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Current Economic Crisis and the BJP Government 

Jayati Ghosh

Indians must be tired of the word "crisis", especially as far as the economy is concerned. The economy seems always to be lurching from crisis to crisis, and people are constantly being told to tighten their belts and be prepared to make sacrifices in view of the past, present or potential crisis. For the vast majority of our citizens, of course, the basic material conditions of living remain appalling in a relatively stable way through all of these crises and through booms, although they may decline further in periods of macro-economic stress. But then there are those crises which show their impact first of all on workers and peasants, through declines in their real incomes and job opportunities, rather than expressing themselves initially through the balance of payments or internal macro-economic imbalances.

The current economic crisis is one such. The two sharpest indicators of the recent economic problems have been the dramatic increase in food prices and the dwindling of job or income-earning opportunities for ordinary people. And these twin issues have become greatly aggravated in past months, despite relatively acceptable values of the economic indicators beloved of financial markets, such as the overall rate of growth of the economy, or the balance of payments position or movements in the exchange rate. The very fact that an economic crisis is now generally being spoken of despite this, shows that these so-called "fundamentals" are not fundamental to the real economic position of common people at all, and that there can be a significant deterioration in mass living standards even when these other macro variables do not suggest it.

The association of these specific problems - of high food prices and of low and declining employment opportunities - with the tenure of the BJP government at the Centre, has obviously been significant politically. Indeed, it speaks volumes for the economic management of the BJP government in the past six months that it has actually made the previous governments - and even the Congress - look better by comparison. This extremely shabby performance, which has been worse than even the most dire predictions of its opponents, could not have been achieved through sheer incompetence alone; a degree of mala fide must also be involved.

Consider specifically the issue of high and rising prices of food items, especially vegetables (such as the infamous onion and now even the hapless tomato) and other essential items like edible oil and salt. Many of these items are direct and necessary elements of the basic diet of common people across the country, which makes demand for them relatively inelastic to price as well. Onion prices have become the chief symbol of galloping prices of essential items. But the important point is that onion inflation is not a special or isolated occurrence, but rather part of a general increase in food prices.

There has been soaring inflation in food items, especially since mid-August. The most massive increases in price are evident in vegetables which have increased by more than 48 per cent in the six months between March and September alone. The other substantial increase has been in the prices of edible oils, which have gone up by nearly 20 per cent in the past six months. The rate is now arguable much higher, since October showed the largest increases in prices of such items.

Government spokesmen have tended to argue that the current high food prices reflect the seasonality of price changes, especially in food items, and that the issue is being played up for political reasons. However, it is clear that the rate of price increase since March has been substantially higher than warranted by the seasonality factor. If the seasonality factor was all that there was to the current inflation, the producers of primary products would have received high prices when they sold their harvest, with consumers paying only a normal trade mark-up over this. But it turns out that during October-December 1997 and March-June 1998, the arrival periods of kharif and rabi harvests, food price inflation was very low and foodgrain prices were actually less than in the corresponding periods of the previous year. Even in the case of onions, the prices during the Rabi harvest in April 1998 were not substantially higher than in April 1997 and less than during the Kharif harvest during November 1997.

Thus farmers actually received a lower price for their produce in the past year. So the subsequent large increases in food prices paid by consumers reflect post-harvest hikes which have been much larger than what is seasonally normal, with the benefits clearly accruing to stockists and traders.

Another official explanation for this extraordinary jump in food prices over the past six months has been that adverse supply conditions have been responsible for the increase. Thus, vegetable output, and particularly the supply of onions, have been badly affected by the uneven and excessive rainfall followed by flooding in several parts of the country, and therefore vegetable prices have increased. Similarly, the rise in the prices of edible oils is sought to be explained by a shortfall in oilseeds production and, later, the controversy surrounding adulterated mustard oil as a consequence of which it was removed from distribution in several states after the outbreak of dropsy. This meant a substantial decline in the oil supplies available in the market.

This explanation also will not do. The rise in prices in food items has been far in excess of anything that could be warranted by the reduced supplies. To take the most infamous example, it has been estimated that there is a shortfall in onion supply in this season of about 15 per cent compared to normal, but the rise in retail onion prices has been more than 500 per cent. Similarly for other fruits and vegetables, the proportionate rises in wholesale and retail prices have been many multiples of any percentage decline in output. In the case of edible oils, price increases have much faster and steeper than reductions in supply, and prices have gone up sharply even in states where no ban on mustard oil was imposed. There can be no doubt that speculative forces have played a major role in pushing up prices of these items.

In any case, even where there are domestic or local supply shortfalls in important food items, large prices increases need not automatically result. Given the currently comfortable situation with respect to foreign exchange reserves (which are now in excess of $ 26 billion) the government has been in a position to import any major commodities in which a shortfall is evident or even likely. The reduced supply of fruits and vegetables, including onions, was evident from early July, and a prudent government could have taken measures even at that point to ensure that no speculative pressures on such commodities would arise. Thus, measures such as restricting onion exports, putting onion imports on Open General Licence, or even undertaking for bulk imports through state agencies, could have been put into place several months ago.

Instead, the government chose to wait until the matter had reached crisis proportions, and even now the scale of the official response in terms of providing additional supplies is far below that required to quell speculative pressures. In fact, it might be plausibly argued that extremely well publicised populist gestures, such as offering to sell onions at Rs 10 per kilo when market prices were four times as high, without ensuring additional supplies, merely fuelled speculative pressures further by increasing panic and inflationary expectations. It may also explain why the speculative price rise is now feeding into the sale of other vegetables (such as potatoes) as well as items like salt, for which supply shortfalls are not so evident.

These speculative pressures had in any case been intensified this year by the fact that other channels of investment remain uninspiring for investors, given the sluggish stock market and the continuing recession in domestic industry. So once more speculation in food items, which used to be a feature of the Indian economy in the 1960s and 1970s, has become a pervasive factor even in determining overall rates of inflation. And certainly this tendency has been encouraged by acts of omission and commission on the part of this government.

Why this inaction, or tacit encouragement of speculative activity, which may even turn out to have been political suicide for the BJP ? Some of the answer may lie in the nature of the political base of the party. It has long been recognised that the basic political support for the party has come from traders, both large and small, and it is only to be expected that such groups would have seen the formation of a BJP-led government at the centre as their moment in the sun.

This feeling must have been strengthened when the government allowed the Essential Supplies Maintenance Act to lapse, on the grounds that it is a device "open to abuse by the enforcing agencies". Inevitably, this act of omission has given a free rein to trading speculation over the past six months. When the public outcry against the dramatic price rises became too much to control, the BJP was forced to make some gestures towards control of the speculative activity which was widely seen as the root of the problem.

But these anti-price rise measures remained very half-hearted. On the same day that this package were announced, Prime Minister Vajpayee told journalists that "beyond a point, the government could do little about the price rise, especially of onions and other vegetables." He also argued that under the law of the land it is not illegal for traders to hoard ! This possibly inadvertent admission from the "mask" of the BJP is probably much more reflective of the basic reality than the subsequent protestations and accusations by his fellow party members.

What all this means is that the BJP is dangerous for the country not only for its communalist and proto-fascist social stances and its nuclear adventurism, but even in the economic realm. Its policies thus far have converted a period of relative macro-economic stability into a nightmare for ordinary people. And the irresponsibility it has already shown may lead to even worse scenarios, if they are not speedily curbed.

Home > Liberation Main Page > Index December 1998 > ARTICLE