The Hindu Business Line : Seeds of inflation

After months of benign neglect and an unfocussed monetary response to the escalation of general prices, come the concerns of the Finance Ministry over inflation, with the Wholesale Price Index (WPI) crossing even the 6 per cent mark. Even as the Finance Minister voiced his worries, he sought to mitigate the severity by referring to the `base effect', a phenomenon that makes the rise seem larger than it actually is because the WPI had been falling during the same period last year. That surely must come as the lamest cover for a government that seems to have slept through what is officially described as the highest rise in prices in two years.

In the last 12 months, the WPI for many primary articles has risen in double digits: 17 per cent for wheat, 18.6 per cent for in oilseeds, 33 per cent for spices and condiments, 16 per cent for other food articles; overall, the Index for foodgrains has climbed 12 per cent. What has made it worse is the spike in some manufactured foods such as edible oils. In the second half of 2005 and the first half of 2006, the Government was content blaming global crude oil prices for the country's inflation rate inching up from the low of 3 per cent. It was only towards the latter half of 2006 that the Finance Minister noticed inflationary tendencies arising out of `supply constraints'. Base effect or not, the hard fact is that prices have been rising not because of a robust growth and an overheating economy but due to the stagnation in the farm sector.

The WPI for primary articles provide compelling proof that inflation is rural based and that the worst hit will be the poor and jobless. Monetary measures such as interest rate hikes dampen prices in an overheating economy. It would be cruel to suggest that the increased demand for food should somehow be contained. On the contrary, that demand has to be met and policies designed to ensure that the country acquires the kind of food security that the fastest growing economy in the world must ensure its people. At the very core of the current inflation lies an agrarian crisis, the loss of whatever self-sufficiency in food the country had for decades and the prospect of hunger and malnutrition spreading beyond the numbers that are alarming enough. Instead of turning to the Reserve Bank of India for another interest rate hike that simply makes credit so much dearer for even the most needy borrowers, the Finance and Agriculture Ministries, along with the Planning Commission, must confront what is probably the biggest crisis in food security and the rural sector that the country has faced in decades.