The lingering inflation tide

Once again with an Onion Odour

Sukanta Mandal

As if rampant corruption were not enough, a shocking price spike has caught the government unawares. Coming at the head of persistent inflation that has already completed more than two years with no respite in sight, it has been termed “a new risk” for the economy by the Reserve Bank of India. It is the onion again which has seen the steepest rise in prices (rising from around Rs 12 per kg in December, 2009 to Rs 15-20 in the middle of 2010 and to Rs 40 or above by the year-end) but basically we are witnessing a food inflation in general, now hovering near 20 per cent. This will be evident from a comparative analysis of the rates of inflation for major food products for the years 2007 and 2010 (January). This rate increased from 6.27% to 17.89% in the case of food grains; from 6.27% to 13.69% in the case of cereals; from 2.14% to 45.62% in the case of pulses; from 6.08% to 12.87% in dairy products ; from 6.38% to 30.71% in eggs, fish and meat; and so on.  Naturally the hardest hit is the rural and urban poor, whose consumption kitty comprises mostly of food items. To make matters worse for them, these wage earners are mostly from the unorganised sector and they get no dearness allowance like those in the organised sector.
The government wants us to believe that inflation in our country is persisting because of high prices in global markets. But the RBI Bulletin of May 2010 tells us that India had a much higher rate of inflation than other developing countries like Brazil, China, Indonesia, Philippines, South Africa, South Korea, Russia, Thailand etc. Recently Montek Singh Ahluwalia, deputy chairperson of the Planning Commission, has said that price of milk is rising because rural people were taking more of it, thus blaming the masses for the rise in food inflation. Reminiscent of former US President George Bush’s ignominious remark that the 2007 global food crisis happened because the Indians and the Chinese had started eating more, this statement once again reveals the callousness and patently bureaucratic anti-people bias of those who are running our economic affairs.
It is obvious that the intensity and stubbornness of this inflation points to deep fault lines in the economy. Supply constrains caused by the long-term neglect of agriculture certainly constitutes a fundamental factor. Industry is not doing well either, with the Index of Industrial Production (IIP) dipping to an 18-month low of 2.7%. However, probably the most important reason in the current context is a new bout of speculation facilitated by the government's policy of dismantling price controls, allowing big private traders dominate the markets for essentials, and permitting futures trading in certain essential commodities. In other words, the near- total dominance of commodity exchanges like MCX and MCDX as well as other market manipulators, fixers, fly-by operators and corporate gamblers over the markets of essential commodities is arguably the most important proximate cause of the current spate of price rise.
 To add fuel to fire, the petroleum ministry has given its nod to another round of raising the price of petrol by about Rs.2.50 a litre. This is the seventh hike in a row in just seven months. As a result the price of petrol has risen almost by 12 rupees since April, 2010. The government puts the blame on high international prices, but the domestic price would have been substantially lower if the central and the state governments did not impose such high rate of taxes and levies on petro products. In fact, the combined central and state levy on petro products is almost 60 per cent of the price of such products.
The only policy intervention by the government so far has been tinkering with monetary policy including interest rates modification. It has already been proved that this is not going to alleviate the situation. The immediate people’s answer to the problem should be to demand that the government must strengthen the Public Distribution System (PDS) and distribute at least 50 kg of cereals to each poor family per month at Rs.2 a kg as well as other essential goods at affordable prices. The hoarders and market manipulators should be identified and punished. The commodity exchanges must be debarred from dealing in food articles.  Big traders and big retailers should not be allowed to hold their stock beyond 7 days; the rest should be confiscated and released to the poor through the PDS. The state governments must ensure that cartelisation by large traders is strictly dealt with under the provisions of the Essential Commodities Act, 1955, and the Competition Act, 2002.
Another major reason behind the present spate of price rise is huge capital inflows into the country, which is being used for speculative activities in the market, and the sudden growth of big retail chains across the country. The big players have all the power to manipulate the market, so a closer supervision is required over them. On the other hand, India needs to impose more levies on export of essential commodities like food items, cement, steel, iron ore and other raw materials.

Is history repeating itself? The political atmosphere is thick with the pungent odour of onion and the UPA government has reason to panick. Already experiencing heavy embarrassment due to mega-corruption at all levels, it must stem the inflation tide immediately. If it fails to, the tide will certainly take it over.