Inflation - A deeper analysis
With the basic commodities also going out of reach for the common man; the government still seems to be unmoved as it seems to be passing the buck to…

It has been almost a year now that India has been plagued by ‘inflation’. Every month we are hit by yet higher inflation rates that are way beyond expectations. And the worst part is that one need not wait for the official announcements; a simple trip to the grocery market is the best indicator of how prices are rising week after week. That is to say, it is the food price rise in astronomical ranges that is fuelling the entire inflationary run in India. However, the official announcements are important as they display two important points. First point here being the differences between Wholesale Price Index (WPI) and Consumer Price Index (CPI) and second one being the ever rising figures quoted by the government along with its admission of failure to curb the problem.

To discuss this in detail we can say that the difference in WPI and CPI indicates that there are certain economic agents that are fuelling the price rise. The most obvious explanation is of course middlemen and hoarders. The problem of the neo-liberal economic policies is that it limits the scope and role of the government in procurement and distribution process of food grains in the economy. With lesser role comes lesser ability to control volumes and prices of distribution. Private
procurement by both national and international agencies mean that they take up total crop produced by farmers and completely dictate to whom would it be sold to. If international prices are more lucrative, food items will be exported, irrespective of the domestic market having enough to feed its own population or not.

In addition to this, the government facilities also face huge problems. The current price rise has also brought forth the pathetic storage facilities at the government agencies. An RTI report in 2008 indicated that between 1997 and 2007, more than 1.3 million tonnes of grain (130,000 truckloads) got decayed in storage. The government spent Rs 2.59 millions just to get rid of this rotten food. It is but common knowledge that in 2001-02, the government chose to export excess grains from government stocks rather than distribute it within the poor to avoid storing costs and rotting grains. This showcases that there is a definite problem in priorities in all forms of procurers in the country.

However, it is not only the distribution that is faulty. The errant monsoons last year also did affect the production. The issue of farmer’s suicide (which reached to such levels that the Prime ministerial committee was setup to address the problem) has been plaguing us even before the droughts actually hit. The withdrawal of subsidies and supports to agriculture resulting in an increased debt of farmers is certainly a problem of faulty government policies. Moreover, inadequate agricultural research, poor extension services, overuse of ground water, and incentives for unsuitable cropping patterns have also caused degeneration of soil quality thereby causing a reduced productivity of land and other inputs. The drought whereas has only acted as a catalyst, but the government is trying to use it as a drape to cover up its faults.

The proof of such an accusation lies in global experiences. Much before the global financial crisis, the world experienced surging prices in food commodities (along with oil) in 2007. In 2007 and 2008 prices of the most primary commodities increased very rapidly with no relation to actual changes in the global demand and supply. Thereafter, they collapsed too, from peaks in May-June 2008, at a rate steeper than the rise. Such price fluctuations cannot be attributed to sudden whimsical changes in global demand, leave apart any global drought! Even the most notorious El Nino cannot he held responsible for this.

The problem was clearly created one rather than an accidental occurring. It is now quite widely accepted that financial activity, especially the involvement of index investors, was strongly associated with these dramatic price movements. Increasing financial deregulations allowed financial agents to enter commodity markets without any requirement of holding physical stocks. This generated a bubble in the future market which spilled over to the spot market as well.

The rise and fall of the financial market affected the global prices of food commodities directly, with catastrophic consequences for both global producers and consumers both. It was expected that with the financial crisis being subsided, commodity price speculations would decrease rather than shooting up as suddenly as they had. The food and oil prices however have been rising globally since early 2009, even before any signs of an actual global re covery from the financial crisis were witnessed.

Such price volatility was witnessed in other primary commodities as well. Although, non-agricultural primary commodities like metals and other industrial inputs showed less price rise during the 2007 commodity boom yet more volatility over the course of 2008 and sharper falls were witnessed thereafter. But these prices have exhibited recovery since then, with more than 50 per cent increase in the metals between March and November 2009, and by 43 per cent in the case of other industrial raw materials. And with our economy being further integrated with the global economic movement, we are more and more vulnerable to such volatilities. Whether it is possible for any particular government to counter these volatilities is yet another issue whereas the biggest challenge for governments is to admit the problem.

Now, why the Indian government refuses to do so is quite evident from our domestic policies. Demand deflationary policies are being increasingly adopted to check inflation. The newest logic being fed is that government policies like NREGA have raised the income levels which in turn have fed the increase in demand resulting in rising prices. The government thus needs to form policies that reduce demand to counter inflation. When George Bush cited similar excuses about China and India, we mocked at him. Now, the same reasons are being cited in case of our own rural poor and it is being accepted seriously. Why so? Citing such excuses signifies that current growth is not meant to benefit the poor. In fact, wellbeing of the poorer section is accused of creating problems! We are and should be more concerned about international investors and corporate profit margins than the well being of the mass population as per the ruling government.

Poverty and malnutrition figures as highlighted by the World Human Development Report have proven the falsity of such claims. The current Food Security Bill and the ensuing debate about its shortcoming have amply proved that the poor in our country have in truth been facing the gravest brunt. Although I welcome the food security bill, yet it must also be kept in mind that such policies cannot succeed if food prices continue to rise unabated.

The failure of the government to curb food prices despite the problem being persistent for over a year now proves the government’s incapability at best; or its negligence at worst. Either way, the onus lies on the government, or in current lexicon, the buck stops at the parliament. The problem is endemic and cannot be countered by individual state governments at local levels. It is up to the central government to address the issue and for that, it must see the picture in its totality and not as an aberration caused merely due to truant monsoons.

— The author is an economist with Economics Research Foundation, New Delhi