The Hindu Business Line : Inflation in the Indian context

The discussion on the causes and consequences of rise in the rate of inflation in the Indian context has been obfuscated by a lot of jargon flying over the people’s heads, leaving them none the wiser. Comments of experts are reminiscent of those of the ‘Six Blind Men of Hindostan’ who, to learning much inclined (as the poet says), wanted to have an idea about what the elephant looked like.

What precisely is the nature of the inflation which has the nation in its grip? Is it headline inflation, core inflation, demand-pull inflation, cost-push inflation or imported inflation? There are commentators plumping for each of these schools of thought. The average householder, however, is not interested in academic and official juggling with words. He only wants to know, in simple words, why prices of commodities in which he is interested are rising markedly and when the trend will be arrested. For both these direct questions, he has not so far received direct answers.

The problem with the English-educated elite manning the governments, academia and think-tanks in India is that they are interested more in parading their imported erudition than in solving the problem on hand. They feel that their job is done with dabbling in some esoteric, exogenous explanations which may not be pertinent to the prevailing circumstances. In other words, looking at Indian problems through Indian eyes based on the Indian situation does not come easy to them.

Let us get back to inflation. First of all, the faulty method of calculating the inflation rate, basing it on the wholesale price index (WPI), instead of on the consumer price index (CPI), as in all other countries, gives no indication of its real impact on the people.

The official line is that what India is faced with is imported inflation, meaning that the rise in the global prices of crude oil and agricultural commodities, including foodgrains, and industrial products, and setbacks to global economy resulting from sub-prime mortgage disaster and US recession have contributed to India’s inflation. Of course, in an interdependent world, everything affects everything else, but for that reason, to palm off all that is happening elsewhere as the reason for the rise in the prices of foodgrains, edible oil, vegetables and items of daily use in India is to take the people too much for granted.

Loss of manoeuvrability

Traditionally, it is the prices of foodgrains that had kept other prices under check in the Indian context. This is because the food budget of an average Indian household constitutes close to 70 per cent of the total expenditure.

Indeed, the very fact that there is enough stock of foodgrains and essential commodities under the Government’s control in the warehouses of the Food Corporation of India (FCI), and that the Government was determined to procure them directly from the farmers without the interposition of middlemen is enough to make the markets behave.

Unfortunately, in recent years, by allowing the exports of foodgrains and by drawing down the stocks of foodgrains with the FCI to unsafe levels, the Government lost the degree of manoeuvrability which is imperative to keep prices stable.

If only the Government had begun taking action a year earlier on to stop exports of foodgrains, intensify procurement, maintain buffer stock at the desired level of at least 35 million tonnes under Central account, instead of letting it fall to around 10 million tonnes (as on January 31 this year) and ensure flow of adequate quantities of essential commodities through the public distribution channels at regulated prices, the inflation rate could well have remained within the comfort zone of five per cent. Even now it is not too late.

B. S. RAGHAVAN