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Budget Impact: PRICES SHOOTING UP, by Shivaji Sarkar, 7 April, 2012 Print E-mail

Economic Highlights

New Delhi, 7 April 2012

Budget Impact


By Shivaji Sarkar


The Indian economy is heating up once again. Prices are rising high. Alarm bells should be ringing as the indicators are not showing any signs of improvement in the performance of either the industry or the manufacturing sector. Indeed, the Union Budget is showing its fangs. The days of price moderation witnessed in January and February are seemingly over. Contrary to Prime Minister and Finance Minister’s claims, commodity prices are on the rise again. Even during days of moderation the price index rose by 6 per cent – much higher than previous years, when it used to rise by not more than 3 per cent during winters.

Prices of all commodities including fruits and vegetables have started moving upwards despite a government report stating better production. Potato, where a glut was being feared, is also fetching high retail prices though farmers are yet to get back their production cost. But the highest rise is being witnessed in edible oil, energy prices and all food items – a mix of policy non-application, poor supply management and the lack of will to maintain a low price regime – essential for growth of the economy.

Food prices in effect have risen by over 26 per cent in a year. Its further increase should be a concern not only for the Government but also for the industry. The latest Labour Bureau data states that on an average a worker spends 49.71 per cent (nearly 50) of his income on food alone. In the case of rural workers it is 59.31 per cent. A family spends another about 10 per cent of income on transportation and more than that on energy consumption.

On an average, 70 to 80 per cent of the income is spent on items that leave little scope for looking at buying minor luxuries, including clothing. No wonder the overall growth is slowing down. The 6.9 figure supposedly achieved by March this year may be difficult to maintain.

Imported edible oils such as soya and palm are playing havoc with the economy. These are hitting the indigenous mustard oil sector. In fact, the lack of a policy on increasing edible oil production has thrown the domestic market wide open to manipulation by importers, usually the big corporates. Thus, the prices are being pushed up. During the past month, palm and other edible oil retail prices have been raised by Rs 6 to 8 per litre though the imported price increase is almost 50 per cent of it.

The reasons for an increase in edible oil imports are higher shipment cost and higher price adjustment owing to the sliding of the rupee against the dollar. As India buys 50 per cent of its requirement in the international market, dealers are jacking up prices.

Further, milk prices too are set to increase once again. Amul Cooperative which was supposed to have ushered in the white revolution today has become the largest monopoly and dictates price at will. In less than 18 months, milk prices have increased by over Rs 24. It costs Rs 40 to 48 per litre from Rs 12 to 16.

Then again, onion and tomato cost almost 100 per cent more than what they were a month earlier. In some cases, the retail markets have almost tripled the price. This is despite an increase in production and even the price of carrot despite a bumper production is rising phenomenally. Insofar as the farmer is concerned, he rues large production as at the end he is forced to dump it. However, the middle man’s profit is not affected rather it is on the rise. It may all look simply but requires a deep probe and rectification. For this critical sector has the capacity to make or mar the economy.

This apart, it is indeed a surprise that rice production has increased across the country. In the wake of the Green revolution, the eastern region has shown seven million tonne increase in paddy production in 2011. However, strange as it may sound the rice costs anything between Rs 4 and 8 per kg depending upon its quality. One reason cited for an increase in some food items is the impact of higher service tax on the transport sector.

In fact, other items including eggs, which normally fetch a lower price with the onset of summer, are more expensive as poultry and other livestock cost have increased because of a hike in the cost of their feed and fodder and transportation cost. But if the latest report of the State of Agriculture is to be believed change in food habit is also responsible for the rise in prices.

One critical observation of the National Sample Survey Office is that despite an overall increase in farm production, the per capita availability has reduced to 444 grams from 550 grams 15 years ago. This is attributed to the phenomenal rise in population. Food grain production has increased to 244 million tonnes from an average of 200 million tonnes around 2000-01.

Even non-farm goods are becoming dearer. The impact of the Budget has resulted in subsidy cut and increase in excise duty on fertiliser, pesticides and seeds. The higher price of all these items is increasing the cost of farm investment. This is a critical issue. Farm prices decide the basic cost of wages and production. If these go on rising, all other input costs at every level are too bound to go up.

There is a nagging fear that inflation in 2012-13 may go through the roof. It would not be an easy task to increase industrial production. Food prices, which are indicated to be higher, would stymie the growth of all sectors.

Undoubtedly, India remains an overheated economy. Even the rural cushion which was available earlier has gone missing. Inflation remains its serious concern. Rise in farm production is not bringing it down. Small decline in any commodity production can lead to severe price fluctuation and turn the market topsy-turvy.

Intriguingly, the argument given to us for reforms was that liberalization would increase production and productivity. It would reduce operations controls on businesses and private sector involvement would bring productivity, better management of assets and technology. Nothing of this sort has happened. In fact, private sector has shown it is as much or even more corrupt and unproductive than the public sector. Barring a few well-managed and well- meaning companies, majority are greedy, manipulators, tax avoiders and having poor quality and customer service. Profiteering has become the key word.

Theoretically, when capacity goes up prices should come down. When competition goes up prices should go down. Why has this not happened? People need to ask themselves and realise who is to be blamed.—INFA

(Copyright, India News and Feature Alliance)

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