Dr Ashwani Mahajan
Whole election campaign of Narendra Modi was centered on economic doldrums and relief from the same. Apart from issues concerning economy and affecting the common man, such as downfall in manufacturing, huge unemployment, foreign payment crisis and resulting weakening of rupee, poverty and hunger; issue which connects most with the public is the issue of inflation, especially food inflation. Commoners are struggling hard to meet their daily needs. Challenge for the man on the street is, how to manage two meals.
Previous UPA Government was finding itself helpless before inflation. Conveniently the blame was put on either monsoon or international forces. The only institution seen fighting against inflation was RBI and that too by a single instrument namely interest rates. Though high interest rates were impeding growth; RBI has been reluctant to take any risk of reducing interest rates in view of ongoing hyper inflation. In general the Government seemed to have given up on inflation.
If we take note of the inflation data, we find that whereas food prices increased by 50 percent between 2010-11 and 2013-14; price of energy and factory made products have increased by much less proportionately. It was basically due to mismatch between demand and supply of food products. However inefficiencies in distribution and economic mismanagement were no less responsible for the same.
Shortage of Warehousing and Cold Storage
Inefficient storage has been the major reason for wastage of food products in India. It is ironical that on the one hand nation has been suffering due to shortage of food grains, food grain were rotting in Government stores. Due to insufficient and inefficient storage facilities and financial backing, farmers are forced to sell off their produce at through away prices at the time of harvest. Taking advantage of the same, companies hoard these agricultural produce, after procuring the same at minimum prices; and later sell at exorbitantly high prices. It is notable that whereas farmers are not able to get even rupee 1400 per quintal for wheat, big companies sell wheat flour ranging between rupees 25 and rupee 40 per kilogram. Food products rot due to lack of warehousing at the cost of the nation. According to its own admission, Planning Commission says that country needs rupees 7685 crores to build chain of warehouses and cold storages, which is no big amount. It is surprising and unfortunate too, that even after more than 66 years of independence; Governments have been so indifferent towards this major problem. Even more unfortunate is the fact that previous Government tried to cover its inefficiencies by arguing for FDI in retail trade on the pretext that it would help overcoming deficiencies in warehousing.
Inflation also Caused by Commodity Exchanges
In the name of reforms in agricultural marketing, agricultural products are also subject to online future trading in commodity exchanges just as shares. This is now a proven fact that future trading in commodity exchanges is a significant cause of increasing prices of food products. It is notable that under pressure Government has imposed ban on future trading in wheat, rice and couple of pulses. Though Government maintains that future trading helps farmers to fetch good price for their produce, however, continuation of future trading in other food items is only serving the interest of hoarders, mostly big companies. In fact, future trading in commodities on the line of share market is an alarm bell for the people of this country. We have to put effective restrictions on speculative activities. We cannot put the majority population’s life at stake for speculators who are not even 0.1 per cent of the total population.
Imperative to Increase Food Production
Growing demand on the one hand and declining production on the other naturally lead to high rate of food inflation. Indifference of the Government has been contributing significantly to the agricultural crisis. Notable is the fact that agriculture which used to get 20 to 25 percent of the share of central Government budget previously; is getting nearly 1.4 percent now. Per capita availability of food grains has actually declined from 510 grams per day in 1990-91 to hardly 427 grams in 2011-12. Continued neglect of agriculture by the Government and declining availability of agricultural land due to diversion of cultivable land in the name urbanisation or industrialistion have been the major causes for ailing agriculture. Sometimes it is argued that we can take care of deficiency of food products by imports; however, this option is no longer practical these days. This is so because food grain production has hit globally. In the last few years USA, European countries and many other food surplus countries have started diverting their land for producing bio fuel plants. As a result food prices are rising fast globally. Even Food and Agriculture Organisation (FAO) has been warning regarding this food crisis.
Deficit Budgets
Whenever the Government spends more than its revenue, resulting deficit in the budget causes borrowing from Reserve Bank of India (RBI) if the Government is not able to borrow from the public to bridge the same. Reserve Bank of India lends to the Government by printing more currency notes. According to the RBI data, currency held with the public was only rupees 7,67,500 crore in 2009-10, which increased to rupees 12,48,300 crore by 2013-14 (that is, 63 per cent increase in the last 4 years). This has affected inflation directly. According to FRBM Act Government resolved to keep fiscal deficit limited to 2.5 percent of GDP. Belying its own resolve, Government has been making budgets with fiscal deficit around 5 percent of GDP or even higher than that. Government has been trying to cover up its inability to curb unemployment and inflation by spending heavily on subsidies and other populist schemes such as MNREGA. This tendency has actually been fueling fiscal deficit, causing increase in money supply resulting in heavy inflation.
How to Combat Inflation?
Perhaps it is a general opinion that there is not going to be any big reprieve from inflation in near future. However, Government will have to think that if in the long run, prices especially food prices have to be kept under check, it will have to end neglect of agriculture and make concrete efforts for agricultural development. Welfare of the masses should guide the public policy and not the populism. Government has to keep fiscal deficit under check by restricting wasteful expenditure, so that there is no additional creation of currency.
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