Inflation
that had been officially declared as being on the
wane is back and raging. Focused on food articles,
it is eroding the real incomes of the already poor
and, therefore, the popular support which brought
UPA II to power. Particularly damaging is the fact
that high inflation has been the norm for a year now,
with its incidence shifting across commodities, but
most often falling on one or other set of food articles.
The government seems to be helpless and just wishing
that the problem would go away. Almost a year ago,
when addressing a Chief Minister's conference on food
prices early in February 2010, Prime Minister Manmohan
Singh declared: "The worst is over as far as
food inflation is concerned. I am confident that we
will soon be able to stabilise food prices."
Three months later, on more than one occasion, government
spokespersons, like Chief Economic Advisor Kaushik
Basu, had declared that inflation had ''peaked out''
and was on a downward trend. Such statements are not
surprising since in the current dispensation government
representatives at the highest level are expected
to talk down prices and talk up markets. It is not
what you say but the confidence with which you say
it that matters.
But there is reason to believe that the government
did actually believe that inflation would follow some
sort of a cycle, and more likely moderate quickly
than rise significanty. One or two predictions of
an impending price decline are understandable. But,
over the last year, almost every month or even week,
one official spokesperson or the other (be it the
Finance Minister, the Finance Secretary, the Deputy
Chairman of the Planning Commission or the ubiquitous
head of the PM's Economic Advisory Council) declared
that inflation is bound to moderate, in a voice tinged
with surprise that it has not done so earlier.
This expectation came from a particular reading of
the situation. Whenever prices did rise rapidly, it
was attributed either to supply side factors such
as a poor crop or to unavoidable factors like the
''base effect''. Thus when the PM spoke in February
last year he looked forward to a good monsoon and
a better crop. And, if prices had been unusually low
a year earlier, even a return to ''normalcy'' would
reflect a high rate of inflation that must be discounted.
Occasionally, of course, there was talk of hoarding
and speculation, but only on the part of unscrupulous
traders, who were exploiting temporary demand-supply
imbalances.
Experience has shown that these ''beliefs'' were patently
false. Despite the fact that the monsoon has been
much better in recent seasons, the annual point-to-point
inflation in the Wholesale Price Index for Food Articles
stood at 18.32 per cent and 16.91 per cent during
the weeks ending December 25, 2010 and January 1,
2011. The figures for the corresponding weeks of the
previous year were 19.9 per cent and 19.6 per cent.
Not much has changed even though the commodities involved
are slightly different. Moreover, the month-on-month
inflation rate as reflected even by the Wholesale
Price Index for All Commodities, which stood at a
disconcertingly high level in the first half of 2008,
and then declined consistently between July 2008 and
July 2009, accelerated subsequently and has remained
at high levels throughout 2010. The month-on-month
rate of inflation stood at 9.7 per cent in November
and 8.5 per cent in December. And if weekly WPI movements
are an indication, this is likely to be true in January
2011 as well. The consumer price indices for agricultural
labourers and industrial workers, which reflect the
movements in the basket of goods consumed by these
sections (which includes housing that dampens the
increase) also rose by 7.1 per cent and 8.3 per cent
respectively in November relative to the corresponding
month of the previous year.
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This persistence of the inflationary trend is substantially
because the government, while occasionally expressing
concern over the high level of inflation, has done
little to combat it, given its belief that inflation
will necessarily moderate when supply conditions improve
or the base effect wears out. This has sent out the
message that economic governance under a government
populated with economists of repute has broken down.
That impression has only been bolstered by the open
spats between segments of the government over who
is responsible for the persisting inflation.
To understand the factors that could be driving the
price rise, we need to turn to a number of noteworthy
features of the current inflation scenario. The first
is that, while it is not restricted to food alone,
it has been substantially driven by food articles,
which are more prone to speculative influences. In
the case of these commodities, even when demand-supply
imbalances are minor or absent, speculation can push
up prices. The second is that within food articles,
inflation has at different points in time affected
different commodities, such as cereals, pulses, vegetables,
eggs, meat and milk. Not all of these commodities
are equally weather dependent and the prices of some
are influenced by how administered prices are set.
To attribute the trends in their prices solely to
demand-supply imbalances or imported inflation is
to avoid the conundrum. Third, when inflation does
occur in some food items, be they onions, vegetables
or even cereals, the rate of inflation tends to be
extremely high, pointing to the role of speculation
in driving prices in the short run. Finally, even
when such influences are not at work, there seem to
be factors operative that keep the ''all commodities''
inflation rate high.
Even though it is still early to say, the trend over
the last one-and-a-half years suggest that there are
structural factors at work that are setting a higher
floor to the inflation rate. They may be neutralised
in the future. But even if they are, they could as
well return to play a role subsequently. The government
has recognised this structural, inflationary tendency
in a peculiar, in fact patently absurd, way. It attributes
the inflation to the demand-side effects of high growth.
If people are richer because of an 8-9 per cent growth
rate, they are bound to demand more. Since supply
does not adjust, prices are bound to rise.
There are many assumptions here. That when GDP grows,
those who need to buy and consume more cereals, pulses
and vegetables garner a reasonable share of the benefits
of that growth. Or that when GDP grows, such growth
cannot occur in large measure in the commodity producing
sectors, resulting in a widening gap between the demand
for and supply of certain goods. That even though
the ''high growth'' era began in 2004, it is only
now that it has generated demand-supply imbalances.
And, that if there is indeed a supply-demand imbalance
the government is unable, for whatever reason, to
redress it by resorting to imports. Making such assumptions
is not just wishful thinking, but avoiding the conundrum.
It is not that there are no demand-supply imbalances.
India's growth has indeed been lopsided. As has been
argued by perceptive analysts, India's high GDP growth
was recorded in a period when the agricultural sector
and a range of petty producers were experiencing a
crisis, an aspect of which was the non-viability of
crop production and therefore an extremely slow growth
of agricultural output and GDP. At some point, that
long-term crisis was likely to result in an unsustainable
demand-supply imbalance.
But there are two other factors that are structurally
embedded in the economic environment generated by
the government's neoliberal reform agenda adopted
for two decades now. The first is a tendency where
corporate consolidation in production and trade, decontrol
that permits profiteering, a reduced role for public
agencies and public sector firms and the withdrawal
or curtailments of subsidies on a range of inputs,
has pushed up costs and prices (including administered
prices) substantially. As some have argued, India
is increasingly a high input price and high output
price economy, with a rising floor for many prices.
The second is the role that speculation has to come
to play, with liberalised trade, with the presence
of large corporate players in the wholesale and retail
trade and with the growing role of futures and derivatives
trading in a host of commodities. Add the influence
of these two factors to the underlying crisis in some
commodity producing sectors and the long-term, structural
inflation is more than partly explained.
The government of course does not consider these angles
worth pursuing. The reason is partly ideological.
It cannot bear questioning the outcome of reform.
It cannot bear suggesting that corporate entry can
lead to profiteering in a context of decontrol. It
does not believe that speculation in futures markets
can push up spot prices, and has banned some of these
markets only because of public pressure. It cannot
contemplate a larger role for the state and no role
for corporate (domestic and foreign) players in the
both wholesale and retail trade. In the event, all
that the Prime Minister's emergency meetings on the
inflation issue could throw up is an inter-Ministerial
group mandated to monitor short-term fire-fighting
measures and promote actions that the government has
claimed to be promoting for many years now.
To top it all, precisely at a time when it can come
in handy, the government is threatening to renege
on the UPA's promise to deliver universal access to
a minimum quota of food through the public distribution
system. Riding on the argument that not enough foodgrain
is available, even though production has been good,
stocks with the government are comfortable and foreign
exchange that can be used to import even more is being
handed over to the rich to be transferred to accounts
abroad, it has used the Prime Minister's Economic
Advisory Council to stall even a diluted proposal
from the Sonia Gandhi-led National Advisory Council
to expand the public distribution system. No guesses
are needed to identify where the push for this effort
to kill the proposal comes from. And here too the
ultimate source is the neoliberal ideology that wants
to cut expenditures and reduce a fiscal deficit even
as tax concessions are being handed out to the well-to-do.
The government is not alone in all this. There is
an influential body of opinion, including in the mainstream
media that the inflation problem is the result of
poor supply management that cannot, at low cost, mobilise
and reach supplies from wherever it is available to
wherever it is needed. This creates unnecessary shortages
that push up prices as well as encourages speculation
that aggravates the price increase. The solution therefore
is corporate retailing services, including that which
would be offered by large transnational retail firms.
According to reports (The Hindu, January 19. 2011),
using inflation as the excuse, the cabinet is about
to consider a controversial proposal to permit 51
per cent foreign equity in multi-brand retailing.
This argument too borders on the absurd. It ignores
the fact that, though India has till quite recently
had no such retail trade structure, there have been
long periods when prices and inflation have been kept
in control. It also ignores the evidence from other
contexts which shows that where such retail chains
are active, the margin between prices paid to producers
and charged to consumers tends to be high, buoyant
and downward sticky.
Neoliberal thinking not only leads to policy paralysis
and absurd reasoning. It also results in policy responses
that are contrary to what is needed. Thus, in the
midst of the current inflationary mess, on the basis
of the liberalised pricing mechanism, the oil companies
have been allowed to hike the prices of petrol a second
time in quick succession. Given the role of public
sector firms here, nobody would believe that a nod
from the government was not obtained before the hike.
If balance has to be maintained a diesel hike must
follow. This government may go in for that as well.
Doing this to the prices of what are universal intermediates
in the midst of an inflation emergency might be seen
by some as madness. If the belief that the people
can be called upon to sacrifice real incomes because
reform cannot be held back or reversed is a sign of
madness, then possibly it is.
