The Hindu Business Line : ‘Inflation and growth’

The editorial “Inflation and growth” (Business Line, March 25) rightly points to the trade-off between growth and inflation. “Rising inflation and falling growth” smacks of a mild stagflation that was lurking around in its sinister form during the 1970s. The current situation in the country is not all that frightening. But there is hardly any room for complacency as inflation is touching 6 per cent. That points to the worrisome prospect of its closing the gap towards double-digit inflation. Steadily rising food prices seen during the last few weeks, unless stemmed, pose a real danger to the stability of the economy as they might upset the growth applecart.

The cereal price index has gone up by 6.28 per cent.

The vulnerable poor will have to fork out more on food items out of their meagre and shrinking income in the absence of alternative income avenues.

The government’s pre-Budget Economic Survey (2007-08) proudly declared: “WPI recorded an inflation of 3.9 per cent on January 19, 2008, down sharply from the 6.3 per cent inflation rate a year ago.”

The triumphant tone sounds hollow as the WPI at 5.92 per cent has surged with a vengeance during the week ended March 8, 2008, in less than a month.

The primary articles group (foodgrains, etc) index marked a lower rise at 3.8 per cent than 10.2 per cent a year ago. These commodities contributed 22 per cent to overall inflation as against 35.4 per cent last year. Primary articles were the major drivers of inflation in 2006-07. These drivers are back in the seat.

The rise is reminiscent of the rampant food prices that prevailed last year also.

Prices of pulses such as moong, arhar, gram, masur, urad and grains such as rice and wheat did go up last year.

The government’s response by holding futures trading in a few commodities as responsible for the rise in the prices and banning futures trading in these, seems retrograde in view of the subsequent evidence to the contrary. This time around, food inflation is likely to be more acute, exacerbated as it is by the overall global tight food situation and persistently rising demand for food (besides fuel) from emerging economies.

The editorial has rightly pointed out that under the circumstances, policymakers must address two distinct issues — fiscal and investment policies have to boost farm production and, in turn, food supplies, and, given the high global prices, increasing imports would only stoke inflation.

Indian policymakers need not be complacent in the belief that the country has close to $300 billion to finance import of foodgrains. The point is if food inflation is an international phenomenon, the grain-exporting countries will first cater to the needs of their populations, and export the surplus.

Frankly, there is not much exportable surplus of grains in the world.

An indication of this can be seen in The Economist commodity-price index (London) that reached a new peak on March 4, driven by investment fund buying that added to strong demand from consumers in the emerging economies. Yet there is no alternative to a long-term agricultural strategy that focusses on public investment, sound rural infrastructure, a fair return to farmers by way of fair prices, crop insurance and protection against volatile agricultural prices.

The time has come for revoking the ban on futures trading in a few cereals and pulses that was imposed last year, if only to ensure fair prices to farmers.

Farmers will then continue to invest in agriculture and help boost its share in GDP. The falling share of agriculture in GDP is not a sign of its being an advanced or mature capitalistic economy a la the US or Japan but a danger signal that points to stagnant agriculture and falling productivity that call for stringent measures.

Nausheen Shaikh Amrita Nanavaty Mumbai