Economic Highlights

New Delhi, 20 November 2009

High Food Prices

NO MONEY LEFT FOR GOODIES  

By Shivaji Sarkar

The common man may not get to enjoy the benefits of India’s projected stellar show as food inflation has reached alarming levels of almost 14 per cent (13.68 per cent). The figures show that prices have been rising every week robbing people of their purchasing power. It has a direct impact on the industry and a fall-out on tax payments.

The indirect tax collection, according to official figures, has hit the Government once again. It has dropped by 21 per cent – Rs 1.21 lakh crore during the first seven months of the financial year against Rs 1.61 lakh crore a year ago. This may lead to a severe budgetary crisis and the Government may remain far off the target in revenue collection.

It is not the first time that indirect tax collections are falling. It has been dropping for over a year. In  December last too, it had taken a hit of Rs 40,000 crore. Clearly, this is a pointer to a grim situation. Tax collections increase during a buoyant economic phase. Indirect taxes comprise excise, customs and service tax. A fall in the collection reveals that activities in almost all the spheres of economy have slowed down. Indirect tax revenues have taken a big hit due to lower imports and a sharp fall in excise duty revenues. The decline in these taxes, on both the customs and excise duty front, must be a source of concern for policymakers.

A part of the fall is attributed to the stimulus package granted to the industry in tax sops. But that the slowdown is continuing is evident from a lower collection in service tax ( 5.4 per cent) at Rs 28,926 crore. Service tax signifies the purchasing trend and the present level of collections indicate that far fewer people are going out for shopping.

Customs duty declined by 31.8 per cent at Rs 45,412 crore indicating lower imports. Excise duty collection was also down by 18.8 per cent at Rs 52,566 crore. Clear trends that the stimulus is not working and the slowdown continues. The Government may not agree that this is linked to high prices.  But the items of daily consumption like potatoes and onions have been primarily responsible for pushing the food inflation up. This is because the two items are the staple food, particularly the poor. On an annual basis, the prices of potato have doubled in a year, whereas onion was expensive by 43 per cent and pulses by 23 per cent, according to the wholesale price index (WPI).

The wage hike given by the Government is regrettably not helping to revive the economy as the outflow of incomes has increased to sustain the family. A World Bank study in nine low-income countries  - Pakistan, Vietnam, Peru, Cambodia, Nicaragua, Malawi, Zambia, Madagascar and Bolivia - shows  that  the recent large increases in food prices are likely to raise overall poverty. A particular reason for the concern about the impacts of high food prices on poor countries arises from the fact that the poorest people spend roughly three-quarters of the their income on staple food.  

World Bank President Robert B Zoellick has recently said that the crisis of surging food prices could mean “seven lost years” in the fight against worldwide poverty. The bank’s study should be true for India as well. But it seems that the Government does not have an effective policy to tackle the issue. Food and Agriculture Minister Sharad Pawar’s statement that prices would continue to rise speaks of a mindset i.e.  nobody is serious about bringing down the prices. Many of our political leaders represent lobbies and couldn’t care much about the poor in a country where an average family spends 60 per cent of its income on food. And, the poorer spend 80 per cent of their income on food.

If all the income goes into buying food, other sectors of the economy have to take the hit. This is exactly what is happening. Adhering to the principles of a market economy is all very well but it has been observed that the market thrives when there is easy and affordable food availability. This is what the country witnessed for a few years till 2004.

Till such time the public distribution system (PDS) had remained universal. Soon the situation changed. It was restricted to the below poverty line people and the rest of the PDS was gradually demolished, the Government lost an important intervening tool. Else how would it justify what it claims as a comfortable buffer stock, and the surging market prices?

A free economy does not mean abdication of the duties by the Government. On the contrary, it imposes on it the duty to regulate and effectively oversee the prices so that the system does not go awry. In the Indian context, the Government wants to get out of all those responsibilities for which the State itself was formed. Reneging on these basics would not only create problem for the projected growth but also might lead to anarchical situations as the anti-price rise demonstrations, sugarcane farmers protest, suicide by families and Maoist violence has so far indicated. This is how Somalia has gradually got into its present lawlessness.

The Government has to effectively and strongly intervene to bring down the prices not only as a poverty alleviation measure but also to boost the industry by way of generating a demand. Food prices should not be treated in isolation. For at the end these decide the basic industrial pricing strategy, wages and demand generation, which are vital for the sustenance of both industry and trade. The Government is keen on high growth trajectory. It can be achieved only if the prices are affordable.

Indeed, the Government has to recognize the threat of high food prices. It must usher in a regime wherein  these do not threaten the economy. Can this be achieved? Only if there is a political will. The next big question is: Do we have it?---INFA

(Copyright, India News and Feature Alliance)