“If prices are rising one has only to wait. They would reverse themselves and begin to fall.? Discussions on inflation these days hinge on this nineteenth century model of the competitive economics, where a rhythmic sequence of expansion and contraction in economic activity was assumed. And economists preferred to suggest unhindered play of market forces rather than pro-active government intervention. The situation changed by mid-twentieth century with Keynes.
In India, today we are witnessing this 19th century response to the 21st century problem.
John Kenneth Galbraith, in his famous book, The Affluent Society, describes the old thinking on inflation vividly. ?Through most of man'shistory the counterpart of war, civil disorder, famine or other cosmic disaster has been inflation. In recent times inflation has acquired new habits: it persists in periods of peace and high and rising prosperity?, he wrote. The scene he narrated, ?new high levels of living costs were posted month after month with monotonous regularity? seemed apt for Dr Manmohan Singh'sIndia. Dr Singh has dealt with the situation with remarkably little effort.
Why is it that nearly everyone finds it convenient to agree on the undesirability of any remedies that are effective? Galbraith said, ?There are several reasons for this barren position. First, to be sure some reap material benefit from inflation. They too oppose it for reasons of respectability, but their opposition is less than impassioned. Of importance also is the influence of inaction-or postponement, as a policy.? Galbraith discussed this market condition, oligopoly, where a relatively small number of large firms enjoy in one way or another a considerable discretion in setting prices. In these markets, all firms are at or near capacity and are assured that no firm by holding back will capture an increased share of market. A near monopoly condition.
This is good for the manufacturer not for the consumer. The prices that have gone up since current phase of inflation began in late 2007 have only gone up, not come down, despite repeated assurances by P Chidambaram. Food prices are a classic instance.
Initially the UPA tried, with import-export restrictions, and manipulation of the monetary supply. That did not work. Perhaps because the government did not bother to factor in the forces that work to make inflation a peculiarly unmanageable problem embedded much more deeply in the fabric of our social life. I had discussed these factors in an earlier column on inflation.
The oil prices in the last two months have been falling. India has had a bumper crop. And a normal monsoon. Food prices have shot up, the first time in our history despite such record food production. Foodgrain production, according to government claim, galloped from 217.3 million tonnes to 230.7 million tonnes. Still food items are selling higher during the harvesting season.
There are mainly two types of economists in India. The establishment economists and the poverty economists of the Marxist variety. Both will not tell the truth. There is an attempt to sell a theory that the farmers are happy when the prices of foodgrains are high. Farmers are getting better price for their produce for the first time, the reports say. A World Bank analysis by Christina Savescu says the impact of high wheat and rice prices benefits farmers though it affects the consumer. This study has concluded that the net outcome is a decline in the poverty ratio by 0.8 per cent. Despite a marginal increase in urban poverty, the rural poverty will decline and so the national poverty also will decline. The study was reported last week.
Another World Bank report on global poverty released on August 26 said India is home to one third of all poor people in the world and that poverty reduction in India has slowed down during the post reform period. Who is telling us the truth?
It is not the middlemen or the trader making huge profit, it is all going to the farmer which is changing the rural economy, the native analysts assure us. Last week there was a survey which proved this. After the loan waiver and harvest, rural India is flush with money that they have pushed out urban India in the use of toothbrush, toothpaste, hair oils, talcum powder, soap and shampoo (AC Nielsen Survey, ET, August 25). This is not to deny that India is getting more and more urbanised and consumerism is catching up in rural India.
Nobody has explained as to why unlike on earlier occasions, the prices are high during the harvesting season. The procurement price the government is trumpeting so much is still very low when we consider the cost of production. The procurement price for wheat in 2006 was Rs.700 per quintal which this year is Rs. 1000. For rice in the same period it has gone up from Rs 570 to Rs.745. And what is the market price? More than double for both per quintal. So it is not the farmer making all the money as some economists are trying to convince us.
The monetary policy is also not working. The high interest rates on loans have crippled the consumer segment. I know of a friend who wanted to foreclose his housing loan because of the increased EMI burden. He approached the bank to find how best he can get rid of the burden and he had arranged the money for a lump sum. Reports say that there is at least a 25 per cent increase in foreclosures in recent months and the banks are worried. What the bank manager told my friend is interesting. Beyond economics to persuade him not to foreclose the loan the PSU bank manager told him some politics. He said, ?Wait for few more months. This government is going. The next government that comes in anyway will bring down the interest rate. Whichever party it will be they cannot afford to have this high rate.?
My friend was impressed and retracted. The market sentiment is this. You need more examples? Look at the long-term fixed deposit interest rates the PSU banks are offering. For the first time again, deposits beyond five hundred days will give you less return than deposits just above one year. For two, three and more years the banks are offering low returns. You may not remember another time like this where long-term rates are lower than short-term. The financial market assessment is that after the polls the rates will come down. Do you need clearer verdict than this that the corporate India has given up on this government? Because it is not up to the task.
Though inflation is about 13 per cent and the highest in 16 years, it has surprisingly moved out of the headlines. The Finance Minister P Chidambaram who used to send out diktat every other day when inflation touched 6.68 per cent in March has now adopted a severe hands-off policy.
It is a measure of the success of the government media management that it was able to silence the critics and push the stories on inflation out of the front pages. More interesting is that it has sold the theory that inflation, like most other things in India is imported. And that the Indians should be thanking the UPA that it has not allowed inflation to reach the global levels and essential articles are still cheaper in India compared to other countries. Pakistan has a 25 per cent inflation. And other developing countries, Brazil, Mexico, South Africa and what to talk of Bangladesh and Sri Lanka, they all have higher inflation, they say. They will not mention USA, China and EU with less than half?this is high by their standards?the rate of inflation as compared to India.
All these theories have no meaning for the average Indian. What matters is if his income is good enough to make his two ends meet. Talking globalisation, pursuing policies prescribed by the World Bank, promoting a strategy to integrate with the global economy and insisting that the inflation is a global phenomenon, the government cannot deceive the country talking as if only some sections are affected by price rise. The truth is domestic positives are not working to bring inflation down because cartelisation and profiteering are imposing huge pressure on local market.
The economists who talk of the farmer getting higher price than ever for his produce forget the fact that all his farm implements have gone up by more than double. The farmer also has to live with inflation in all other activities of life. Also the plight of urban India cannot be juxtaposed against rural India. The divide is only misleading. Those who tell us that the urban India is affected by inflation and this actually is benefiting rural India further propound a theory that inflation has really not affected the villages as much as the cities and that the government need not worry about the political backlash of inflation. Convinced of such studies some Congressmen, according to reports, are telling the party to advance the poll. That high foodgrain prices are not all that bad in politics. That price rise is not an issue in voter behaviour they say. During the Karnataka assembly election the CNN-IBN opinion poll confirmed it. Anti-incumbency is an issue, they said. Then Congress should have been the real beneficiary. But the BJP won and inflation was an issue. Congress will be proved foolish if it believes that inflation will not affect its poll prospects.
Unfortunately its friendly economists are not the type to give up. They will continue to feed wrong information. That is why like weather man the UPA government is going on changing its target for inflation to come down from September to December and to March next year. And postpone the monsoon session of Parliament to winter months.
(The views expressed in this column are personal. The writer can be contacted at [email protected])
