India News and Features Alliance (INFA) - Tackling Inflation: Sustainable Approach Necessary, by Dhurjati Mukherjee,14 June 2007

There has been a lot of concern in the country about the rising inflation, which had crossed over 6.40 per cent for the last two months, though it declined to around 6 per cent. Also the consumer price index for rural workers was in double digit even in the surplus States of Punjab and Uttar Pradesh. Most political parties, including the Congress and the BJP as also the Left parties, have expressed anguish over the rising prices. Even the Deputy Chairman of the Planning Commission warned quite appropriately: “If the Government could control inflation in the short-term with administrative measures, the situation could be handled. But failure to do so will have serious ramifications”. Even Dr. C. Rangarajan, one of the Prime Minister’s advisers, echoed him.

The Economic Survey rightly took the view that inflation was due to a shortfall in the supply of agricultural commodities. It is generally believed that this price rise has been caused by faulty policies of the Union Government. As is well known, the price rise has been steepest in essential commodities like cooking oil, pulses, wheat, flour etc., thereby affecting the poorer sections of society the most.

By encouraging multi-commodity exchange and forward trading, the Government has kept essential commodities on the same footing as share prices of companies. According to an estimate, around Rs 20 lakh crore is invested in the multi-commodities market. There are apprehensions, and not without reason, that those who have invested such a huge amount would not allow prices to come down, even if there is adequate supply of commodities.

Moreover, procurement is not done at the right time by the FCI. It does not support farming community by raising the minimum support price (MSP). The argument given for this is that it has no money to subsidize the Indian farmers but in the name of containing inflation imports are resorted to, mostly at higher prices. It is indeed tragic that the country’s farmers cannot be supported who are committing suicide but farmers in countries like Australia are being given higher prices for foodgrains imported from there.

Rising prices are an invisible tax on the masses by which their money floes from them towards the rich. The economically weaker sections, specially the work force in the unorganized sectors, suffer the most because they have no protection like increase in dearness allowance or the salary increases in the private sector. And the booming economy means more disposable income in the hands of those sharing this boom. This is indicated by the highest manufacturing inflation in the last 18 months or so.

“Inflation is always and everywhere a monetary phenomenon”. This is the mantra repeated tirelessly by the legion of Milton Friedman’s disciples and is an idea, which has taken firm root in mainstream thinking. Short-term trade-offs recession (unemployment) and inflation are illusory according to this view. Thus it is generally believed that excessive money creation leads to inflation.

As economists feel that the primary cause of inflation was excessive demand, the most effective instrument to curb demand would have been the Budget. But nothing has been done in the current Budget and experts believe that the Finance Minister has just not done his job. It has, however, been argued by the Finance Ministry that the Budget was deflationary, which however is not acceptable even though expenditure growth is projected to be lower than revenue growth. It is doubtful whether the Government would succeed in finally keeping the expenditure growth lower at the year-end.

The present measures taken by the RBI to tighten monetary policy to contain expansion of credit may be in the right direction. The recent fall in inflation has been on expected lines due to the monetary and fiscal steps taken by the Government and the RBI. Though the reduction on import duty on crude and imported palm oil by 10 per cent has been right decisions a lot, however, would depend on the rabi harvest and to what extent it is able to ease the supply-side constraints.

It may be mentioned here that Central Banks across Europe, Japan and China also raised their interest rates in 2006 and is expected to do it again 2007. An RBI statement pointed out: “The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability along with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances”. Even the RBI Governor, Y. Y. Reddy, indicated that the apex bank planned to maintain inflation below 5 per cent in the medium term, which appears not quite a realistic proposition.

The situation today is definitely one of concern and the RBI has indicated that “the economy is growing at somewhat above sustainable levels, thereby risking the acceleration of inflation in future”. There is more money in the economy. Broad money supply is running higher than the targeted 17-18 per cent.

The deposit rate in banks has gone up steadily. But the Government diktat and control over certain segments of funds such as small savings and employees provident fund leads the way for lower deposit rates. This implies less money in the hands of the vulnerable section and senior citizens to meet the extra cost of living. Whether the monetary steps of the RBI to curb liquidity resulting in stabilizing prices work remains to be seen in the coming months.

Former RBI Governor, Dr. Bimal Jalan, had suggested that he would rather go for a GDP growth of 7-8 per cent with low inflation than have a growth of 9.5 per cent plus and inflation rate hovering around in the 6-7 per cent range. There are many others who subscribe to this view. But though some believe that high growth and inflation go hand in hand, including the Prime Minister and Finance Minister, it needs to mention here that China made it possible to attain 10 per cent growth with 2 per cent inflation.

However, a certain section of experts like Dr. Omkar Goswami, believe that there is little that RBI can do as the current bout of inflation is driven largely by the supply side. The RBI measures of hiking cost of funds may only impede growth and with it manufacturing and perhaps even services. But is it not better to curb unsustainable growth to tackle inflation ? It remains to be said that the challenge of all economic policy makers is to combat the problem without losing sight of medium and long-term goals and possibilities.

The Government is focussed on growth and growth alone. But there have been no efforts to examine how much of this growth reaches the masses, constituting the majority of the country. As has been aptly pointed out: “Peddling prosperity for all, based on budgetary sops and extra-budgetary support to a small portion of the economic players, is now revealing the darker side of growth as a beacon light of globalization”. It now appears that the windfall gains from globalization are coming to an end with world inflation creeping up.

Growth without welfare is sure to cause imbalances and vulnerabilities and lead to resentment and chaos, which is already being manifest in different forms in various parts of the country. If growth is not broad-based across sectors and geographical regions, it cannot be sustainable and wholesome and cannot benefit the larger sections of the population whose upliftment has become imperative today.---INFA