Economic Highlights

New Delhi, 16 September 2011

Change Policy Paradigm

INFLATION FOCUS, NOT GROWTH

By Shivaji Sarkar

The economic focus is once again back to inflation and sluggish growth, if at all. The ninth hike in petrol prices since June 2010, despite phenomenal profits by oil companies, is certain to take the Indian economy downhill like European and other western economies.

Significantly, high energy prices are stated to have created the negative impact on US and UK economies. It has led to persistent unemployment and depressed housing prices in both countries and of late fuelled general inflation, though at a far lower rate than India. Somehow, the rising global commodity prices in emerging market economies (EMEs) have been linked to the western situation, their failing financial system and high debt burden.

Today, commodity prices or generalised inflation is playing a key role in deciding the Indian trajectory. It has led to a critical situation, which has in official terms “moderated” growth. Clearly, an understatement as a fall in industrial and manufacturing production, household savings and overall morass encompassing the economy. Food price inflation is almost constantly at double digit.

The Reserve Bank (RBI) Governor Subbarao has further thrown a spanner by questioning the quality of data collection by the Government’s statistical organisation and also the fixation for deciding inflation on the basis of the wholesale price index (WPI). He has called for having the consumer price index (CPI) as the base for calculating inflation. Stating that provisional data always projects a lower inflationary trend and puts the RBI in a fix on deciding strategies.

In the Indian context, the RBI has underscored that the high inflation rate is above tolerance limits. This is a grim warning and a comment on the governance system which propels the Government to function on profit motives rather than on principles of equity and justice.

Notwithstanding, RBI’S interest rate hikes is being viewed by the industry as an imprudent move. True, it was considered a monetary measure to contain inflation but on the contrary it stoked inflation as credit-linked investment becomes expensive and has led to an overall fall in demand of consumer goods. Worse, the policy has led to stagflation.

Pertinently, the international community tends to believe that the global energy price hike is the handiwork of the oil mafia which is engaged in destabilising many economies to perpetuate its hegemony. Also it has tremendous clout over their respective Governments. Highlighted by the huge profits being made by global oil companies, including Exxon, Shell and Russia’s Gazprom, Indian companies too are no exception.

Thus, the so called under-recovery of Indian petrol companies is based on hypothetical propositions. Earlier, their only concern was the actual international prices, today they are increasing prices on the plea that the rupee is losing marginally against dollar.

Time for the Government to take it up seriously. Given that the under recoveries are not based on the actual basket of prices that India purchases crude from the international market. The oil prices are based on futures trading, which are much lower than contemporary international prices. But companies charge on the basis of the contemporary prices. Raising a moot point: Is such profiteering legal and ethical?

Undeniably, the Government is paying a heavy price for the profligacy of the public sector oil companies. It is stoking up inflation on a continuous basis, creating discontent and moderating growth. Needless to say, the political leadership needs to shed their differences, sit together and draw up a proper oil pricing policy so that it does not become the major factor in destabilising economy.

A policy, which is based on not just the purchasing price of oil but also the profits made by companies. Along-with taking into consideration the impact every hike has on each commodity.

Remember, oil prices always have a cascading effect. Not only does it raise transportation costs, increase prices of all commodities and now even the railways are being forced to hike fare and freight rates. Resulting in a further inflationary impact. Of course, the oil PSUs should have a working profit but not so much as to allow distribution of largesse to their employees and shareholders.

Taking a cue from the European situation, India must formulate an oil pricing policy so that its economy does not follow the same declining pattern. It also needs to shed the European pattern of fixing domestic oil prices linked to the so-called market prices. Depressing profits of oil companies are not against their interest. The prices have to be fixed keeping national interest in mind. In this case it should be easing the economy and freeing it of inflationary pressure.

Certainly, oil is not the only cause of inflation but it is a major component. As it stands, the country has not taken any effective step to contain food inflation which coupled with oil price rise has a cascading effect. Whereby, all commodities and wages become dearer and lead to erosion of purchasing power.

Of late, banks are facing a critical situation as power generation (again energy) companies have taken massive loans and are not repaying back. Leading to a situation where public savings are dwindling and banks have high non-performing assets (losses).

As suggested by the RBI Governor, the country needs to shift to the consumer price index (CPI) for assessing the exact impact of inflation. Creating any camouflage, be it wholesale price index (WPI) or something else, does not help the nation.

Plainly, Subbarao’s decision seems to suggest that the people in Government should not take the figures as an affront on them. Even the Government’s Chief Economic Advisor Kaushik Basu called for the easing of interest rates.

Undoubtedly, a serious discussion has to ensue on containing inflation on all fronts. Unquestionably, growth is a necessity but it would be futile to believe that if prices remain unaffordable, people get impoverished and lack purchasing power there could be a real growth. High prices and uncertain market conditions have other ramifications. Those who have money do not invest. Further, investments do not go into productive areas. Consequently, the economy instead of creating a wider base leads to shrinkage in all its dimensions.

In the ultimate, indications are that the tight monetary situation would continue. But if an effective policy to contain inflation at all levels is not ensued it may be detrimental to the overall well-being of the country. For the next few months, the focus of the Government should be inflation alone. Once this is achieved, with other strong fundamentals, growth would not be difficult to achieve. Let us change the basic policy paradigm. ---- INFA

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