Tuesday, May 27, 2008

How much is Congress responsible for high inflation

The inflation has risen from 4.1 in February to 3 year high of 7.6 in May and it’s expected to touch 10 in coming months. Global trends are cited as the primary reason for the present situation. The IMF has reported that food prices in February were 65% more than in 2005; metal prices were up by 70% since 2005 and petroleum products have shot up by over 175%. A buoyant economy, shortfall in production of several goods, sky-rocketing crude prices, and the diversion of food crops for bio-fuel have all contributed to rising prices. These global trends have impacted not only India, but every country. Even China has reported an 11 year high inflation of 8.7%.

With the Lok Sabha elections due in a few months from now, this is really very unfortunate for the Congress. Very aptly the opposition has been using the price hike and inflation as an ammunition against Congress. The recent state election in Karnataka seems to have yielded results to BJP on this ground. But truly speaking none of the causes of high inflation can be directly attributed to the Congress. The economy is strong and we’ve been harvesting record wheat (67 million metric ton in 2003-04) & rice (89). We’re the second highest producer of both rice and wheat, just behind China. Still, we see high inflation due to the external factors, none of which could have been directly controlled by the UPA government. The measures taken by RBI are also very correct and typical to such situations.

Inflation is caused when the supply is less, demand is high and people have money to buy. Theoretically to tackle inflation the local currency, INR in this case, should be allowed to appreciate, which means the value of dollar should decrease (one way of doing this is to stop dollars purchase, thus reducing the demand for dollars). This results in lesser import cost, and hence reduction in price of all the imported commodities. But this impacts the export adversely, because exporters now earn lesser. This results in some exporters refraining from exporting stuff outside, which results in availability of more commodities in local market, which results in increase of supply and hence reduction in price. The second measure is to increase bank interest rates, thus resulting in people refraining from taking more loans from banks and keeping more money in banks. This results in less money floating in the market/industries. Hence the production is impacted, dividends are lowered, people have lesser money to spend and thus finally the demand (or buying capacity) reduces, which in turn helps to reduce inflation. At the same time the government has more money (in banks) at its disposal, which can be used for many developmental work. RBI has exactly done these two things. It has stopped buying dollars and hence allowed INR to appreciate. It has also increased the bank interest rates.
But still, isn’t there anything that the UPA government, lead by Congress, can do at this moment? Also is there anything that they have done wrong, which is having an adverse effect now? Yes, they can surely do something that will impact inflation in the long run, but not before the election and hence I’m sure they will never do that. Also it’s not possible for the illiterate electorate to appreciate the point.

Apart from the measures, mentioned earlier, for curbing inflation, there’s another indirect way, that is to increase the supply and match the demand. One of the reasons for the present inflation is scarcity in wheat and rice in the world market. Isn’t there any way to increase the production of both these grains significantly in India? The prices in the international market for these grains is now very high. If we have any surplus, after feeding our unfed and partially fed population, we can make a killing. At present we’re produce little surplus rice to export around 3 million tons of rice and just adequate wheat to feed our own people. But still not everyone in our country is fed adequately. If we can produce more rice and wheat we can surely add value to the nutrition of our own people. If we can produce even more we can surely export the surplus. At present the yield, metric ton of grain produced per hectare, for wheat is only 2.63 (10th in the world), whereas in China it’s 3.93 (7th), USA 2.97 (9th) and UK 7.78 (1st). For rice India’s yield is just 3.12 (17th), even lower than Bangladesh, which is 3.6 (14th), whereas in China it’s 6.06 (8th) and Egypt 9.52 (1st). UK & Egypt, with highest yield for wheat & rice, have much smaller cultivable lands and hence we may choose to argue that emulating them might not be feasible. But we can always emulate China, which has comparable cultivable lands. If we operate at China’s yield we can produce 100 million tons of wheat and 250 million tons of rice, against the current consumption of 69 and 118 million tons respectively. The increase in yield is possible through better technology and infrastructures, which will come at a cost.

This additional cost could have come from the $15 billion that was waived as debt for farmers. It was argued that this will impact 40 million farmers who have taken loans from government banks. But in reality the 110 million farmers, who have taken loans from local money lenders at ridiculous interest rates like 120%, won’t be benefitted. Only in Punjab, farmers have debt of the order of $250 billion, out of which more than 50% is from local money lenders. So this $15 billion waiver is just a political gimmick. The entire amount could have been used for increasing the agricultural yield, which would have impacted the farmers in a much better way and solved the present food crisis to a great extent.

Recommended Reading for futility of the $15 billion waiver of farmers debt: http://conversationstarter.hbsp.com/2008/03/indias_25_billion_poison_pill.html

All statistics from http://www.nationmaster.com/red/country/in-india/agr-agriculture&all=1 (for 2003-04)

No comments: