India: Inflation Beast - Here I Come!

2007

Assistant Professor D Tripati Rao

In the past the incumbents losing the election due to rise in 'onion' prices in no less than the Capital is still afresh in the memory. It is not surprising that as the elections for political heavy weight states likes Uttar Pradesh is round the corner, there has been sudden concern in all quarters on the rising inflation. It is politically unsustainable for its negative distributional aspect since at present inflation is led more by staple goods - food articles; which explain around one-fourth of the variation in the wholesale price index (WPI) and around half of the variation in the consumer price index (CPI). Therefore, the CPI remained above the WPI for more than a year being close to 7 per cent. It is so much so that, the panic-stricken government banned futures trade in some pulses such as urad and tur dal and banned the export of wheat and skimmed milk; where the price rise is steepest. While at the other hand, the Monetary authority (RBI), continued with its tightening monetary policy measures of upward revision of host of policy rates starting with repo and reverse repo, and as I am writing this column, announced a two-step 25 basis points hike in the cash reserve ratio raising to 6 per cent. Besides making it requiring for the commercial banks a higher provisioning of capital against loans and increasing the risk weights to certain class of lending such as, real estate and personal loans. Alas, there is little that these measures could be able to succeed in taming the inflation beast! Therefore, today the government has cut Petrol and Diesel prices and announced its intention of import tariff cuts. However, the continuous rise in agricultural prices such as, cereals like wheat and pulses, is due to the chronic supply-demand imbalances. A mix of arduous structural impediments including the long neglected supply constraints - a resultant of relative stagnation in the production growth of pulses, against a sustained demand for it.

After fifteen years of economic reforms agriculture continues to be bereft with low productivity, sharply declining capital formation, and moreover want of credit inflow. In the times where the Foreign Institutional Investors fuelled buoyant stock market driving-in all the money, the unattractive single-digit growth in agriculture is starving it of funds. Real annual rates of gross capital formation declined sharply from 5.4 to 1.5 per cent between the early and late 90s with a relative stagnation in private capital formation combined with sharp fall in public capital formation. Agriculture registered not only an abysmal decadal growth of 1.9 per cent in spite of good monsoon but agricultural production remained highly volatile in the 90s. Growth in food production is in the danger of falling below population growth per annum along with the symptoms of cyclical variation. The per hectare yield for staples - wheat and pulses has seen absolute decline. The estimated domestic consumption of pulses is around 15 million tones and growing whereas the supply is consistently below remaining around 12-14 million tones necessitating an import of 1.3 and 1.7 million tones in the last two years. Since the wheat procurement by the government declined, last year 5 lakh tones of wheat were imported. Besides, there has been rising economic cost of procuring foodgrains for the government. Together all had benign effect on rising prices of food articles.

Therefore, when the low agricultural growth is structural (supply constrained) in nature, short-term trade reform as well as monetary tightening measures may provide a temporary relief, but inflationary beast may willy-nilly resurface. For that, long-term measures of ample credit flow, adequate capital formation and substantial investment in rural infrastructure need to be carried out seriously. Of course, policy makers may ignore at their own peril keeping an eye on nearing elections.

WATCHPOINT: It needs to be seen whether the government is serious enough to initiate long-term measures or remains complacent with short-term relief as a political propaganda.

D Tripati Rao Assistant Professor Business Environment Group Indian Institute of Management Lucknow Lucknow, Uttar Pradesh, India dtripatirao@yahoo.com

WATCHPOINT: It needs to be seen whether the government is serious enough to initiate long-term measures or remains complacent with short-term relief as a political propaganda.

 

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