The Hindu Business Line : Fighting the inflation blaze

Apart from hurting several millions of the country's poor, inflation is bothering the government as nothing else. There is serious concern over the unabated rise in prices, especially of essential food products. Over the last several months, the Centre initiated a series of measures (often, under panic), but achieved little success in effectively containing inflation.

Even as the inflation rate raced past the 6 per cent mark at the wholesale level, the Government from time to time expressed optimism that prices would soon moderate or would be brought under control. Brave assertions on the price front have led us nowhere.

A CONFESSION

The Finance Minister has now made a confessional statement (Rajya Sabha Question Hour, May 8). He is certain that inflation will not be contained anytime soon. However, he continues to express confidence that the rate of inflation will be moderated. He is quoted as saying that "in the long term it (inflation control) is possible only if the supply-demand mismatch is met".

This confession — perhaps made for the first time — is a complete U-turn from what he had been saying since last year. In the past, three or four different explanations had been proffered. Some time it was base effect (the rate of price increase appears large as it starts from a low base), and at other times, it was supply-side constraints. On another occasion, inflation was explained away as a `monetary phenomenon'.

The appropriateness of these explanations apart, the ground reality is that raging inflation continues to hurt almost everyone. Shortages of essential food products are becoming more and more acute. Dependence on imports is rising. High international prices translate to high domestic prices despite imports. We are moving towards a crisis situation as far as availability and prices of essential food products are concerned.

The fact of the matter simply is that policymakers have failed to pay adequate attention to agriculture production and related issues. While demand has been inexorably expanding due to income growth and demographic pressure, for ten long years, farm output growth has been rather low at 2.2-2.3 per cent. Output of major food crops — rice, wheat, coarse cereals, pulses, oilseeds, sugarcane — has either stagnated or worse, declined.

Spark Ignored

The policymakers ignored the spark that started a few years ago, and now it has turned into an inferno. The Government is fighting a losing battle to bring the `accident' under control.

Meanwhile, the Government did just those very easy things, similar to plucking low-hanging fruits. Import barriers were removed; tariffs were slashed; internal markets were liberalised; and too much speculative money was allowed to chase scarce commodities through, among others, online derivatives trading. Without doubt, these are important steps in the market reforms process and have to be taken at some stage; yet, when you juxtapose these liberal measures with utter neglect of the structural issues of production, processing and marketing, the disconnect becomes clear.

Policymaking has been far from holistic. The least the Government should have done was to strengthen the production processes simultaneously with market liberalisation. Today, the entire nation is paying a price for callousness and continued neglect of the farm sector. Unfortunately, miracles seldom happen in agriculture, and not under Indian conditions in nay case.

It would be a pity if the Finance Minister believes that supply-side management means imports. No doubt, imports may be necessary on occasions, and should be resorted to when there is no alternative. But the Government has done little to explore the alternative, which is raising indigenous production and productivity of a whole range of crops in a sustainable manner.

Have Farmers Benefited?

While on inflation and sharp rise in prices of food crops, a serious issue that must engage the attention of everyone is whether farmers (primary producers) have actually benefited from the price rise.

While it is a fact that consumers have ended up paying a high price for their food — rice, wheat, pulses, edible oils, etc., — there is nothing as yet to suggest that growers have been the beneficiaries of rising prices.

In the present dispensation, there is strong suspicion that there has been a transfer of money from the consumers, not to the growers, but to the middlemen, mostly speculative traders. In case of many crops, especially wheat, farmers usually pre-sell their crop to commission agents who derive the price premium.

In sum, the candid confession of the Finance Minister should send a message to everyone — do not expect food-related inflation to moderate soon.

The discomfort of the Government is further exacerbated by strong international agri-commodity markets caused by the sudden craze for bio-fuels. Strengthening rupee is the only silver-lining. Imported foods will be less expensive.

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