Prices start getting out of control (Inflation-I) (APRIL 16, 2008)


Prices start getting out of control

DR. MOHAMMAD MANZOOR ALAM takes a look at the inflationary surge that has burnt a big hole in the middle class pocket and bodes greater ill for the weaker sections.

As inflation rocketed to 7.41 percent at the end of March, from a little over 4 percent in January, it shocked and awed opinion and policy makers to sit up, take note and do something about it. Sooner the better. Because the people (especially, the urban middle class) are not amused by such developments. An electorate that could send a government packing over the rise of prices of a single commodity, onion, ten years ago, would not possibly tolerate an out of control inflation that had sent food grain and commodities prices spiraling through the roof.

The most distressing point of it is that the inflationary pressure has been building relentlessly over the last several weeks. And, we are talking in terms of the wholesale price index (WPI) only. We know that the average consumer has to pay a more to buy the same goods at retail outlets than the price at the wholesale market. Thus it is the consumer price index (CPI) that really matters. Only that shows how big a hole has been burnt into your small little pocket.

Food grains, edible oils, cement and steel, petroleum products, manufactured goods―the whole spectrum―reflect a steep, steady climb. India's chief statistician Pronab Sen has admitted that the salaried classes have to shell out 30 to 40 percent of their earning on food only. That is surely a discouraging picture.

Sen has explained the economics of the present inflationary trend, "Since food and manufactured items constitute almost four-fifths of the WPI basket, the inflation rate is bound to increase. India is no longer insulated from the world. Food and commodity prices are rising globally," he told the Indian Express  recently.

Our economist prime minister said the same a day earlier. Things are turning out to be bothersome for the salaried classes as they have to shell out a substantial part of their earning on food alone (to the detriment of other needs). However, the prime minister has cautioned against drastic measures to bring down food prices.

At least here the government is partially right. We, in the cities, had a great time over the last decade, enjoying a steady rise in our incomes, while the people who produce our food in the countryside have been dying from malnutrition and disease. To top that 20,000 farmers have been committing suicide every year out of sheer desperation and hopelessness.

As the economic boom was going on at a spectacular rate of 9 percent, we, the urban middle class, had been scooping off all the cream and leaving nothing for the poor farmer. Even today 67 percent of our work force is employed in agriculture, which has been growing at a rate of less than one percent. The prime minister is right in his assertion that the farming sector cannot be sacrificed to accommodate other interests. Even at the present level of prices farmers are hardly getting any substantial profit.

Today the food security situation has returned to something close to the pre-Green Revolution days. Now we have a short fall of nearly 20 million tonnes of food grains. According to the classical economic thinking, if there is more money and less goods (and services) in the market, prices will rise. To ease inflation government is to import food grains and oil seeds, which should ease the pressure as there will be more food available to dampen prices.

Export of pulses and rice is banned (except some fine rice like Basmati and other long-grained, high-value varieties produced in extremely low quantities). Export of steel and cement is being curbed. Towards this end duty cut has been announced on edible oils.

All this might have to be augmented with the possible hike in cash reserve ratio by the Reserve Bank of India (RBI). That means banks will have to increase the amount deposited in reserve with the RBI. Monetary tightening results in some curbs on extra cash flow, which in turn douses inflation as theoretically there is less money available to fuel the inflationary fire.

However, we must remember that measures to control inflation are always likely to slow down the rate of economic expansion. In short, we may not have 8-9 percent growth for a while.  g

(Watch this space)

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