Economic Highlights

New Delhi, 4 November 2011

Skyrocketing Prices

LEHMAN-TYPE INDIAN DISASTER!

By Shivaji Sarkar

Indian economy is in a quagmire. There is no effort at curbing prices, giving an independent direction and pepping up an overall – not sectarian rich-oriented – growth. No wonder food inflation is spurting to ridiculously new highs. It jumped to 12.21 per cent from 11.63 per cent at wholesale price level in just a week. At the retail level it would be ten per cent higher.

Finance Minister Pranab Mukherjee says that festivals are responsible for the rise in prices. What he doesn’t say is why such a situation never arose in the past many decades. Some time ago Planning Commission Deputy Chairman Montek Singh Ahluwalia had said prices are rising as Indians were eating more. A novel way to justify the unjustifiable, indeed!

Sadly, our decision-makers live in their own paradise. Else they would not have agreed to another petrol price hike of Rs 1.82 per litre – the sixth in nine months! Petrol companies are making phenomenal profits year after year citing hypothetical “under recoveries”, which help their shareholders get rich dividend, Government large funds as dividend and taxes. Worse, these are used not for development purposes but to meet the Government’s fiscal deficit, which this year may be touching a record.

Obviously, the economic fundamentals are in jeopardy. The fact that banks need recapitalisation to the tune of Rs 450,000 crore is a pointer to a grave crisis. In short, it means the banks, particularly the nationalised ones, have lost this money to unscrupulous creditors. The big question is: Are we marching towards an unannounced Indian Lehman crisis?

The unity in the economic thought process between the Government and the Opposition that had become this nation’s USP is truly tearing apart. Many now question the wisdom of the post-1991 reforms that have taken the nation on a path of series of scams, right from 1992.

To add to the misery, the Greek crisis and consequent Eurozone turmoil has virtually now hit the functioning of G20, of which India is a part. Europe wants G20 countries to rescue it. China is dithering and India is apparently in two minds. The G20 meeting is being used by BRIC to look for a new route.

Prime Minister Manmohan Singh’s statement that the Euro crisis will hurt others is significant. His call to IMF to step in has its pitfalls on India and other emerging economies, because if it gets entangled in the “rich” Euro zone, known for its profligacy, it would further hurt the poorer nations.

Undoubtedly, the call to the IMF once again shows that India is not keen on protecting its interests. Ideally, Singh should have categorically said the Eurozone crisis is EU’s own creation and it alone should resolve it. The IMF is a multilateral body formed primarily to support weaker economies and not those which have never paid heed to its advice and always overspent.

IT czar Premji Azim couldn’t have been more apt on the disorientation of the entire Government system. He stated: there is a complete absence of “decision making” and warned that growth would suffer if prompt corrective action was not taken. It sums up the morass.

It is an unmanaged economy, some aver. Some say it is deliberately mismanaged to benefit a few operators. Neither is incorrect. All said and done, inflation is just not restricted to food items. Iron, steel, cement, auto parts and every other commodity has become expensive.

The Government has been repeatedly depending on the RBI’s monetary measures to contain inflation. The 13^th time increase of interest rates is hitting all -- business, manufacturing, warehousing, power sector and the banks itself.

No one in the portals of the Government has ever glanced through these issues. Chief Economic Advisor Kaushik Basu had once mentioned about the deleterious effects of inflation and had even opposed interest rate hikes. It had raised hopes. But the decision- makers did not consider it worth even a discussion. Even Manmohan Singh has started questioning the Bretton Woods system. The thinking process, however, does not go beyond it. The Soviet-type controlled economy collapsed in 1989. Now we find that the corporate capitalist-type Bretton Woods institution-sponsored economic principles too are collapsing.

At such a time, the Commerce and Industry Ministry has prepared a plan to “make it mandatory for foreign retailers to do bulk of their sourcing from small farmers”. It does not realise that they are only strengthening the failed World Bank model and such a measure would only add to inflation. Such models have led to phenomenal profits by the corporate, siphoning of public funds and as the US and Euro zone economies collapse, many of them have amassed larger wealth than all these Governments.  

Clearly, India does not need to follow this failed model. The corporate have not helped the farmers anywhere, not even in the US though they pocket all the agricultural subsidies those governments give. At the same time, they oppose subsidies on agricultural inputs in countries like India and our policy makers fall prey to their skewed logic.

Inflation remains and will remain the concern. While the Government has many administrative and policy tools to control it, these are not used. It has hoarded of 230 lakh tonnes of wheat, and a stock of 242 lakh tonnes rice, more than double the requirement. As against this, it is supposed to maintain a buffer stock of 82 lakh tonns of wheat and 118 lakh tons of rice. Thus, at least 30 per cent of it rots which obviously increases the market price and helps private traders make a killing.

One simple step, of allowing this stock to be sold to everyone through PDS, alone can help bring down the food grain prices by 20 per cent. Our sugar mills get subsidies, but are allowed to manipulate prices only to help the political partners in the government.

Owing to neglect of decades, agriculture has become a low contributor of 14 per cent to the GDP. Even the 12^th Plan Approach Paper has not paid much attention to it. A small boost to this sector can ameliorate the condition of 58 per cent or 72 core people.

Recall, India had taken a major leap in the 70s as its agriculture paid huge dividends. This needs to be replicated. Small entrepreneurship must be promoted so that exploitation of the people and amassing of wealth by the few rich corporate, symbolising the Bretton Woods system, is stopped. Money and wealth needs to be shared by larger number of people. Trickle down theories are incorrect and unacceptable.

It once again calls for a shift in the policy process. It is time to open up a debate for ushering in a new economic pattern for overall happiness, just not growth and an Indian economic system. Let us not march towards a Lehman-type disaster, before it is too late. ---INFA

(Copyright, India News and Feature Alliance)