UPA Protects Corporates, Leaves People at the Mercy of Price Hike

— Girish Ghildiyal

The second increase in petroleum prices within 3 months is a result of crude prices going up beyond 50 dollars per barrel in the international market. There seems to be little likelihood of international prices coming down in coming months – except perhaps due to a drastic reduction in demand from China.

Inflation which had climbed down to 7.3% in first week of October’04 from a high of 8% in the month of August’04 had already resumed its upward journey by the third week of October and now threatens to reach new heights.

The Government had previously looked at soft options, so as not to upset the low interest rates, and had artificially depressed the rupee against the dollar in the hope of not scaring away potential investors. Now, it has finally come around to the view that increasing interest rates may be inevitable. To tame the inflation, RBI increased repo rates by .25% at the beginning of the month and slowly banks are following suit in case of lending to the consumers.

Inflation pushing the wholesale prices beyond 8 percent has not only become a much talked about topic in the newspapers, it has also created panic in the corporate circles. The biggest component of inflation is imported – in the form of rising prices in crude oil, iron ore, steel, and coal. The second biggest component is shortfall rainfall of about 12% this year. The situation has brought back the memory of 1995, when in the face of inflation reaching as high as 12.5 percent, Mr. Manmohan Singh, the then Finance Minister had to impose savage monetary tightening through Reserve Bank, thereby pushing the industry into recession. If the inflation gets out of hand, the government may be faced with the possible nightmare of stagflation. However, the issue has not yet been made a matter of political confrontation by the principal opposition party BJP, and the CPI-CPI(M) has done little more than sending caution notes.

There is an all-round hike in the prices of primary articles, fuels and manufactured products, which has pushed up inflation to a new height. Though it is being claimed that consumer goods’ prices have not increased, the fact is that the index of Primary Articles’ group was up by 0.1 per cent to 192.9 points due to a rise in prices of both food and non-food articles by the end of August’2004 and is rising since then. It was 177.3 points in the year-ago period. And what is the guarantee that inflation will not soon invade the consumer goods sector? Inflation continues to be high despite cuts in excise duties and import duties on petrol, diesel, kerosene and LPG, and steel during the year.

From the responses of the government it is clear that it is least bothered about the fate of toiling masses. Rise in prices soon after devastating floods in Northern and Eastern parts of India has made the life of millions miserable. Elsewhere in the country there has been scanty rainfall during the monsoons and backbreaking inflation is going to be an added burden on a failed crop.

While the public reels under the assault of inflation, the government seems to have adopted a policy of wait and watch. For public consumption, it is being explained off as a consequence of a combination of national and international events – about which not much can be done. But that is not the whole story.

It is true that on the domestic front the rainfall has been erratic and at the international level there has been an increase in geopolitical tensions, and also there has been tremendous amount of speculation in oil; and also that the demand for crude oil in growing in China and the US. On the other hand, the Russian petro-major Yukos is going through a crisis these days. Arabian countries have declined to step up oil production to meet this “energy crisis”. All this has forced the crude oil prices to sustain at a ‘high’ mark of $ 43 a barrel. Given all these things, one cannot overlook the apparent lack of concern shown by the government in managing this rise in prices. Why?

The Government is sitting pretty since it feels that the rise in consumer price index (which reflects the movement in prices of a large number of items that people actually buy at the retail level) still remains at a rate below 5%, which is still not high enough to bother about. However, this is merely a jugglery of statistics. In fact the divergence in WPI (wholesale price index) and CPI (consumer price index) is largely on account of composition of indices, i.e., items taken in CPI are different from those in WPI. It is quite probable that because of cheaper imports, competition has increased in the consumer items, which has led to reduction of the margins earned by the middlemen and the manufacturers. But that may not last long.

But that is the worry of the victims of inflation. What the government actually has in mind is the prospect of realizing the impossible budget numbers as a result of this inflation. An increase in inflation will be very helpful in achieving disproportionately high growth targets. An inflation hovering around 7 to 8 % will make it possible to achieve a nominal (as against real) GDP growth of around 13%! Since most of the duties and taxes are on percentage basis, the government’s revenue collection will end up closer to the target.

Another reason for the government’s inability to contain inflation is its unwillingness to raise rates of interest. Firstly, the Manmohan-Chidambaram duo is once bitten twice shy. Mr. Chidambaram has already proclaimed himself as “investment minister” so as to keep Dalal Street indices at a happy high. Similar to what we saw in the case of provident fund, the government is trying hard to keep interest rates at a low level, so that it is cheaper for the corporates to borrow. Because of the government’s stubborn wish to keep the interest rates low, the corporates are borrowing sub 8% rate of interest – which is below the inflation rate – which means they have access to funds free of cost!

It is easy to understand the dilemma of the government. Despite tall proclamations in the much-hyped Common Minimum Programme, the government is determined not to spend more on PDS, or in social sectors such as healthcare – so as to minimize the impact of inflation. It has kept its hands tied simply because it cannot withstand a rise in budgetary deficit. On the other hand, it cannot raise interest rates, apprehending that it would choke new investments and might affect the growth rate. However, mere inaction will not rescue the government from the present unenviable situation between the devil and deep sea. If inflation drags on for some more weeks there would be a drastic slowdown in the rate of growth all the same, simply because the growth in the manufacturing sector may wilt in the absence of demand. The problems will be difficult to handle as soon as the consumer price index (CPI) too begins the upward journey. Finally the ascent of CPI would bring in the spectre of stagflation (a combination of stagnation and inflation).

Thus we see the story repeated once again. In the face of its first critical test, the UPA government, which came to power on promises of helping the poor, has started showing apathy towards 75 percent of the population living on agricultre, when in our country 80% of agriculture depends on monsoon. Whatever be the rate of growth in the economy, a bad monsoon spells disaster for millions of poor. However, the government has opted to obey the dictates of the market and provide cheap money to the corporates on the one hand and keep the mandarins of world finance pleased by producing lucrative numbers in the budget performance. Q