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January 23, 2011




Page: 15/40

Home > 2011 Issues > January 23, 2011

Economy Watch

Growth hurts. Pinching price rise

By Dr Bharat Jhunjhunwala

The present all-round increase in prices is good. High price of fuel oil strengthens the developing countries vis-à-vis the developed countries. Factories are being established from capital inflows. High price of agricultural produce are benefitting the farmers and helping secure food security of the country. However, it must be accepted that the price rise affects large number of our people. Objective of economic growth is welfare of the people. Growth that harms people is not desirable.

THE three challenges before the economy in 2011 are rising prices of fuel oil and agricultural goods; and large inflow of foreign capital. These are also the cause of present all-round increase in prices. Most economists consider this price rise as a problem that must be tackled immediately. I, on the other hand, welcome this increase in price. Present price rise is not a problem. Rather, it is a symptom of good times.

Price of fuel oil is rising because demand from developing countries is increasing rapidly. Western countries are mired in slowdown for the last three years. Their consumption of oil is less. Yet the price is increasing because demand from the developing countries is more. This increase is especially beneficial for India. Increased incomes of the oil-exporting countries of West Asia will lead to more demand for workers from India. Second, we are getting a good share of their incomes in the form of investment in our share markets. West Asian investors were previously investing their incomes in London and New York. Now they are investing in Mumbai. Third, higher price of oil strengthens the developing countries against the developed countries. The developing countries as a group are exporters of oil while developed countries are importers. Higher price of oil leads to transfer of money from the developed to the developing countries. Last, increase in price of fuel oil will lead to a reduction in use of fossil fuels. It will encourage the development of alternative sources of energy such as wind and solar power and help secure energy security of the country. We should, therefore, welcome the increase in the price. The Government should, in fact, phase out the subsidy on diesel and LPG and encourage lesser consumption of these fuels.

There has been a large inflow of foreign capital in our share markets in the last year. Indian companies are using money from Initial Public Offerings to set up factories. This is leading to higher demand for cement, steel, machinery and labour and to an all-round increase in prices. This increase is welcome because it is caused by increased economic activity. Yet there is need to be alert. It is possible that this inflow may reverse and destabilise our economy. Such had happened in 2008. The Sensex had crashed from 21k to 8k because foreign investors had sold out. The possibility of such happening again is high because economies of the developed countries are running on the respirator of stimulus packages. The Government should impose an 'exit tax' on foreign investors to prevent recurrence of such an exit. Investors repatriating money before three years should be required to pay a heavy tax. This will reduce short term volatile capital flows.

Another challenge is the increase in price of agricultural goods like onions and sugar. This increase is rather surprising. The monsoons have been favourable this last season. Stocks of wheat are in excess of our requirements which indicates that production of agricultural goods is plentiful. The increase in price of onions, edible oils and pulses appears to be due to global shortage. Agricultural land is being diverted for residential colonies, highways, Special Economic Zones, factories and airports across the world. Yet more agricultural land is being diverted to the production of biodiesel-corn in United States, sugar cane in Brazil and Jatropa in India. This is leading to less production of food. Simultaneously the demand pattern of food items is getting diversified. Previously the larger part of our people ate only grains and pulses. Now they have started consuming fruit, vegetable and milk products. But the farmer has continued to grow more wheat because he is assured of reasonable price under the Minimum Support Price programme. This has led to surplus production of wheat and shortage of other items.

The production of onions this year has been good. The shortage is mainly due to exports. This policy of opening the domestic agricultural market to global trade is fundamentally correct. It is unwise to sell onion in the country for Rs 50 a kg if the global price is Rs 150. It is equally unwise to force Indian consumers to buy apples for Rs 100 a kg if they are available in the global markets for Rs 50. We should encourage our farmers and consumers to respond to global price movements. We are depriving our farmers from benefitting from the high global price of onions by banning exports. We are again encouraging them to continue with inefficient production of crops that are available cheap in the global markets. The present policy is to ban exports when global prices are high and to make imports when global prices are low. The Indian farmer loses in both cases. He cannot sell at a high price in global markets due to export ban. He cannot avail of the high domestic prices when global prices are low. This policy is wholly anti-farmer and must be dismantled. But this must not apply to the few crops that ensure our food security such as wheat, rice, ragi and bajra.

The present all-round increase in prices is good. High price of fuel oil strengthens the developing countries vis-à-vis the developed countries. Factories are being established from capital inflows. High price of agricultural produce are benefitting the farmers and helping secure food security of the country. However, it must be accepted that the price rise affects large number of our people. Objective of economic growth is welfare of the people. Growth that harms people is not desirable.

We may look at the impact of price rise on the people by dividing them into three groups. The present price rise is beneficial for the farmers because the price of their produce is increasing. The price rise is harmful for the urban middle class because they have to buy goods from the market. But this should not bother us because incomes of this group have risen much faster than rest of the population. They can easily absorb the price rise. Problem is mainly of the worker who buys food from the market. The monthly salary of the housemaid who does cleaning in four or five houses in Delhi has increased from Rs 300 per month to Rs 350 per month. The prices have increased much faster. This problem should not be solved by reducing the prices because we will deprive ourselves of the various benefits accruing to us as explained above. The solution is to increase the wages of the housemaid. She can buy onions at Rs 50 a kg if her salary is increased to Rs 500 per month. The Government must give employment subsidy to industries, require use of manual labour in government contracts, increase wages payable under MNREGA to Rs 200 per day, provide tax relief to labour-intensive industries, etc. These measures will lead to increase in demand for labour and higher wages. That will neutralise the impact of price rise on the poor people.




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