The UPA government'sinflation fire fighting has gone berserk. The Finance Minister P Chidambaram has amended his budget proposals thrice in two months. Concluding the debate on the Finance Bill on April 29, the Finance Minister told the Lok Sabha that the UPA government'spolicies ?fiscal, monetary and financial ?were aimed at making growth inclusive. Can such hyperbole beguile the voter ?
If his priorities were the common man how is it that during the UPA rule luxury items like car, air conditioner, electronic goods and imported fancy gadgets became cheaper while rice, wheat, cooking oil, cooking gas, vegetable, and household items became costlier? If bringing the price of food items was his priority why did he not release foodgrain from the government stock and streamline public distribution system instead of banning agricultural exports and slash import duties on edible oil, milk powder, butter, ghee, maize etc.? All these items are costlier in the international market compared to the domestic price. So even after duty cut it will not come cheaper on import. Obviously, it will not help fight inflation.
It is not clear why he had to make so many changes in his budget proposals. After claiming that budget deficit will come down below 2.5 per cent of the GDP why he had to compromise on duty cuts creating a huge deficit which some analysts consider more inflationary and unacceptable ? Experts calculate the fiscal deficit to rise to 10 per cent of the GDP of 1990-01 level when India faced a real economic crisis.
What is intriguing is in the name of fighting inflation, in instalments the FM has sneaked in all the World Bank administered duty cuts on imports while he made all Indian exports costlier. In this column I had quoted the World Bank document where it had suggested that India stop foodgrain export and allow import of packed food by reducing duty. In the latest bid, for instance, Chidambaram has reduced customs duty on skimmed milk to allow its import. India is the largest producer of milk and milk products in the world. Is there any rationale to cut duty on milk powder import?
At the time of presenting the budget for 2008-09 the Finance Minister was upbeat; he had the cheek of throwing a googly at his critics and he claimed it was not inflationary. Is the Finance Minister so na?ve that he could not anticipate the corporate manipulations in the market even as his largesse created more demand ? That middlemen and manufacturers were making huge profits at the cost of the common man is a bane of ineffectively regulated market economy.
The problem is neither of scarce supply nor it is demand driven. Let'snot confuse between inflation and price rise. The profiteering greed of the corporate and the cash-rich new entrants in the retail sector are the real culprits. There is no scarcity in the market. And the living standard of Indians has not gone up overnight to create a spurt in the demand side. So to a large extent the price rise is artificially created. That is why the price rise has affected all commodities across the board. Another reason for the misery of the common man is the criminal neglect of the public distribution system. The UPA government'srefusal to provide adequate foodgrain supply from the central pool for state distribution network has confounded the crisis. Armchair economists with their fetish for theoretical jargon will not agree. But the market mayhem that we are witnessing today is largely man made. And this exposes the total mismanagement of the economy by the UPA.
Crony capitalism is all about creating artificial scarcities. It leads to monopolies and market manipulation. For instance, take the case of present oil price. After a year-long spurt when the price of crude oil started falling in the international market to the level of $55 per barrel in September-December 2006, oil companies went into a tizzy. Economic journals carried stories saying that major oil companies had made huge investments to increase their production anticipating the crude oil price to cross dollar one hundred per barrel. They reported that if the prices fall instead of reaching the hundred mark all these investments will go waste leading to huge job loss and fall in the profit margin of oil companies. After the Iraq war US is practically holding all cards on the oil front. Now we know, when the crude oil price has crossed $ 115 per barrel that their profits have been restored, though developing economies are taking the brunt.
I cannot believe that economic wisdom or call it common sense is in such short supply in the US and EU that they went into the generation of bio-fuel diverting almost 25 per cent of their cultivation away from food production. And the Australian draught which resulted in a fall in wheat production is a four-year-old story. So the dip in the international food basket is created artificially to deliberately make food articles sell high. This they might be thinking will slow down the march of the Asian tigers. Now Condoleeza Rice with neocon arrogance says the world food crisis is because Indian and Chinese poor are eating more. To be fair to Rice, we heard it a fortnight ago from our Commerce Minister Kamal Nath and Food Minister Sharad Pawar.
Indians eating more need not worry America. India is self-sufficient in food. We have sufficient wheat and surplus rice production. Till the UPA came India was a net exporter of food. With foodgrain stocks projected to be comfortable 134 lakh tonne wheat and 229 lakh tonne rice already procured against the target of 150 lakh tonne wheat and 270 lakh tonne rice?there is no reason for food scarcity. The monsoon is predicted to be normal and the food production this year again is likely to be bumper. This despite all the cash crop fiasco and SEZ encroachments into foodgrain production.
Yet the slew of measures in three instalments by the Finance Minister, Commerce Minister and the RBI has not brought the prices down. In fact, inflation induced prices have a tendency to stay put even after inflation is brought under control. This is where the administrators have to perform. It is not hoarding. But speculation is. Forward trading can also contribute to price rise. Big companies will not enter the retail market for chicken feed. Their overhead is high and they are there for astronomical margins. Thus the farmer will not get high remunerative price for his produce, the consumer will pay high and the middleman and the cartels will make huge profit. To my mind one of the reasons for the price rise is the corporate intervention with deep money bags.
This is perhaps one of the reasons for the Prime Minister to exhort the corporate to eschew the temptation of seeking short-term gains, absorb to the extent possible rise in input costs and pass on benefits of tax cuts to the consumers. A really loaded statement.
In a market economy, where crony capitalism is a way of life, the corporates predetermine their profit margin and fix the price tag accordingly. Chidambaram is right when he says in some sectors it may be necessary to take administrative measures although they have no place in a market economy.
This is where the UPA has failed. An effective and expanded public distribution system (PDS) would have ensured an effective market intervention. Liberalisation zealots will say that it is not the job of the government to sell rice and vegetable. But this is also a country of 800 million poor. The lobbyists have ensured that the PDS has become a discredited, corrupt enterprise. The Parliament Public Accounts Committee last week found significant deficiencies and lapses in the implementation of government'sfood management policy. The all India picture of the PDS is that 39 per cent of rice and 53 per cent of wheat meant for PDS distribution have been diverted to the open market by unscrupulous traders with political connivance. This is what the UPA has to tackle if it is serious about public welfare.
(The views expressed in this column are personal. The writer can be contacted at [email protected])