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Saturday, February 5, 2011
Wednesday, February 2, 2011
C P CHANDRASEKHAR ON THE INFLATION CONUNDRUM
TO the surprise of the UPA government, inflation just refuses to go away. Almost a year ago, when addressing a chief minister’s conference on food prices early in February 2010, prime minister Manmohan Singh declared: "The worst is over as far as food inflation is concerned. I am confident that we will soon be able to stabilise food prices." This is not the only evidence that the government did actually believe that prices would follow some sort of a cycle, and are more likely to rise slowly than at a rapid pace. But, over the last year, almost every month or even week, one official spokesperson or the other (be it the Finance Minister, the finance secretary, the Deputy Chairman of the Planning Commission or the ubiquitous head of the PM’s Economic Advisory Council) has declared that inflation is bound to moderate.
This expectation came from a particular reading of the situation. Whenever prices did rise rapidly, it was attributed either to supply side factors such as a poor crop or to unavoidable factors like the “base effect”. Thus when the prime minister spoke in February last year he looked forward to a good monsoon and a better crop. And, if prices had been unusually low a year earlier, even a return to “normalcy” would reflect a high rate of inflation that must be discounted. Occasionally, of course, there was talk of hoarding and speculation, but only on the part of unscrupulous traders, who were exploiting temporary demand-supply imbalances.
Despite the fact that the monsoon has been much better in recent seasons, the annual point-to-point inflation in the Wholesale Price Index (WPI) for Food Articles stood at 18.32 per cent and 16.91 per cent during the weeks ending December 25, 2010 and January 1, 2011. The figures for the corresponding weeks of the previous year were 19.9 per cent and 19.6 per cent. Not much has changed even though the commodities involved are slightly different. Moreover, the month-on-month inflation rate as reflected even by the Wholesale Price Index for All Commodities, which stood at a disconcertingly high level in the first half of 2008, and then declined consistently between July 2008 and July 2009, accelerated subsequently and has remained at high levels throughout 2010. The month-on-month rate of inflation stood at 9.7 per cent in November and 8.5 per cent in December. And if weekly WPI movements are an indication this is likely to be true in January 2011 as well. The consumer price indices for agricultural labourers and industrial workers, which reflect the movements in the basket of goods consumed by these sections (which includes housing that dampens the increase) also rose by 7.1 per cent and 8.3 per cent respectively in November relative to the corresponding month of the previous year.
SPECULATION PUSHING PRICES
There are a number of noteworthy features of this inflation scenario. The first is that, while it is not restricted to food alone, it has been substantially driven by food articles, which are more prone to speculative influences. Even when demand-supply imbalances are minor or absent, speculation can push up prices. The second is that within food articles, inflation has at different points in time affected different commodities, such as cereals, pulses, vegetables, eggs, meat and milk. Not all of these commodities are equally weather dependent and the prices of some are influenced by where administered prices are set. To attribute the trends in their prices solely to demand-supply imbalances or imported inflation is to avoid the conundrum. Third, when inflation does occur in some food items, be they onions, vegetables or even cereals, the rate of inflation tends to be extremely high, pointing to the role of speculation in driving prices in the short run. Finally, even when such influences are not at work there seem to be factors operative that keep the “all commodities” inflation rate high.
Even though it is still early to say, the trend over the last one-and-a-half years suggests that there are structural factors at work that are setting a higher floor to the inflation rate. They may be neutralised in the future. But even if they are, they could as well return to play a role subsequently. The government has recognised this structural, inflationary tendency in a peculiar, in fact patently absurd, way. It attributes the inflation to the demand-side effects of high growth. If people are richer because of an 8-9 per cent growth rate, they are bound to demand more. Since supply does not adjust, prices are bound to rise.
There are many assumptions here. That when GDP grows, those who need to buy and consume more cereals, pulses and vegetables garner a reasonable share of the benefits of that growth. Or that when GDP grows, such growth cannot occur in large measure in the commodity producing sectors, leading to supply-demand imbalances. That even though the “high growth” era began in 2004, it is only now that it has generated demand-supply imbalances. And, that if there is indeed a supply-demand imbalance the government is constrained, for whatever reason, to redress it by resorting to imports. Making such assumptions is not just wishful thinking, but avoiding the conundrum.
It is not that there are no demand-supply imbalances. India’s growth has indeed been lopsided. As has been argued by perceptive analysts, India’s high GDP growth was recorded in a period when the agricultural sector and a range of petty producers were experiencing a crisis, an aspect of which was the non-viability of crop production and therefore an extremely slow growth of agricultural output and GDP. At some point that long-term crisis, was likely to result in an unsustainable demand-supply imbalance.
STRUCTURAL FACTORS
But there are two other factors that are structurally embedded in the economic environment generated by the government’s neoliberal reform agenda adopted for two decades now. The first is a tendency where corporate consolidation in production and trade, decontrol that permits profiteering, a reduced role for public agencies and public sector firms and the withdrawal or curtailments of subsidies on a range of inputs, has pushed up costs and prices (including administered prices) substantially. As some have argued, India is increasingly a high input price and high output price economy, with a rising floor for many prices. The second is the role that speculation has to come to play, with liberalised trade, with the presence of large corporate players in the wholesale and retail trade and with the growing role of futures and derivatives trading in a host of commodities. Add the influence of these two factors to the underlying crisis in some commodity producing sectors and the long-term, structural inflation is more than partly explained.
The government of course does not consider these angles worth pursuing. The reason is partly ideological. It cannot bear questioning the outcome of reform. It cannot bear suggesting that corporate entry can lead to profiteering in a context of decontrol. It does not believe that speculation in futures markets can push up spot prices, and has banned some of these markets only because of public pressure. It cannot contemplate a larger role for the state and no role for corporate (domestic and foreign) players in the both wholesale and retail trade. In the event, all that the prime minister’s emergency meetings on the inflation issue could throw up is an inter-ministerial group mandated to monitor short-term fire-fighting measures and promote actions that the government has claimed to be promoting for many years now.
ABSURD REASONING
Neoliberal thinking not only leads to policy paralysis but also to absurd reasoning. According to some in the government the inflation problem is the result of a poor supply chain that cannot, at low cost, mobilise and reach supplies from wherever it is available to wherever it is needed. This creates unnecessary shortages that push up prices as well as encourages speculation that aggravates the price increase. The solution therefore is corporate retailing services, including that which would be offered by large transnational retail firms. According to reports, using inflation as the excuse, the cabinet is about to consider a controversial proposal to permit 51 per cent foreign equity in multi-brand retailing. This argument too borders on the absurd. It ignores the fact that, though India has till quite recently had no such retail trade structure, there have been long periods when prices and inflation have been kept in control. It also ignores the evidence from other contexts which shows that where such retail chains are active, the margin between prices paid to producers and charged to consumers tends to be high, buoyant and downward sticky.
What is more, in the midst of all this, on the basis of the liberalised pricing mechanism, the oil companies have been allowed to hike the prices of petrol a second time in quick succession. Given the role of public sector firms here, nobody would believe that a nod from the government was not obtained before the hike. If balance has to be maintained a diesel hike must follow. This government may go in for that as well. Doing this to the prices of what are universal intermediates in the midst of an inflation emergency might be seen by some as madness. If the belief that the people can be called upon to sacrifice real incomes because reform cannot be held back or reversed is a sign of madness, then possibly it is.
Courtesy: www.pd.cpim.org/
Saturday, January 22, 2011
EDITORIAL OF PEOPLE’S DEMOCRACY DATED 16-01-2011: BIZARRE WAYS OF UPA GOVERNMENT
BIZARRE are the ways of governance of this UPA-II government. There was much expectation that the union cabinet, which met last week to consider the alarming situation caused by relentless rise in the prices of all essential commodities, would come out with some tangible measures that would provide relief to the people groaning under this onslaught. Nothing of this nature happened. Instead, media reports suggest that there is a frenetic exercise of `passing the buck’. The high-profile Congress general secretary hinted that the compulsions of a coalition government prevented the undertaking of effective measures to contain this price rise. The spokesman of the Nationalist Congress Party, whose chief is the minister for agriculture, shot back with references to successful coalition governments in Italy!
While the agriculture ministry is, indeed, responsible for many a decision that impacts on the production and availability of foodgrains, the decisions of other ministries like finance and commerce also impact on the prices. The former, along with the Reserve Bank of India, determines the quantum of money that is currently in circulation through monetary policy measures. The commerce ministry determines the export-import policy that has implications on the availability of commodities in the domestic market. Therefore, it is the collective responsibility of the union cabinet to take appropriate measures on the basis of a scientific evaluation and analysis of the causes that are making the prices gallop. In discharging this collective responsibility, the union cabinet has miserably failed. Worse, it appears to be completely at loss to comprehend the causes.
It would be wrong to conclude that the cause for this current price rise is a supply-demand mismatch alone. Take the example of onions in Delhi. Alarmed at the astronomical rise in the prices of onions, its supply was nearly doubled from 730 tonnes on December 20, 2010 at the Azadpur Mandi to 1144 tonnes on December 21. The wholesale price fell from Rs 55 to Rs 50 per kg while the retail price increased from Rs 75 to Rs 80 per kg. Clearly, there is more to this price rise than mere supply-demand mismatch.
In the last nine months of 2010, the wholesale price index for vegetables rose by 67 per cent. The retail prices have soared much higher, making chicken cheaper than onions! Marie Antoinette, who infamously screamed during the French Revolution that if people cannot get bread, why don’t they eat cakes, would, indeed have been a happy person now in India.
What happened with sugar in the beginning of 2010 is happening with onions at the beginning of 2011. The exports were encouraged through incentives despite warnings that there could be shortfall in the supply of these commodities. When the prices started to soar, exports were banned and imports were encouraged by eliminating all import duties. Yet, the prices did not begin to climb down. The same traders that benefited from export incentives are now benefiting from duty-free imports. Is this a reflection of the bizarre ways of this government, or, is there a scam waiting to unfold?
During the same period of the last nine months of 2010, the cumulative value of trade in the commodity exchanges in the country rose by a phenomenal 51.37 per cent to stand at Rs 78 + lakh crores. The cumulative value of trade in agricultural commodities alone rose by nearly 8 per cent to stand at Rs 9 + lakh crores. The rise in the value of trade in the forward/futures markets obviously reflects high profitability. It is such speculative trading, which today is internationally recognised, that is relentlessly pushing up the prices of all essential commodities particularly food prices. Despite continuous demand by the Left parties, this UPA-II government refuses to prohibit such speculative trading.
Unless such speculative trading is banned, the excess foodgrain stocks rotting in central government godowns are released to the states for sale through the public distribution system and the budgetary hikes in the prices of petroleum products are rolled back, no relief for the aam admi is possible.
The bizarre ways of this government can be seen in other areas as well. The new telecom minister, holding additional charge, has completely negated the CAG report which estimated a loss of Rs 1.76 lakh crore to the exchequer in the 2G spectrum sale. If the CAG report is baseless, as the minister claims, then why did A Raja resign from the union cabinet in the first place? The issue is not finding fault with calculations. That there is a massive scam has been proved by the fact that at least two companies that procured 2G licenses, unloaded a part of their shares to international telecom operators at prices that are 10 to 12 times more. The scam lies in the fact that the licenses were sold in 2008 when the mobile telephone population was 30 crores at the 2001 prices when the mobile telephone population was only 40 lakhs.
It is high time that this UPA-II government must be forced to take urgent measures suggested above to contain this relentless rise in prices that is pushing, additionally, crores of people to survive below the poverty line and speedily uncover the manner in which a colossal loot of our country’s resources has taken place. Further, the government must be forced to recover the losses and put these huge sums of money to provide the much-needed food security, education and health for our people.
(January 12, 2010)
Courtesy: www.pd.cpim.org/
Thursday, January 13, 2011
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