Economic Highlights

New Delhi, 10 June 2011

Double Digit Inflation

INDIA’S HIGH-COST ECONOMY

By Shivaji Sarkar

Food inflation continues to surge almost at double digit level at the whole price index. It is at a two-month high of 9.06 per cent at the end of May. Giving our policy makers sleepless nights as it raises labour prices and costs of all industrial and other products.

The present inflation indicator is jumping as fruits, milk, eggs, meat and fish are becoming expensive. Wheat, rice, pulses, vegetable and edible oils are already at a high. As petrol and gas prices increase and a diesel price hike is on the cards, food inflation is expected to rise further.

The trend is likely to hit India’s growth prospects, which many agencies, including Reserve Bank of India (RBI), have already moderated. High food and commodity prices are fanning prices of most manufactured goods. These include textiles, consumer goods, education and travel. Inflation of manufactured goods has been in the range of 20 to 25 per cent over the past many weeks.

Undoubtedly, the food prices are rising phenomenally as during the third week of May whereby the WPI showed inflation at 8.06 per cent. This means that in a week prices have increased by one percentage point. This is bound to have a severe impact on the Government.

The Finance Minister Pranab Mukherjee said that the Government might miss its tax collection targets --- implying a crunch on the people’s spending power. Bluntly, people grappling with rising food prices do not have spare money to spend on other items. Thus, their income is being spent on managing food bills.

Besides, the measures taken by the RBI have been limited to making lending expensive. It hiked interest rates nine times in 13 months. Resulting in a slowdown in the industrial sector. The overall industrial growth at 13 per cent during May has been the most sluggish since September 2009. It also hit the automobile sector, which was doing well. Domestic car sales grew only by 7 per cent, the slowest in two years. The car sales figures were 158,000 units in May against 194,000 in March when sales had touched a growth of 25 per cent.

Also, the overall manufacturing growth at 5.5 per cent during January-March this year was the slowest in 18 months. Even the services sector is hit by the trend and the growth is certainly not on expected lines.

Needless to say, high inflation has a double scourge. It makes life difficult, reduces the purchasing power and turns the economy high cost. One of the reasons for India’s ability to attract foreign investment was the moderate labour cost in the country. With development, some rise in labour cost is natural. But cost on all sectors is increasing. Thanks to the rising lending, power and fuel costs. Moreover, efforts to contain this have lead to further rise in costs.

This has been happening for the past few years. But the constant food inflation, almost at 15 to 20 per cent at retail prices demand offsetting the labour wages. This normally should have generated demand. But it is not happening as the given raise again goes to meet the cost of food.

True, the industry is concerned as steps for containing food prices have not succeeded. Raising another question. Have the investors turned to the food market to get quick returns as most other sectors, including realtor and stock market, are on the downslide?

This again shows that the country, despite all policy level efforts is unable to manage the economy the way it should. In such a scenario, the Government’s latest manufacturing policy might have a noble aim, but may not actually materialise.

Plainly, the country is unable to diagnose the exact disease and those who are manipulating the system are gaining an upper hand.

Additionally, it is not just the large industries that are being hit by the trend. Smaller entrepreneurs are in a worse situation. Thousands of small shops and confectionaries have closed down owing to their inability to meet the high prices of food items. Thus, adding to unemployment.

True, measures like the rural employment guarantee scheme have served a section of the people but in the face of the poor show by the overall economy and falling Government finances it might not be sustainable for long. That would have again an economic and political fall-out.

This is not all. The infrastructure sector was supposed to be the massive job giver. But the country could not do much in this area notwithstanding some development taking place which is not enough to sustain a 9 per cent growth.

Shockingly, India ranks a low 86 in the global infrastructure competitive index. This sector needs huge funds. This could come when all other sectors of the economy do well. As this is not happening, it remains laggard.

Unmistakably, the country needs to go back to the basics. It has to manage the food sector well. The new manufacturing policy lays huge demand on land. That means again there would be pressure on agricultural land. This is again likely to lead pressure on availability of food grain and other food items. Consequently the prices will rise again.

Obviously, the country’s obsession with industry alone is not helping much. Once again it needs to learn from the US. Despite recession and a severe financial crisis, the US is still able to hold because it has kept its food prices in check. By not diverting the arable land it continues with farm subsidies. The basic fundamentals of the US farm policy have resulted in the least inflationary pressure on food items.

Sadly, India is doing the opposite. Its policy is industry-oriented. Whereby, all policies in the SEZ, industry and manufacturing are targeting agricultural land. Every year this land is shrinking.

Worse, population has risen by 18 crore in a decade while food production has remained almost stagnant for the last over two decades. Thereby, automatically creating a demand-supply gap. This needs to be bridged.

However, raising industries on farm land is not the solution. Indeed, there should be more emphasis on the farm sector as it employs 54 per cent or 72 crore people. Unless there is a policy shift and change in mindset, India’s dreams may not turn into reality. ---- INFA

(Copyright, India News and Feature Alliance)