16 October 2013, 04:50 PM IST
Inflation is essentially in food articles , whose output the monsoon will boost , starting October
The central bank should stay focused on growth, and not be sidetracked by inflation, which remains stubbornly untamed. It is the government that has to act to contain inflation , and some of the requisite action involves greater, rather than curtailed , investment, calling for accommodative monetary policy.
Inflation in September has turned out to be marginally higher than in the previous month. Most people conclude from this that the RBI has now no room to lower its policy rates. The conclusion is gross, pun intended . A disaggregated view of prices would lead to a different conclusion.
Wholesale prices for manufactured goods went up by just 2% in September . Fuel and power went up by 10%. Primary articles went up by 13.6%, with food articles seeing their prices rise by 18.4%. The price of rice went up 18.8%, prices of vegetables rose 89.4%. This has been the pattern in the recent past as well.
Inflation in Superior Foods
Fuel prices went up because diesel prices are being weaned off subsidy, albeit in homoeopathic doses, and all fuels reflect the effect of rupee depreciation , some 15% since September 2012. So, the price rise we see now is not really the telltale sign of an overheating economy that needs to be drenched in coolant. Growth, in fact, has been slowing. The way out is to grow faster, particularly by investing in things that would boost the production of milk, meat, fish, eggs and poultry and build cold chains that would allow more fruit and vegetables to be transported from rural areas to distant consuming centres without turning into compost en route.
Consider the alternative of squeezing demand out of milk and eggs. Who precisely are creating this new demand for protein foods in excess of the pace at which supply is rising?
Don't Blame the Ambanis
Credit Suisse has an interesting report that its author has titled Animal Farm, which puts numbers to the gap between demand and supply of the superior protein foods. Listing the details could be tedious but not the picture they outline. Who would be eating all these fresh loads of eggs, meat, milk, fish, fruit and vegetables now in demand? Certainly not Mukesh Ambani.
Why is Ambani blameless in the country's new gargantuan appetite for meat, eggs and milk? Not because he is a vegetarian. Because he is well off enough already to eat anything he wants. People like him do not increase their demand for fresh fruit and cream when their profits go up by an incremental crore.
Rather, it is the horde that has been newly liberated from the clutches of wrenching poverty who are gobbling up superior foods as never before. As rural real wages go up for seven years in a row and the structure of employment shifts to bring down the share of the workforce still trapped in agriculture below 50% — this landmark event happened in 2011 — and the overall productivity of labour goes up — that is the obverse of fewer people joining the workforce in a growing economy — it is inevitable that the demand for superior foods would go up, as more people make their diet more diverse.
We should be celebrating this ability of a rising proportion of the population to afford superior foods, not squeezing their demand out of the system with harsh monetary policy.
The right response is to increase the supply of food ever more and invest in the logistical and marketing infrastructure, both to allow the incentive of better prices to filter through to the farmer and to transport perishable products to consuming centres fast. This would call for amending the Agricultural Produce Marketing Committee Act to exempt perishables from its ambit.
Govt Must Discipline the Fiscal Deficit
What about the price of rice going up by nearly a fifth when the government has millions of tonnes of the grain in stock? Begin with X-rays . The minister and the secretary for food need to be examined to see if they have anything resembling a brain in their cranial cavity and anything stiff down their back.
For fear of being accused of causing loss to the exchequer, these worthies refuse to sell their excess stocks in the open market at a price that would clear stocks, increase supply in the market and bring prices down. The result: well-covered posteriors for the minister and his secretary and sky-high rice prices. This anomaly is not hard to fix.
Does this mean that inflation can be ignored? Not at all. The government has to take credible, coherent action to bring down the fiscal deficit, a potent source of excess demand in the system that feeds inflation.
There are two things the government can do to shrink the fiscal deficit . Double the rate of diesel subsidy removal, from 50 paise to . 1 a month. The second reform needed is to levy an import duty of 2.5% on crude oil. This would reduce protection in the refining industry, not eliminate it. The industry can well absorb it.
Further, the go-ahead large projects , the Delhi-Mumbai Industrial Corridor and oilfield development in Barmer, have finally received must be followed through to produce new orders and activity to break ground and pour cement. Growth will induce fresh investment and growth.
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