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Rising Inflation:

A Timely Warning to Address Structural Elements

GRK Murty
All of a sudden, Indian economy finds itself in a quandary: on the one
hand, the rising inflation is already hovering around 7% and threatening
to shoot up with the high rise in the prices of vegetables, fruits and
onions (around 82%), calling for demand-side checks—obviously,
reining in of money circulation that is currently growing at 15% year-on-
year, which is of course, growing at a pace lower than the nominal
growth rate of the economy—and on the other hand, slowing down of
industrial production to an 18-month low of 2.7% in November that is
demanding pump priming the economy to maintain growth momentum
at or around 8-9%, plus the rising concern at the mounting subsidy bills
and the resulting widening fiscal deficit. And, it is the balancing of these
counter-demands that is today challenging the wit of the government
and its policy makers.

Amongst these growth constraints, it is the rising food inflation that is


driving everyone, both the consumer and the government, crazy. The
steep rise of 59% in vegetable prices pushed the food price index to a
whopping 18.32%. The rise in inflation is, of course, not confined to
agricultural products alone; it even spread to mineral and petrol prices
which have gone up by 30.6% and 25% respectively. Nonetheless, as
the food articles have a weight of 14.34% in the overall wholesale price
index, any further rise in them is sure to upset the inflation estimates.
Incidentally, global food prices too have gone up by 30% over the last
year, mostly due to the fall in production, which again is the outcome
of changing weather, diversion of land use from food grain production
to biofuel production, etc., and this in itself is a sure pointer to what is
in store for the future.

Whilst on this, it is essential to bear in mind what the expert


committee set up under the chairmanship of Rangarajan to examine
the implications of the proposal of the National Advisory Council—that
proposed legal entitlement to subsidized food grains to both ‘priority’
and ‘general’ households, covering 72% of population under the first
phase starting from 2011-12, and 75% in the second phase in 2013-
14—has got to say. It opined that the recommendations of the NAC
need to be ‘calibrated’: one, owing to non-availability of food grain;
two, the potential of such large procurement (63.98 million tons in the
first phase and 73.98 million tons in the second phase) being pretty
high to distort the open market food prices, that too, when all this
requirement has to be necessarily sourced from the domestic
production, not through imports as it would be much more costlier and
undependable; and three, it entails ‘large subsidy implications’ that can
stretch to anywhere around Rs 85,584 cr under the first phase and Rs
92,060 cr under the final phase.
Fairness or no fairness of the recommendation aside, it reveals a
truth: we need to do something solid to fix up the supply-side
constraints relating to food products—move away from overplaying
on/blaming seasonal elements and address immediately the structural
elements that we have been conveniently underplaying for all these
years. Secondly, any shortfall in agricultural output could only lead to
serious distortions in the economy, for no civilized nation growing at an
annualized rate of 7-8% can afford to let half of its population go with
no food security, that too, indefinitely, while better nutrition is “a
necessary prerequisite for economic development.”

After all, agriculture, by itself, is a risky vocation. Globalization has


only made it riskier. Given our inability to provide food-security to the
populace, the government must do something concrete on the
agriculture front. No shortcuts will do. Various reports have earlier
indicated that there is tremendous potential for increases in
production—all that it calls for is creation of institutions and right
policies to build and supply appropriate technologies to farmers
coupled with timely credit and right price for their output that
incentivize farmers to produce more.

Given the nature of our agricultural markets—localized, fragmented


and thin physical markets, because of which the flow of price
information remains slow and mostly limits itself to influential market
manipulators—what is simultaneously required to be done is: create a
market infrastructure that can effectively transmit market information
to all concerned well in time. Such free flow of information to
producers, consumers and policy makers, coupled with creation of
storage facilities in the countryside, transparent and flexible trade
policy, and removal of state-level regulations that can pave the way for
creation of a pan-India market for agricultural commodities, will
cumulatively not only minimize the price volatility, but also
disincentivize hoarding by traders—a known element behind every
price volatility.

In this regard, there are a few who, of course, advocate that multi-
brand retailing be thrown open to foreign investment so that requisite
technology can flow into food-production infrastructure. There is also a
counterargument: this can be aimed at even by domestic corporates
that are already engaged in retailing business. Whatever be the
argument, one thing is certain: Indian agriculture needs all-round
modernization. What, after all, needs to be done is, both private and
public players must chip in to make agriculture a thriving profession;
else India will continue to reel under malnutrition, who knows how
long.