With
the clamour against corruption having temporarily subsided,
the government's attention would now turn elsewhere.
From the point of view of the ever-referenced ''common
man'', it would do well to make one more effort at taming
the inflation demon. For more than two years now food
price inflation has been at uncomfortably or intolerably
high levels of 8 per cent or more. And the same has
been true for overall inflation for about a year and
a half. Yet no effective solution is in sight.
The Reserve Bank of India's (RBI's) recently released
Annual Report for 2010-11 has once again flagged this
critical problem. It also underlines a significant and
unusual feature of the recent inflation syndrome. The
focus of inflation has shifted over time across commodity
groups, resulting in the persistence of a high rate
of overall inflation even when temporary demand-supply
imbalances are corrected. Taking account of the importance
of particular commodity groups in the overall commodity
basket, it finds that of the 3.4 per cent increase in
the Wholesale Price Index (WPI) during April-July 2010,
32 per cent was accounted for by Manufactured non-food
products, 30 per cent by Food articles and 24 per cent
by Fuel and power. When we move to August-November 2010,
a smaller 2 per cent increase in the WPI was due largely
(38 per cent) to Primary non-food articles and minerals,
with Food articles and Manufactured non-food products
accounting for a lower 28 per cent each. Fuel and power
were not important drivers of inflation in this period.
Finally, between December 2010 and July 2011, while
the WPI increased by 7.1 per cent, as much as 43 per
cent of the increase was due to Manufactured non-food
products, 25 per cent to Fuel and power and 23 per cent
to Food. This continuous shift in the focus of inflation
suggests that multiple factors-imported inflation, administered
price increases, demand and supply imbalances and speculation-must
have combined to keep high inflation going.
This raises an interesting question. Is it mere coincidence
that factors like these have combined to keep inflation
high over such a long period? Demand-supply imbalances
do tend to appear and disappear in systems characterised
by uneven development. But for that reason their effects
can be addressed by short-term measures such as imports.
But the factors providing proximate explanations for
the ongoing episode of inflation are quite varied.
If there is an element common to them, it is that many
of them are the outcomes of economic reform. Consider
the many links between neoliberal reform and inflation.
India's vulnerability to the effects of changes in international
prices has increased with trade liberalisation. Increased
concentration due to the dilution of anti-trust measures
and reduced regulation tend to encourage a profit driven
escalation in the prices of certain manufactured goods,
as is exemplified by pharmaceuticals. Imbalances between
demand and supply of primary products are accentuated
by the government's reluctance to release additional
food through the public distribution system in order
to curb subsidies. The effort to reduce subsidies has
also resulted in a continuous increase in the prices
of commodities such as petroleum and fertiliser whose
prices are administered. The list is long and almost
endless. What the recent inflation experience suggests
is that while the earlier regime of intervention and
regulation is criticised for generating a high-cost
(and, therefore, a high price) economy, the processes
of liberalisation and deregulation are the ones that
lead to a high inflation economy.
For a government committed to liberalisation and deregulation,
this makes the task of combating inflation difficult.
Not surprisingly, the government appears to have given
up on the task of curbing inflation and is either hoping
that it would just go away or that people would not
notice. The common man, it is hoped, would learn to
live with the phenomenon and somehow adjust. This is
reflected in the changing response to persisting inflation.
Initially, government spokespersons declared inflation
to be a temporary aberration that would fade away. Then
it was attributed to non-addressable international factors
or just plain statistics.
But since these arguments could not be convincingly
advanced for too long, the tendency more recently has
been to recognise the problem, express concern and then
declare that it was the inevitable outcome of high growth
that can be tackled only in the medium or long term.
The argument seems to run as follows. With incomes rising
rapidly, demand for a number of commodities is growing,
but supply is either not keeping pace or can, in some
cases, only adjust over the medium term. Inflation,
it is suggested, is a result of this frictional imbalance.
It is a cost that has to be paid for the good life.
And only the cussed would point out that neither does
everybody bear the cost nor do all benefit from the
good life.
The one organisation that has, hitherto, chosen to respond
to inflation is the Reserve Bank of India. However,
it has relied largely on a single instrument. It expects
interest rate increase to moderate investment demand,
curb debt-financed housing purchases and consumption
and rein in speculation financed with credit. In fact,
as the RBI admits in its Annual Report, it has been
aggressive on the rate increase front over the last
year, hiking it by far more than the market expected.
Cumulatively, the repo rate has been hiked by 3 percentage
points from 5% to 8% over the last 16 months.
Clearly, however, the RBI's heavy reliance on this instrument
has not helped matters. Prices continue to rise and
inflation persists at high levels. So in a curious turn
the RBI too is attributing inflation to factors that
can be addressed only in the medium or long term. Consider
for example its emphasis on agriculture in its recent
Annual Report. Recognising that monetary policy cannot
serve the inflation reduction objective unless ''complementary
policies are put in place'', the Report emphasises the
need to relax supply constraints in the agricultural
sector. According to the RBI, inflation reduction needs
''improved supply response for food, higher storage capacity
for grains, cold storage chains to manage supply-side
shocks in perishable produce and market-based incentives
to augment supply of non-cereal food items.'' This has
to be complemented with, ''better management of water
as also technical and institutional improvements in
the farm sector and allied activities. Land consolidation,
improving land quality, better seeds, irrigation, harvesting,
technologies and supply chains to retail points all
can contribute to lowering inflation and the inflation
expectations that are formed adaptively.''
The importance of many (if not all) of these in themselves
cannot be doubted. But to focus on these inadequacies
in agriculture that have been accumulated over the long
run as being the reason for the recent inflationary
surge is to evade rather than address the problem. The
concern even in areas outside agriculture is far removed
from the immediate problem. Recognising that the ''transmission
of inflation from abroad has also been an important
element in keeping inflation high,'' the report makes
a case for paying attention to fuel and food security.
What needs to be done towards that end? ''There is a
need for environmentally sustainable solutions to manage
energy security'', says the report. Finally, with respect
to manufactured goods, it calls for a study of the ''industrial
organisation structures'', which together with the competition
policy and price information, can help ''stamp out anticompetitive
practices and collusive behavior'' that contribute to
inflation.
Clearly, other than tinkering with interest rates, the
RBI has no immediate solution to the problem at hand.
It therefore focuses on supply-side policies, some of
which may recommend themselves, but can achieve little
in the short run. This focus on long-run supply side
constraints serves three purposes. The first is that
it absolves the government and the RBI of the responsibility
of addressing the persisting inflation problem immediately.
If growth increases demand, then we need to adjust supply
to hold prices. That, ostensibly, takes time. Secondly,
this line of reasoning seeks to obfuscate the fact that
the growth that occurs bypasses sectors such as agriculture,
and in the process exacerbates rather than resolves
supply side problems. Uneven development and disproportionality
that contribute to inflation are a part of neoliberal
growth. Third, the argument seeks to divert attention
from the link between the current inflation and neoliberal
economic policies. Rather the supply side argument allows
the RBI to advocate further neoliberal reform to remove
distorting subsidies (recommended with respect to fertilisers)
and strengthen the supply chain (through encouraging
large retail). It also, however, argues for free pricing
of petroleum products, since ''a large population cannot
be subsidized in an import dependent item.'' In its view,
neoliberal economic policies are not a cause of inflation,
but its solution. As in its belief in the efficacy of
interest rate increases, here too it is wrong.
*
This article was originally published in the Frontline,
Vol. 28: No. 19 Sep 10 - 23, 2011.
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