Originally Published 2010-08-09 00:00:00 Published on Aug 09, 2010
The UPA government's economic policy is insensitive to the woes of the common man whose share of heady GDP growth is only high prices and misery. The fires of rage now sweeping India was only to be expected.
Inflation soars, nation on the brink
The UPA government’s economic policy is insensitive to the woes of the common man whose share of heady GDP growth is only high prices and misery. The fires of rage now sweeping India was only to be expected.

While the good news is that food inflation has come down to 9.5 per cent in July; the bad news is that headline inflation (measured by the Wholesale Price Index), is still high at 10.5 per cent. Food inflation has come down due to a few cheaper vegetables (potatoes and onions) but dal (pulses) remains beyond the reach of the common man. This foretells more malnourished children in the future. But that is the “India” which the growth-obsessed government and political class is blind to.

The Wholesale Price Index (WPI), which gives greater emphasis to manufactures and fuel, is now in double digits which means non-stop misery on the non-food front as well. The fuel price index has risen to 14.2 per cent because of the government’s decision to raise the prices of petrol, cooking gas, kerosene and diesel. It is also significant that industrial growth is sliding and was at 11.5 per cent in May compared to 16.5 per cent in April 2010. Core sector (6 infrastructure industries) growth too has receded and recent company results show that many companies registered a much lower net profit than they did last year.

What’s happening is that various capacity constraints are surfacing like inadequate infrastructure, high raw material costs, higher land rents and prices and construction costs. All these would force companies to hike product prices further in the future also because so far they have tried to contain the steep price rise by keeping smaller profit margins. The petrol and diesel price hikes would also add 1 per cent to headline inflation.

However, one must also take note of the fact that the Chinese are experiencing an industrial slowdown which is cooling global energy and commodity prices and may benefit Indian industry to some extent and help inflation to come down a little. But if it doesn’t and headline inflation continues to be high, it would mean lower industrial growth and lower GDP growth in 2011. Besides, the action taken by the RBI to calm inflation (by hiking repo rates recently by 0.25 per cent) may remain inadequate if the money supply in the economy is high due to circulation of black money, Pay Commission handouts, and expenditure excesses like the fraudulent Commonwealth Games. One may expect the demand pull and cost push factors to continue.

Lower inflation is important for giving positive signals to foreign and domestic investors. If it doesn’t then all of them would like to simply wait and watch indefinitely. Foreign investors want to take back profits and when there is high inflation, the value of the rupee would erode in terms of dollars.

Inflation would also erode export competitiveness with its accompanying high cost of production. India has recently been ranked second to China in terms of manufacturing competitiveness. But with double digit inflation, this rank cannot be sustained. Thus, while China and Brazil which also faced inflation two years ago due to rising commodity and oil prices and fall in world wheat exports, have controlled inflation by raising productivity growth and increasing the supply of essential goods; in India inflation has persisted.

Prolonged inflation has been bad especially for the poor and the elderly (pensioners) and people with fixed incomes. They have had to forgo many necessities of life in order to survive. It may not have hit the middle classes as much because they are spending a relatively smaller amount of food than the poor. To the upper income groups, it is even less important whether the price of petrol or tomatoes rise by a few notches — the number of cars on the roads of Delhi would bear this out and people are buying still high-priced vegetables every day.

But the poor outnumber the rich especially if one takes note of Oxford University’s Multi-Dimensional Poverty Index, which is going to be used in the UN’s Human Development Report, according to which 421 million Indians live in intense poverty. It says that there are more poor in 8 Indian states ( Madhya Pradesh, Bihar, Orissa, UP, Chhattisgarh, Jharkhand, Rajasthan and West Bengal) than in all of sub-Saharan Africa’s 26 countries, which is home to 410 million poor people. The index reinforces the claim that distribution of wealth generated by India’s rapid economic growth is deeply unequal. Indeed according to another report, there are 100,000 Rupee billionaires in India (worth `10 crore each). But there are also 8.7 crore families (Planning Commission estimate) that are below the poverty line. For them to have two square meals a day and spare some money to educate their children and look after their health is a struggle which makes controlling inflation imperative.

One obvious way to do so is to revamp agriculture. On the agricultural front, much still depends on monsoons and how well the government is able to protect and store foodgrains production. The last Rabi crop of wheat, which was a good one, lent itself to colossal waste. According to the BBC, 13 lakh tonnes of wheat lay rotting outside in the open and this amount could have fed 10 million people for one year. This type of negligence is indeed unheard of anywhere in the world in recent times.

According to the Agriculture Minister, there is a gap in storage capacity of 140 lakh tonnes for which `4,000 crore is required. One fears that such a big expenditure could lead to corruption and another scam.

Agriculture growth, which declined by 0.2 per cent last year due to the monsoon deficit, would need to rise to 4 per cent which is not an easy task given the uncertainty of monsoons and the decline in public investment. The production of pulses has got to rise in order to satisfy the growing demand from the poor as dal is often the only source of protein. There is going to be an increase in demand for food in the future as NREGA, which has given cash in the hands of the poor, would lead to a spurt in demand for food.

Revamping the public distribution system (PDS) is important but how can the endemic corruption be eliminated? The government is contemplating issuing smart cards which would enable the real poor to access cheap foodgrains. But this would need to go through reality checks.

The government, which has been enriched by `1 lakh crore from 3G telecom auction sales, would do well to start a scheme of social safety nets for the poor and vulnerable workers in the informal sector covering illness, accidents and loss of jobs. If there is a social safety net, the burden on the poor due to high inflation rate would be much reduced. But the government is ready with a list for spending on other items.

In any case, the common man or woman is helpless against not only continuous price rise but also the rampant corruption that is taking place all over India in not only food distribution, hoarding of essential commodities but also in other mega ventures like the CWG. The political fallout of all this will be bad news for the government.

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