Opinion Inflated by controls

scenario,the Committee cannot but urge the Government to overcome its inertia and come to grips with the reality of unabated rise in the prices of essential commodities.” These sentences,particularly the first,have been much quoted in the media. However,the report is about much more than that. One can complain about language and structure.

But,if one wishes to understand what’s happening to inflation in India,this report is far better than anything the RBI or the Prime Minister’s Economic Advisory Council has produced.

“Inertia” doesn’t only mean inactivity,the sense in which the report probably used it. It also means ineptitude; and if one lists the reasons for inflation and failed government policies,ineptitude cuts across all organs of government,not just the finance ministry. First things first,to ensure concerned consumers are completely confused. There are assorted price indices and they vary: the basket of commodities included; their weights; the sources of price-data; and aggregation methods are all different.

Broadly,there are: the WPI (wholesale price index),CPI-IW (consumer price index for industrial workers,a surrogate for urban consumers) and CPI-AL (consumer price index for agricultural labourers,now the same as the consumer price index for rural labourers,a surrogate for rural consumers). Let’s leave aside the issue of their proposed revamp and switch from WPI to CPI for policy purposes.

Each is subject to monthly variations. Consequently,an inordinate focus on point-to-point changes,functions of base levels a year earlier,can be misleading. Thus,when point-to-point WPI became negative between June and August 2009,some sections of the media were eloquent on the subject of India being on a deflationary spiral. Broadly,since UPA-I,annualised WPI-inflation has been between 4 and 7 per cent,with 7 per cent possible in 2009-10,higher than government comfort levels.

In 2008-09,annualised WPI-based inflation approached 8.5 per cent. That brings us to the three components of the WPI: the primary component; fuel,power and so on; and manufactured items. For non-primary,global price changes and exchange rates can be determinants and with global recovery,that will again become an issue. But at the moment,all discussions are about food items (a sub-component of primary). Since 2005-06,annualised food inflation measured by WPI has been 6.5 and 9.5 per cent,12 per cent-plus levels are point-to-point. Both CPIs have higher food weights than the WPI. Therefore,food inflation phenomenon becomes sharper with the CPI.

Beyond statistical quibbling,two propositions stand out. First,there is an issue with food price inflation. Second,this has worsened under the UPA.

Within food,different items (rice,wheat,sugar,edible oils,pulses,fruits,vegetables) have some sector-specific reasons. But let’s take a generic issue first. Before liberalisation,global prices of manufactured products were lower than domestic prices,and global prices of agro-products were higher than domestic prices. With liberalisation,the two move closer. On an average,just as Indian consumers pay less for manufactured items now,they will pay more for agro-products,a trend accentuated when global prices harden. Export restrictions (wheat,rice,pulses,edible oils) can be temporary and knee-jerk reactions. They can’t be part of long-term solutions. If domestic garment prices increase,will one ban garment exports?

Domestic supply curves of agro-products have been inelastic. We have talked about agricultural reforms that will enhance supply ad nauseam since 1991,but little has happened. Climate change makes matters worse. This is a long-term trend,not something that can be ascribed to convenient scapegoats like the drought of 2009-10.

On this,we superimpose hikes in minimum support prices (a euphemism for what are actually procurement prices) in excess of what CACP recommends,artificially incentivising the switch towards food-grains from products such as sugar. (There has been a switch towards bio-fuels too.) Whether MSP hikes help the cause of poor farmers is debatable. In addition,input costs increase because of higher fuel,power and freight costs,not to forget labour costs,partly thanks to the NREGS.

Spliced onto this inelastic supply curve we now have greater demand — general population,income and consumption growth,changes in consumption patterns,increased rural demand (farmer’s debt relief,NREGS,Bharat Nirman) and incremental demand because of processing and organised retail.

Government functionaries before the Standing Committee mentioned all these arguments ex post. But with all that economic expertise in-house,shouldn’t these have been anticipated ex ante? That’s where inertia,interpreted as ineptitude,creeps in. Some within government have taught economics to students and have spoken about cobweb cycles and time-lags. Sugar is a good instance. Yet none within government apparently anticipated that the high production (and low prices) of 2007-08 would lead to a shortfall in 2009-10. Trade policy measures (imports) and futures,designed to cushion volatility,haven’t been allowed to function efficiently either.

Vested interests may not necessarily wish trade policy (or even futures markets) to function efficiently. There is a strong link between political classes and agro-distribution chains. The Standing Committee documents something no one has a clear answer to. Why has the spread between wholesale and retail prices increased in the last few years (especially for Delhi)? With reforms (which are missing) one expects dis-intermediation.

But why,and how,has intermediation increased?

There remains the matter of the poor and subsidisation of BPL households. Those inefficiencies are known. With its emphasis on an inclusive agenda,one would have expected the UPA to deliver on this. There was talk of food stamps in the 2004-05 budget. There was talk of smart-card based delivery in the 2008-09 budget. Because of inertia,nothing has occurred. And we are left with blaming states,black-marketeers,hoarders,speculators and inflationary expectations and invoking the Essential Commodities Act. It is a mistake to think we have discarded mindsets of the ’50s. For agriculture,they are still with us.

The writer is a Delhi-based economist

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