species
on earth from acellular viruses
to single celled microorganisms
like bacteria, mycoplasmas,
actinomycetes etc. to multicellular
plants and animals. For proper
functioning of particular community
B
The author is an Ecologist associated with Department of Botany, Banaras Hindu University, Varanasi.
or ecosystem the species diversity
is very essential. In a community
the survival of all species are
interrelated to the existence of
other living organisms. Ecosystem diversity refers to variations in the
biological communities in which
species live, the ecosystem in which
communities exist and interactions
among these levels. Ecosystem
diversity is reflected in diverse
biogeographic zones such as lakes,
deserts, coasts, estuaries etc.
Significance of biodiversity
Biodiversity plays a crucial role
in the life of man. Biodiversity
fulfils the need of food, fodder,
fuel, timber and medicines. It is
estimated that more than 25 per cent
of all medicines available today are
derived from tropical plants. Plants
are important source of grazing for
cattle and other herbivores. Flesh
of animals is an important source
of food for human beings.
Arvind Singh
fOCuS
58 YOJANA August 2010
Biodiversity helps in increasing
the agricultural production and
also in developing disease resistant
varieties. It was evident in the early
1970s when an epidemic called
grassy stunt disease of rice caused
by virus destroyed more than
160,000 hectares of the crop in Asia.
A resistance gene borrowed from
wild rice variety of Central India
named Oryza nivara controlled
the disease. It was the only known
genetic source of resistance to the
grassy stunt disease.
Biodiversity plays an important
role in protecting the water
resources. The natural vegetation
cover in water catchment helps in
maintaining hydrological cycles,
regulating and stabilizing water
runoff and acts as buffer against
natural disasters like flood and
drought. Vegetation facilitates
the percolation of water into the
ground, thus helping in maintenance
of ground water table.
T h e s t a n d i n g m a n g r o v e
vegetation along the sea coast
serves as a shield against natural
disasters like cyclone and tsunami.
Biodiversity plays significant role in soil formation and its protection.
The vegetation improves the soil
structure, increases the water
holding capacity of the soil and also
raises the nutrient level of the soil.
Biological diversity plays
important role in nutrient recycling.
It is the sink and source of nutrients.
Microbes in the soil, facilitating the
nutrient return to the soil decompose
the dead plant parts and animals.
Biodiversity helps in elimination
of environmental pollut ion.
Breakdown of the pollutants and
its absorption is a feature of many
plants. The plant Vinca rosea
(Sadabahaar) has the ability to
degrade Trinitrotoluene (TNT)
like explosive. Several strains of
microorganisms have been found
useful for the purpose of cleaning
up toxic wastes. Some plant species
thrive on soils that are rich in heavy
metals. Several plants have the
ability to hyperaccumulate metals
like copper, nickel, cadmium,
chromium, cobalt and mercury.
They can be planted on toxic waste
sites where they remove the toxic
metals from the soil. The Indian
mustard (Brassica juncea) has the
ability to absorb cadmium and
chromium from the soil. Aquatic plants like Eichhornia crassipes, Lemna minor and Azolla pinnata are
used for disposition and extraction
of metals like copper, cadmium,
iron and mercury from water.
Forests comprising diverse
group of plant species are the major
sinks of carbon dioxide. The latter
serve as a green house gas causing
global warming. Thus ecologically
diverse forest ecosystems help in
mitigation of global warming.
Biodiversity provides stability
to the ecosystem and maintains
the ecological balance. Plants and
animals in ecosystem are linked
to each other through food chain
and food web. The loss of one
species in the ecosystem affects the
survival of other species. Thus the
ecosystem becomes fragile.
Ecologically diverse forest
ecosystems are home of wild-life
and tribals. The forest of surrounding
areas fulfils all the needs of the tribals. Due to constant association
with the forest environment tribals
have evolved a curious knowledge
of plants and their utility for them.
Many of the uses for which plant
tribals employ products are not
known outside their restricted
community.
Biodiversity of India
With 2.4 per cent of the world’s
land, India contributes 8 per cent
to the world diversity. It has,
therefore, been designated as one
of the 12 megadiversity regions
of the world. India is recognized
as a country uniquely rich in biodiversity because of its tropical
location, varied physical features
and climate. Indian biodiversity is
estimated to be over 45,000 plant
species contributing 8 per cent of
the world’s flora and about 80,000 animal species constituting 7 per
cent of the world’s fauna of which
33 per cent flora and 62 per cent fauna are endemic (found nowhere
else in the world) to India. Among
the plant species, the flowering
plants have a much higher degree of
endemism, a third of these are not
found elsewhere in the world. Of the
estimated 45,000 species of plants
about 5,000 species of algae, 20,000
of fungi, 1,600 of lichens, 2,700 of
bryophytes, 600 of pteridophytes
and 15,000 of flowering plants have been identified and described so far. Indian flowering plants represent 15 per cent of the flowering plants
YOJANA August 2010 59
of the world. Among flowering
plants orchids have high species
diversity (1,082) found mainly in
North-eastern Himalaya.
Apart from the high biological
diversity in Indian wild plants
there is also great diversity of
cultivated crops. The traditional
cultivar includes 30,000 to 50,000
varieties of rice and a number of
cereals, vegetables and fruits. The
highest diversity of cultivars is
concentrated in high rainfall areas
of the Western Ghats, Eastern
Ghats, Northern Himalayas and the
North-Eastern hills.
As far as faunal diversity is
concerned, India is home for 67,000
species of insects (including 13,000
butterflies and moths), 4,000 of
molluscs, 6,500 other invertebrates
2,000 of fishes, 1,200 of birds, 540 of reptiles, 200 of ambhibians,
and 500 of mammals, in which 62
per cent ambhibians and 32 per
cent reptiles are endemic to India.
Among lizards, of the 153 species
recorded 50 per cent are endemic.
Among the larger animals 79
mammals, 44 birds, 15 reptiles
and 3 amphibians are threatened
today and 1,500 plant species
belong to endangered category
(the species which are in danger of
extinction).
Indian sub-continent alone has
given the world nearly 320 species
of wild animals, whose centre
of origin lies in India. Livestock
diversity is also high i.e. 27 breeds
of cattle, 40 breeds of sheep, 22
breeds of goats and 8 breeds of
buffaloes are available in the
country. However, today many of
these are standing on the verge
of extinction due to the increased
use of exotic breeds. Jersey and
Holsteins have largely replaced
indigenous breeds of cattle.
India has contributed 167 species
of cultivated plants along with their
320 species of wild relatives and
land races and several domestic
animals. Rice, sugarcane, jute,
jackfruit, ginger, turmeric, black
pepper, bamboos, camel, mithun
and water buffalo have originated
in India.
India is extremely rich in
Ecosystem diversity as well.
According to Wildlife Institute of
India the country has 10 biographic
zones: (i) Trans-Himalayas (ii)
Himalayas (iii) Desert (iv) Semi-
arid (v) Western Ghats (vi) Deccan
(vii) Gangetic Plain (viii) North-
East India (ix) Islands; and (x)
Coasts
The North-East, the Western
Ghats, Western and North-Western
Himalayas are rich in endemism.
At least 200 endemic species are
found in the Andaman and Nicobar
islands.
Hot spots are the regions of
high biodiversity with massive
threat to flora and fauna due to
high biotic pressure. Of the 18
biodiversity hot spots of the world 2
belong to India. Western Ghats and
Eastern-Himalayas are the hot spots
of biodiversity in India.
The Andaman and Nicobar
islands are extremely rich in
species, and many subspecies of
different animals and birds have
evolved here. The islands alone
have as many as 2,200 species of
flowering plants and 120 species of ferns. Out of 135 genera of
land mammals in India 85 (63%) are found in the north-east. The
north-eastern states also have 1,500
endemic plant species.
A m a j o r p r o p o r t i o n o f
amphibian and reptile species,
especially snakes, is concentrated
in Western Ghats, which is also
habitat for 1,500 endemic plant
species. The Coral reefs around the
Andaman and Nicobar islands, the
Lakshadweep islands and the Gulf
areas of Gujarat and Tamil Nadu
are biologically diverse ecosystems
and are often called ‘tropical rain
forest’ of the ocean.
Causes of loss of biodiversity
The fundamental causes of
biodiversity loss include:
1. Unsustainably high rates of
human population growth and
natural resource consumption.
2. Introduction of exotic species
associated with agriculture,
forestry and fisheries.3. Economic systems and policies
that fail to value the environment
and its resources.
4. Inequity in ownership and access to natural resources,
including the benefits from
use and conservat ion of
biodiversity.
5. Inadequate knowledge and inefficient use of information.
60 YOJANA August 2010
6. Legal and institutional systems
that promote unsustainable
exploitation.
Conservation of Biodiversity
Conservation of biodiversity
refers to planning and management
of biological resources in a way
so as to secure their wide use and
continuous supply, maintaining
their quality, value and diversity. The World Conservation Strategy
has suggested the following steps
for biodiversity conservation:
1) Efforts should be made to
preserve the species that are
endangered.
2) Prevention of ext inct ion
requires sound planning and management.
3) Varieties of food crops, forage
plants, timber trees, livestock,
animals and their wild relatives
should be preserved.
4) Each country should identify
habitats of wild relatives and
ensure their protection.
5) Habitats where species feed,
breed, nurse their youngs and
rest should be safeguarded and
protected.
6) International trade in wild plants
and animals be regulated.
For the conserva t ion o f
biodiversity the immediate task will
be to devise and enforce time bound
programme for saving plant and
animal species as well as habitats
of biological resources. Action plan
for conservation, therefore must be
directed to :
i) Inventorization of biological
resources in different parts of
the country including the island ecosystems.
ii) Conservation of biodiversity
through a network of protected
areas including National Parks,
Sanctuaries, Biosphere reserves,
Gene Banks, Wetlands, Coral
reefs etc.
iii) Restoration of degraded habitats
to their natural state.
iv) Reduction of anthropogenic
pressure by cultivating the
species elsewhere.
v) Rehabilitation of the threatened
and endangered species.
vi) Protection and sustainable use
of genetic resources/germplasm
through appropriate laws and
practices.
vii) Conservation of microbes
which help in reclamation and
rehabilitation of wastelands and
revival of biological potential
of land.
viii)Control of over-exploitation
t h rough Conven t ion on
I n t e r n a t i o n a l Tr a d e i n
Endangered Species (CITES)
and other agencies.
ix) Rehabil i ta t ion of t r ibals
displaced owing to creation of
protected areas.
x) Protection of domesticated
plant and animal species in
order to conserve indigenous
genetic diversity.
xi) Multiplication and breeding
of threatened species through
modern techniques of tissue culture and biotechnology.
xii) Maintenance of corridors
between different nature
reserves for the possible
migra t ion of spec ies in
response to climate, or any
other disturbing factor.
xiii)Restriction on the introduction
of exotic species without
adequate investigation.xiv)Suppor t fo r p ro tec t ing
t r a d i t i o n a l i n d i g e n o u s
knowledge and skills for
conservation.
xv) Discouragement of monoculture
plantations.
There are two main categories
of biodiversity conservation:
Ex situ conservation and In situ conservation:
1. Ex situ conservation : This
is conservation outside their
habitats by perpetuating sample
population in genetic resources
centres, zoos, botanical gardens,
culture collection etc. or in the
form of gene pools, and gamete
storage for fish; germplasm
banks for seeds, pollen, semen,
ova, cells etc. In this type
of conservation, plants are
maintained more easily than
animals. Seed banks, botanical
gardens, pollen storage, tissue
culture and genetic engineering
have been playing important
role.
India has done commendably
well as far as ex situ conservation of
crop genetic resources is concerned.
Gene banks have collected over
34,000 cereals and 22,000 pulses
grown in India. It has also taken up
such work on livestock, poultry and
fish genetic resources. However, there is need to develop facilities for
YOJANA August 2010 61
long and medium term conservation
through :
i) Establishment of Genetic
Enhancement Centres for
producing good quality of seeds.
ii) Enhancement in the existing
zoos and botanical garden
network.
iii) Seed-gene banks.
vi) Tissue culture gene banks
v) Pollen and spore banks
vi) Captive breeding in zoological
gardens; and
vii) I n v i v o a n d i n v i t r o
preservation
2. In situ conservation : This is
the conservation of genetic
r esources th rough the i r
maintenance within natural or
even human made ecosystem
in which they occur. This type
includes a system of protected
areas of different categories,
managed wi th d i ff e ren t
objectives to bring benefit to the society. Strict Nature Reserve/
Wilderness Area, National
Parks, National Monuments/
Natural Landmark, Habitat/
Species Management Area,
Protected Landscapes and
Seascapes, Managed Resource
Protected Area, Wildl ife
Sanctuaries and Biosphere
Reserves belong to this type of
conservation.
Protected Area Network in India
The protected areas in India
includes National Parks, Wildlife
Sanc tuar ies and Biosphere
Reserves.
National Parks : These are
areas dedicated to conserve the
scenery, natural objects and the
wildlife therein. In these areas,
all private rights are non-existent,
forestry operations and grazing of
domestic animals are prohibited.
Certain parts of the parks are
developed for tourism, enjoyment
and study in such a way that it will
not disturb or scare the animals. The
boundaries of the National Parks
are circumscribed by legislation.
There are 89 National Parks in
India, occupying nearly 4.1 million
hectares (1.25%) of the land area of the country.
Wildlife Sanctuaries : These are
dedicated to protect the wildlife,
and their boundaries are not limited
by state legislation. In a sanctuary,
killing, hunting or capturing of
any species of birds and mammals
is prohibited except by, or under
the control of the highest authority
in the department responsible
for management of a sanctuary.
Forestry and other usages are
permitted to the extent that they do
not adversely affect the wildlife..
India has 500 wildlife sanctuaries
occupying about 12 million hectares
(3.6%) of land area of the country.
Biosphere Reserves : These
are multipurpose protected areas
which are meant for preserving
genetic diversity in representative
ecosystems by protecting wild
populations, traditional life style
of tribals and domesticated plant/
animal genetic resources. Each
biosphere reserve has following
zones:
i) Core zone : where no human
activity is allowed.
ii) Buffer zone : Limited human
activity is allowed.
iii) Manipulation zone : Human
activity is allowed but ecology is
not permitted to be disturbed.
iv) Restoration zone : Degraded
area for restoration to natural
or near natural form.
Nilgiri Biosphere reserve was
the first biosphere reserve of India established in 1986. Today there
are 15 Biosphere Reserves in India,
three of which i.e. Sunderban,
Gulf of Mannar and Agasthymalai
Biosphere Reserves have been
improved as World Biosphere
Reserves by United Nations
Educational, Scientific and Cultural Organization (UNESCO).
Conclusion
In a biodiversity rich developing
country like India the fast growing
human popu la t ion has pu t
tremendous pressure on biological
resources. Hence unsustainable
use of the biological resources has
resulted in the loss of biological
diversity of the country. Besides
this, introduction of exotics have
also substantially contributed to
the loss of biological wealth of the
country. Therefore, conservation of
biodiversity is the need of the hour
not only for the fulfillment of food, fodder, fuel, timber and medicinal
requirements but also for the enhanced agricultural production,
ecological balance, mitigation of
environmental pollution and natural
calamities. q
(E-mail : [email protected])
62 YOJANA August 2010
Retrofitted Car for the Physically Challenged
ShODh yATRA
UJIB KHAN, born in January 1974, is an automobile mechanic f r o m J a i p u r . A childhood attack of
polio has left his lower limbs weak and only partially functional. Being handicapped himself, he has encountered problems that any disabled person faces, when it comes to mobility and has developed a technique to retrofit any car with attachments, making it disabled friendly.
Mujib faced a tough childhood due to his disability, but he was not a man to sit at home and rue his fate.
In the 1990s, he started his business of making bedsheets on order and selling them to exporters.
As the export market became dull, and objections rose over use of certain dyes in the material, he had to change his line of work. With his keen interest in mechanical things, he then started a scooter and motorcycle-repairing workshop. In
M this small 5’ by 5’ workspace, he did all types of work on two wheelers including repairing, tinkering and painting.
It was in this workshop where, after a lot of trial and error, he developed the hand-operated car and showed disabled people the way to be independent. This made Mujib a hero of sorts and a role model for the youngsters in his area. People watch in disbelief as they see Mujib, stop and get out of his car on crutches. It is difficult for them to imagine a man with impaired limbs, drive on the main highway!
Genesis
Though they had a Maruti van at home, which was used by his father and brother, Mujib regretted the fact that due to his disability he could not drive around. Hiding from the family, he started his work on the car. After initial experimentation, he attached a rod to be able to operate brake and accelerator and drove the car in the absence of his parents.
The principle consists of
modifying the driving actions so that the controls are transferred
to hand by use of leverage, wires
and linkage mechanism
YOJANA August 2010 63
Once he had completed his initial modification, he slowly started to learn to drive the vehicle. In about a couple of month’s time, he had perfected his driving. No body helped him at any stage and he learnt all by himself. Then he took his van to his workshop to incorporate a system wherein both normal and modified mode of driving could be fitted.
He worked on it for six months, still the modifications in the car were looking like jutting intrusions and not blending with the vehicle dashboard, facia and controls. However, slowly people started acknowledging his efforts, the process of evolution continued, and he started making the attachment commercially.
After modifying dozens of car, he at last became successful in developing such a retrofit, which perfectly blended with the car interiors.
He modified the existing Maruti 800, Mahindra Scorpio, etc. to make it suitable for people with lower limb impairments. The modifications were made in brakes, clutch and accelerator.
All these controls were modified in such a way that hands can operate these.
For the person with one leg, the clutch remains at its original position while the other controls are modified to be operated by hands.
These modifications were made in such a way that a normal person could also use the cars in the conventional fashion.
Innovation
The innovation lies in the modification to accelerator, brake and clutch arrangement for operation by hand. Comfort, simplicity and ease of operation are other features embedded in the controls.
There are references in literature for modifications in cars to suit handicaps. Most of them have the telescopic mechanical members for actuating brake and accelerator pedals. Mujib has used parallel system for hand-operated controls, which enhances safety.
The principle consists of modifying the driving actions so that the controls are transferred to hand by use of leverage, wires and linkage mechanism.
Brake pedal is activated either by mechanical arrangement made of linkages or by using an additional hydraulic cylinder arrangement.
Using the push-pull type switch, installed on the dashboard, the accelerator gets activated through a wire connecting it to the engine.
The clutch wire is connected to a semi circular hand steering element, which is connected through the steering assembly to the clutch plate to operate the clutch.
Currently the design is adapted for Scorpio and Maruti, and has to be standardized for any other vehicle. The innovator wants to modify the kit to meet the needs of physically challenged users with one hand and one leg and reduce the cost.
This kit is especially important, as many car companies have discont inued the expensive custom solutions that they had earlier introduced for physically challenged people.
Mujib works on a single car at a time and it takes him around 3-4 days to work on it. The price of attachment varies from model to model. The kit for a Maruti 800 costs around Rs. 10,000 while a similar one for a Honda City could cost anywhere between Rs. 15000-20000.
His first commercial kit was made for Mr. Chandra Pal Singh, SMS Hospital, Jaipur in the year 1995, who was really satisfied with his work and helped him get orders to modify another 15-20 cars. Now after modifying around 70-80 cars, his kit has blended ubiquitously with the existing car interiors like an ‘invisible presence’ in the cars that help physically challenged people with
non-functional limbs. q
(E-mail : [email protected], www.nifindia.org)The modification to accelerator, brake and clutch arrangement for operation by hand.
64 YOJANA August 2010
They will go on to various fields and professions and reflect what education really
signifies, a journey from darkness
to light
Education for All : A Lesson from Jagjagi Kendras
BEST PRACTICES
HILE RTE is poised to make education universally accessible to all sections of society, the Jagjagi Kendras
in Sitamarhi district of Bihar, set up under Mahila Samakhya Programme as a part of the Bihar Shiksha Pariyojana stands out as a precursor.
It arose as a response to the situation on the ground, where hundreds of little girls were simply left out of the school system. The reasons were stero-typical, an unholy mix of poverty and the entrenched mind-set which sees girls’ education as totally dispensable, probably antithetic to their only perceived role in society, as home-makers. There are today some 230 Kendras across the 13 blocks in Sitamarhi, practically in each village, bringing the light
of knowledge through Jagjagi,
literally meaning the twinkling of lights!
wSujata Raghavan
The Kendras do not have a building, which in a sense opened up doors within the community for them. Often it would be a Panchayat Bhavan, or someone’s home or simply an open safe space. This very naturally led to a sense of ownership and involvement of the community, taking the learning in the Jagjagi Kendras beyond, to actually chip away at old prejudices and medieval mindsets.
The Kendras are entitled to receive a fixed amount under various heads from the Bihar Shiksha Pariyojana. A one-time payment of Rs.2075 to cover ‘infrastructure’ costs like ‘durries’, glasses, water jugs; another yearly amount of Rs.3075 for running costs of educational aids like blackboard, chalk, colour pencils and chart paper. The teacher, one per Kendra is entitled to Rs. 1,000/- . Within this princely amount, the kendras have functioned and made optimum use of not only their resources
The author is Manager, Programs & Editor, Charkha Features.
YOJANA August 2010 65
but also an intrinsic creativity,
which marked their approach to
education.
The Jagjagi Kendra is unique in a sense; it did not suffer from
any grandiose vision or plans, but
addressed the needs of girls who had
crossed their formative childhood
years without basic schooling. Girls
whose parents, mostly agricultural
labourers did not pause to think
before condemning them to a life
of domestic chores, looking after
younger siblings, cutting grass and
tending to cattle. While the boys
invariably were encouraged to go
to school and there are several
primary and middle schools in the
area, it was common to see girls
reaching adolescence, unlettered
and growing much like the wild
grass around their village.
In s t ead o f adop t ing the
c o n v e n t i o n a l a p p r o a c h t o
teaching, these Kendras developed
an ‘organic’ way which would
link learning with the natural
environment of these girls. This
was actually a finely evolved
system but broken down to words,
symbols, associations and linkages
with common everyday things in
their lives. A creative combination
of learning by alphabet and by
association. For instance the term
“ ghar parivar”. Literally it means
“ home-family”, figuratively it
denotes a somewhat larger concept
of rules of the household, authority
of elders, role of each member,
coexistence, mutual respect as part
of the learning. The girls are taken
through this, through interactive
sessions to provoke response.
At a more basic level, the actual
term “ghar parivar” is taught as
alphabets, each of the starting
alphabets like ‘g’ and ‘p’ are taken
up to make other words, again with
an active participation by the girls.
In essence, learning is imbibed
by correlating it with their lives,
it becomes a discipline or study,
which corroborates or strengthens
what they already know.
The beauty of this form of
teaching lies in the fact that it is
not based on some esoteric or
unviable principles which exist in a
vacuum but seeks very concertedly
to mainstream the girls into the
education system. The system
takes in these girls from literally
zero and to the level of Class V,
after which they have acquired the knowledge and skill required for entering Middle School.
Renu Kumari of Ashogi Got
village, now 18 years old, is a living
testimony to how this actually
works. One of 6 siblings of Ram
Bharose, who used to works as an
agricultural labourer, little Renu’s
education simply did not figure in the family’s priorities, until a day
when she was 12 years old, another
village girl who had joined the
Jagjagi Kendra excitedly shared her
experience and as only children can
do, urged her parents to allow Renu
to join. Initially both these girls
took Renu’s mother to the Kendra
and after convincing her, worked
on the brothers and father, all who
were ranged against the very idea
initially. However they too relented
and a brilliant new chapter unfolded
in Renu’s life, the darkness of
ignorance slowly yielding way to
the lamp of knowledge.
A promising student, Mahila
Samakhya program coordinators
nurtured the spark in Renu. She
was given the task to supervise the
Mid Day Meal schemes running in
village schools. Today Renu is in
the last year of school and her eyes
are set on acquiring a BA degree and then sitting for the Railway
exams or taking to teaching. Today
she is the only educated person
in her family. The respect that is
accorded to her, the responsibilities
she undertakes in all family matters
is of a value that stems only from
education.
R e n u a n d h u n d r e d s o f
little girls in Sitamarhi live a
transformed life, they have an
identity, which allows them to
craft their lives and bring about
change in their environment. It
is through them, that the role
of Jagjagi Kendras and indeed
the vision of Mahila Samakhya
shines through. According to Renu
“Mahila Samkhya has opened up
the path of learning for me. I have
the desire and will to stand on my
own feet now” .
The Jagjagi alumni is also doing
the institution proud. The girls are
enrolling for B.A, M.A after passing
out of the school system, the entry
into which it was unthinkable
left to their natural environment.
They will go on to various fields and professions and reflect what education really signifies, a journey from darkness to light. It is also in a
sense a journey from exclusion and
deprivation to being masters of one’s
own destiny. q(Inputs Lata Kumari, Sitamarhi, Bihar)
Charkha Features
66 YOJANA August 2010
DO yOu KNOW?
what is the objective of the unique Identification Project ?
Establishing one’s identity
is a major problem that people
face in India. As on date , there
is no single document that can be
used for identifying a person and
people are forced to carry multiple
documents to be used for different
purposes. Thus every time you
wish to avail of a service like
opening a bank account, obtaining
a passport, mobile connection etc
you are forced through a rigmarole
of providing different sets of
identity documents. Further, the
present sets of identity documents
being used today do not provide
migrants with a mobility of
identity, nor do they include the
poor and marginalized people.
The UID project aims to provide
each person in the country with a
unique identification number which will become a single source
of verifying his identity. This
would not involve issue of any
identity card. The basic identity
of a person will be linked to his
biometrics and stored in the UID
database. Whenever there is a
need to establish the identity of the
person, the same can be provided
through his UID through an online
authentication process.
will it be compulsory to get a uID number ?
It will not be compulsory to
get a UID number, but certainly
uNIquE IDENTIFICATION PROJECT
most beneficial. Any person
who is a temporary or ordinary
resident of India is eligible for,
and should get a UID number as
this would spare them the hassle
of repeatedly providing supporting
identity documents each time they
wish to access some service. The
UID will also facilitate entry
for poor and underprivileged
residents into the formal banking
system, and the opportunity to
avail services provided by the
government and the private sector
and also give migrants mobility
of identity.
How will the uID database be created ?
Creation of the UID database,
wi l l involve a network of
institutions at largely three levels.
At the point of first public interface there will be Enrolling Agencies
who will enrol people into the UID
database. These Enrolling Agencies
will be monitored by a network of
Registrars which would include
government and private sector
agencies who already have the
infrastructure for public interface
for eg banks, insurance agencies,
LPG distribution companies,
NREGS etc. Outreach Groups
working among women, children,
underprivileged persons etc will
also be engaged. At the central
level there will be a Central Identity Data Repository which
will manage the central data and
the network of Registrars.
How will a uID number be issued ?
A resident will first have
to apply before an Enrolling
Agency and submit the required form, with information asked
for, documents, photograph and
biometric elements like all ten
fingerprints, both iris scans. This information will be sent through
the Registrar to the UID central
database. There it will go through
a process of de-duplication. This
means that if he will be issued a
UID number only if his details
are not already in the database.
If his details are already there
in the database, his application
will be rejected. De-duplication
makes his UID number really
unique and also serves to prevent frauds. In case wrong information
is fed into the data base or a
person wants to change some
information about himself, this
will have to be done in accordance
with the laid down procedure.
The policy will also take into
consideration disabled persons
and the biometric standards
prescribed will ensure that these
groups are not excluded. In the
case of people without hands/
fingers only photo will be used for identity determination and
there will be markers to determine
uniqueness. Children will be required to get their biometric information updated every five
YOJANA August 2010 67
years till they are 18 when their
biometrics stabilize.
How will authentication be done ?
The process would provide
for an online authentication of
the biometrics of the person. A
one to one online match will be
run between the biometrics of
the person and his biometrics as
present in the UID database. The
reply to an authentication process
will be given in a “Yes” or “No”.
How will inclusion of the underprivileged be ensured under the project ?
Inclusion of the underprivileged
is one of the major objectives of
the UID project, as it is these
persons who find it most difficult to prove their identities and are
forced to forego benefits and
subsidies. To ensure that every
such needy person gets a UID
number the project will work
through its network of registrars
who already have a presence at local
levels and have the infrastructure
for public interface. In addition
the project would be involving
outreach agencies like civil society
working among women, children
and underprivileged sections of
the society.
How secure would the database be?
The UID database will be
guarded both physically and
electronically by a few select
individuals with high clearance.
It will not be available even for
many members of the UID staff
and will be secured with the best
encryption, and in a highly secure
data vault. All access details will
be properly logged.
what is the institutional set up under which this project is being implemented ?
The government has constituted
a Unique Identification Authority of India as an attached office
under the Planning Commission.
The Authority is headed by
Shri Nandan Nilekani, its first
Chairman. The Authority will
develop and implement the
legal, technical and institutional
infrastructure for the project. q
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Fax : 26175516Also ensure that it is drawn in favour of ADG (I/C)Publication Division, Ministry of Information and
Broadcasting, New Delhi.
68 YOJANA August 2010
NEw GERM PLASM TO INCREASE SAFFRON CuLTIVATION IN VALLEY
Concerned over decline in area and production of saffron in the Valley, the government is contemplating introduction of new germ plasm to deal with the problem. According to Official sources in past ten years there has been steady decline in saffron production in the Valley. In 1998
the crop was grown on 4161- hectares which came down to 2880- in 2002. The production in 1998 was 65.25 quintals. Interestingly, in 2004 while the area under saffron was increased to 3025 hectares and the production didn’t rise beyond 48.34 quintals. In 2008-09 the area under saffron cultivation was 2667 hectares and the production was 56.13 quintals. The yield rate of saffron has been highest in 2007 at 3.75 kg per hectare.
Officials attribute the decline in saffron production and cultivation to lack of adequate irrigation facilities and increasing diversion of agricultural land to urbanization and industrialization particularly in the Valley’s saffron belt in Pampore. Besides, monoculture of the same germ plasm for centuries, poor cultural practice, reluctance of saffron growers of investment in improving their own infrastructure facilities, unprecedented drought like conditions from 99 to 2002-03 and in 2008-09 and incidence of corm rot disease have led to decrease in the production and apathy of growers towards its cultivation.
A plan has been prepared to increase the production and the farmers would be given seeds, fertilizers, borewells for irrigations, the plan has been prepared by the Agriculture Department in collaboration with the Sheri Kashmir University of Agriculture and Sciences. The government would try to fix the problem by replacing the existing corms through the introduction of a new variety of germ plasm. The world’s best saffron is grown in Pulwama and Budgam districts of the Valley. In Jammu its cultivation is limited to district Kishtwar in Chenab Valley. q
J&K WINDOW
J&K uSHERS IN DAwN OF CLOuD REVOLuTION
Private companies in India may have lagged behind in adopting cloud computing. So it's the government now which has decided to act as a beacon. In one of the first cloud pilots in the country, Jammu & Kashmir has successfully used computing services offered by Madhya Pradesh to roll out citizen
services within 60 days at zero initial cost. If two or more states start sharing IT infrastructure, it may save the exchequer almost 50% of the Rs 1,378 crore allocated for state data centre projects. The centre is pushing other states too to use the cloud model which enables sharing of resources (like software and hardware) already possessed by one state with others through a pay per use model.
In one of the first pillots, the J&K government is all set to successfully roll out its ration card and recruitment services automation from a data centre based in Madhya Pradesh, in a few days. The pilot spanning 60 days has been completed successfully and MP will get revenues from J&K on a per transaction basis. According to the ministry of IT and Communications, Cloud services are going to become mainstream, and the ministry is encouraging other states to share applications and data centres, as successfully demonstrated by these two states. The SDC (state data centre) project is part of the Rs 27,000 crore National e-Governance Plan rolled out in 2005. So far, only 13 states have been able to roll out their data centres. The remaining 22 states and union territories are yet to commence rollout. This pilot can change the paradigm of citizen services delivery.
Some states which are already rolling out data centres can act as cloud providers. Once established, the data centres will house data on citizens' property, transport, tax etc apart from hosting applications for running police stations and state government portals. Citizens of those states which launch e-governance later might not have to suffer since states can use data centres of other states on a pay per use basis. For running data centres, states also have to spend money on power, cooling solutions and security software but innovative models like Software as a Service or cloud computing can reduce costs. If states start adopting cloud computing many tech majors which would be building separate applications and data centres for each state might have to be content with fewer contracts. The cloud market is at a nascent stage in India at $110 million. q
YOJANA August 2010 69
Overall Assessment • With the improving growth outlook, monetary and fiscal exit measures have started. • While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline
inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth.
• In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses.
Highlights Global Economic Conditions • Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery, however,
remains significantly divergent. The projections for global output for 2010 generally point to consolidating recovery, led by the Emerging Market Economies (EMEs). The WTO projects world trade to stage a strong recovery in 2010.
• The risks to the overall global macroeconomic environment have, however, increased because of large public debt in advanced economies, on the back of concerns relating to reduction in potential output, high unemployment rates, impaired
financial systems and premature exit from the policy stimulus. • With stronger recovery in EMEs driven largely by domestic demand, improving exports and return of capital flows, EMEs
face the risks of inflation and asset price build up. Indian Economy Output • The Indian economy exhibited clear momentum in recovery, and despite the impact of a deficient monsoon on agricultural
production, GDP growth for 2009-10 has been estimated at 7.2 per cent, up from 6.7 per cent recorded in 2008-09.
• Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector.
• Survey data suggest pick up in capacity utilization levels in recent months, which still remain below the previous peaks.
• Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normal monsoon. Support for sustained momentum in growth can be expected from all three major components, viz., agriculture, industry and services.
Aggregate Demand • Final consumption expenditure remained subdued during 2009-10, as growth in both private final consumption expenditure
and government final consumption expenditure decelerated. Investment demand, particularly gross fixed capital formation, however, showed a gradual recovery during the year.
• While the momentum in investment demand is expected to continue, pick-up in private consumption demand could drive the recovery in growth. Growth in corporates sales, after remaining significantly depressed over four consecutive quarters, staged a strong recovery in Q3 of 2009-10, indicating improving private demand conditions.
• The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary.
External Economy • India’s external sector position improved alongside the recovery in the global economy. After declining for 12 consecutive
months, exports recovered in October 2009. Similarly, imports recovered in November 2009 following a phase of
decline.
• Despite a lower trade deficit, the current account deficit widened during April–December 2009, as compared with the corresponding period of the previous year. This is attributable to a fall in invisibles, particularly on account of business
services.
• During 2009-10, foreign exchange reserves increased by US$ 27.1 billion, comprising mainly of increase in gold holdings (US$ 8.4 billion), SDRs (US$ 5.0 billion) and foreign currency assets (US$ 13.3 billion). The bulk of the increase in
foreign currency assets was on account of valuation.
• Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital
inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management.
Macroeconomic and Monetary Developments in 2009-10
70 YOJANA August 2010
Monetary Conditions • Reflecting the stronger recovery in economic activities, growth in broad money (M3) and flow of credit to the private
sector exceeded the Reserve Bank’s indicative projections for 2009-10.
• While the increase in CRR effected by the Reserve Bank in its Third Quarter Policy Review of January 2010 led to some moderation in excess liquidity, overall liquidity conditions remain comfortable as reflected in the daily reverse repo operations.
• The banking system’s credit to the government was the prime driver of monetary expansion during the year. The flow of resources to commercial sector distinctly improved from both bank as well as non-bank sources.
• Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation. Financial Markets • With market activity returning to the pre-global crisis level, volatility in the domestic financial markets was much lower
during 2009-10 than in the year before, when the crisis erupted.
• Despite considerable stability and the commencement of exit, markets faced concerns emerging from large government borrowings and the increase in inflation. This affected yields in the government bond market.
• The transmission of lower policy rates to the credit markets improved, albeit, slowly. • Asset prices increased at a relatively faster pace in the recent months, reflecting optimism about the economy’s prospects
as well as easy liquidity conditions. • With the revival of capital inflows, nominal exchange rate appreciated. Given higher domestic inflation, the appreciation
in real terms was even higher.
Inflation Situation • Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10. • The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of
a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised.
• This is evident from the acceleration of inflation in non-food manufactured products from -0.4 per cent in November 2009 to 4.7 per cent in March 2010.
• Inflation, as measured by consumer price indices (CPIs) also remained high, though there was some moderation in February 2010.
• These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations.
Risks to Growth • Apart from monsoon-related uncertainty, there are downside risks to growth: First, private consumption demand needs to improve significantly to support the growth momentum. Second, global recovery, despite gaining strength, is expected to remain fragile, which has implications for exports.
Third, the exit from fiscal stimulus and the growth-supportive monetary policy, unless calibrated carefully, could impact the growth process.
Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings. This has adverse implications for the potential growth of the economy.
• Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent. Inflation Outlook • Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are,
however, upside risks to inflation: First, international commodity prices, particularly oil, have started to increase again. In several commodities, the import
option for India to contain domestic inflation is limited, because of higher international prices. Second, the revival in private consumption demand and the bridging of the output-gap will add to inflationary
pressures.
Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation. q
(RBI Release)
YOJANA August 2010 71
North east diary
SuCCESS AFTER SHIFT FROM SHIFTING CuLTIVATION
Ajhumia, one who does jhum clutivation, has turned progressive rubber planter thanks to the initiative
of the Soil and Water Conservation Department. The Department's 2009- 10 annual report reveals
the success story of lenggan M Sangma of Doldenggare under dalu C&RD block. Sangma, the
Nokma (headman) of his village, was a jhumia and owned assets including a paddy field, three hectares of cashew nut and one hectare of areca nut plantations.
The Nokma was finding it tough to look after his family of eight till 1986-87 with a meagre income. The Soil and Water Conservation Department came forward to sponsor him to cutivate rubber in a
one hectare area. He was also sent to Kerala by the Department for a study tour on rubber cultivation.
Impressed with his efforts, the Department again offered him two hectares of land.
The Soil and Water Conservation Department has been making efforts to prevent soil erosion
in the hilly state by encouraging farmers to go for alternative livelihood by doing away with
jhum cultivation or shifting cultivation for which huge patch of forest land is cleared every
year. J Sangma now plants a mixture of rubber clones of RRIM 600 and RRIM 105 besides other.
With the existing number of 1200 standing rubber trees, the average yield per hectare is 800-900 kg
per year. He grows 1200 kg of paddy in his 32.5 bigha plot of land and about 50 quintals of cashew from an eight acre plantation per year. q
wORLD BANK TO ASSIST RuRAL PROJECTS IN NORTH EAST
The World Bank will provide Rs. 5 billion to four north eastern states-Mizoram, Nagaland, Sikkim
and Tripura to create self-employment opportunities for the tribals and poor people living in rural
and remote areas. The Bank would provide the assistance for the North East Rural Livelihood
Project (NERLP), starting this financial year (2010-11).
The pilot project of the NERLP would be implemented in two districts each of the four north eastern
states aiming to generate livelihood of those people who are yet to get any assistance from any medium
or major scheme. The NERLP has four components-social empowerment, economic empowerment,
partnership development and management, project management. NERLP would play a vital role in
transforming rural economy, eradicating poverty and providing viable employment opportunities by
utilising local and natural resources. It is aimed at socio-economic development of tribals and other
backward people. The Development of North Eastern Region (DoNER) ministry in consultation with the
Department of Economic Affairs and World Bank has finalised the NERLP. It would be implemented through a society registered at Guwahati.
The NERLP is based on the IFAD (International Fund for Agricultural Development) assisted North
Eastern Regional Community Resource Management Project (NERCRMP) which has been successfully
implemented in two districts each of Meghalaya, Assam and Manipur. IFAD ia a specialised agency
of the United Nations and its mission is to enable the rural poor to overcome poverty. 32,000 self-help
groups (SHGs) have been formed in Tripura and the state government has been providing Rs. 50,000
to these under the Tripura Support Scheme (TSS). The SHGs are producing and marketing more than
250 products. q
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