Getting a start on investments

Everyone knows food inflation hurts the poor more. While food makes up roughly 30 per cent of an average Indian family’s consumption expenditure, this proportion is more than half for less well-off households. It goes without saying, then, that in the current scenario, where overall commodity prices are increasing annually by 7.25 per cent but food inflation is almost 11 per cent, the poor are bearing the brunt. What makes the present situation worse is that the Indian economy is today in the grip of a slowdown, which is partly reflected in ‘core’ or non-food manufacturing inflation being less than 5 per cent. That limits the ability of workers, for example, to demand of their employers, a hike in wages to absorb higher living costs on account of food. Also, firms can hardly be expected to take a benign view of such demands, when their own margins are under squeeze due to poor demand conditions. That probably also explains the recent spurt in labour disputes that the country is witnessing. The current food inflation is, indeed, different from that in say, 2010, when economic activity was sufficiently robust to permit some pass-through of wage pressures.

It is clear from this that without growth returning, food inflation can emerge as a much bigger source of social instability than in the immediate past, when the economy was in an expansionary mode. Moreover, there is not much that the Government can do about a poor monsoon, just as monetary policy cannot really prevent prices of vegetables or milk going up. If that makes food inflation a relatively autonomous phenomenon at least in the short run, it only points to the urgency for growth and investment reviving at any cost. When firms are unable to utilise even existing capacities fully, which pushes up their unit fixed costs, it is difficult to accommodate wage demands, howsoever fair and reasonable they may be.

All this only re-establishes the case for both the Government and the Reserve Bank of India (RBI) to prioritise growth over other concerns. If the current inflation has largely to do with food articles – which monetary tightening cannot really address – there is no reason for the RBI not to cut its policy rates, even only for the purpose of restoring investor sentiment. But here, the Government has an equal, if not more, role to play. If someone like the steel magnate, Mr Lakshmi Mittal is deterred from making investments in India only because of local wrangles over land acquisition, the blame lies largely with the Government. The role of mediating among various stakeholders to balance their often conflicting interests is something only the Government can effectively discharge. And it needs to do this all the more today to get projects off the ground, which ultimately benefit the poor as well.

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