Danger of inflation

C.P. CHANDRASEKHAR

Government inaction on food-price inflation amounts to an implicit declaration that it is inevitable and has little to do with policy. WELL before Budget 2010-11 was presented, inflation had emerged as the principal economic problem in the country. With food-price inflation running at close to 20 per cent, even the United Progressive Alliance (UPA) government at the Centre had been forced to recognise it as a problem that deserved as much attention as the objective of achieving a 9 or 10 per cent rate of growth, if not more.

In fact, the increase in the prices of rice, atta and sugar in cities, averaged across the major regions, had been so rapid as to be alarming, especially over the past two years, with rice prices increasing by nearly half in the northern cities and more than half in the southern cities. Atta prices have, on average, increased by around one-fifth from their level of two years ago. The most shocking increase has been in sugar prices, which have more than doubled across the country. Prices of other food items, ranging from pulses and dal to milk and vegetables, have also shown dramatic increase, especially in the past year.

Yet, there is little of substance that the government appears to be doing to rein in prices, with the Budget contributing to aggravating rather than redressing the problem. The proposed reduction in subsidies on fertilizers and the increase in duties on petroleum and petroleum products would increase the cost of production (including the cost of irrigation) and the cost of transportation, pushing up farm-gate, wholesale and retail prices further.

Food security

The across-the-board increases in indirect taxes will only make things worse. This is surprising, since questions of food security and the right to food have become such urgent political and social issues in India today. Rapid aggregate income growth over the past two decades has not addressed the basic issue of ensuring the food security of the population. Instead, nutrition indicators have stagnated and per capita calorie consumption has actually declined, suggesting that the problem of hunger may have got worse rather than better. So, despite apparent material progress in the past decade, India is one of the worst countries in the world in terms of hunger among the population.

The number of hungry people in India is reported by the United Nations to have increased between the early 1990s and the mid-2000s.

Political instability

These very depressing indicators were calculated even before the recent rise in food prices, which is likely to have made matters worse.

Indeed, the rise in food prices in the past two years has been the highest since the mid-1970s, when such inflation sparked widespread social unrest and political instability. Between 2005 and 2007, the year-on-year increase in food prices fluctuated between 3 and 5.6 per cent. It rose to 7.9 per cent in 2008, 12.9 per cent in 2009 and 19.4 per cent as of January 2010.

What is especially remarkable is that food prices have risen even when the general price index (for wholesale prices) was either flat, as in 2009 when the overall inflation rate was only around 2 per cent, or much lower at around 8.5 per cent as of January 2010. If, despite this, the government has chosen to underplay this problem, it must be because of its neoliberal preoccupations diverting its attention from the pursuit of its declared objective of “inclusive” growth.

To the extent that it recognises inflation, the Centre has chosen to identify price trends over the past few months as being the collateral fallout of policies and developments in the domestic and world economy. Among the reasons being cited are increases in the minimum support price for farm produce, increases in international prices, increases in demand “due to the increase in purchasing power” resulting from higher growth, excess liquidity in the system, “inefficiencies” in the marketing of farm produce, and the high cost of intermediation.

While action to deal with some of these has been promised in the past and that promise reiterated more recently, many of the factors seen as driving inflation are either out of the Centre’s control or otherwise positive economic outcomes that cannot be countered. Not surprisingly, when under attack for not doing much to curb inflation and in fact adopting policies that would aggravate it, the government has argued that inflation is restricted to a few commodities and can be dealt with through appropriate management of supplies.

New taxes in the Budget, it argues, would have marginal or negligible implications for prices. It almost seems that the government expects the problem to somehow go away. But this is unlikely for three reasons, among others.

First, as the Reserve Bank of India’s recent policy review statement notes, “the global rates of increase in the prices of sugar, cereals and edible oils are now appreciably higher than domestic rates”, so the opportunity to use imports to contain domestic food prices is limited. Second, even where imports can be resorted to, managing distribution to reach supplies where they are needed is not easy given the limited spread of the public distribution system (PDS).

Third, global oil prices are still rising, at a time when the government is committed to linking domestic prices to international prices. It is the resulting erosion of its ability to ensure low inflation while pushing for reasonable growth that the government’s anti-inflation propaganda seeks to conceal.

Policy failures

Thus, the government’s views and inaction amount to an implicit declaration that food price inflation of some intensity is inevitable and that such inflation has little to do with policy. The evidence suggests that the real situation is very different, with food-price increases being the result of major failures of state policy.

Domestic food production has been affected adversely by neoliberal economic policies that have opened up trade and exposed farmers to volatile international prices even as internal support systems have been dismantled and input prices have been rising continuously.

Inadequate agricultural research, poor extension services, overuse of groundwater, and incentives for unsuitable cropping patterns have caused degeneration of soil quality and reduced the productivity of land and other inputs. Women farmers, who constitute a large (and growing) proportion of those tilling the land, have been deprived of many of the rights of cultivators, ranging from land titles to access to institutional credit, knowledge and inputs, and this too has affected the productivity and viability of cultivation.

But in addition to production, factors such as poor distribution, growing concentration in the market and inadequate public involvement have been crucial in allowing food prices to rise in this appalling manner.

Successive governments at the Centre have reduced the scope of the PDS. Even now, in the face of the massive increase in prices, the Central government has delayed the allocation of foodgrains to States for their Above Poverty Line population. This has prevented the public distribution system from becoming a viable alternative for consumers and one that thwarts speculation and hoarding.

In addition, the decision to allow corporates (both domestic and foreign) to enter the market for grain and other food items has led to some increase in concentration of distribution. This has not been studied adequately, but it has many adverse implications, one of them being that farmers benefit less during periods of high prices because the gains are garnered by middlemen.

Thus, it has been found that the gap between farm-gate and wholesale prices is widening.

A similar story is evident in terms of the gap between wholesale and retail prices. In the case of rice, the gap between average wholesale and retail prices has widened considerably – even doubled – across the four major zones of the country. As for wheat, the pattern is more uneven, but the retail margins are very large indeed, as expressed by the difference between the wholesale price of wheat and the retail price of atta (which is the most basic first stage of processing).

Underlying this tendency are forces that allow marketing margins – at both wholesale and retail levels – to increase.

This means the direct producers, the farmers, do not get the benefit of the rising prices, which consumers in both rural and urban areas are forced to pay.

The factors behind these increasing retail margins need to be studied in greater detail.

The role of expectations, especially in the context of a poor monsoon that was bound to (and did) affect the kharif harvest adversely, should not be underplayed.

But that refers only to the most recent period of rising prices, whereas this process has been marked for at least two years now.

In addition to this, there is initial evidence of a process of concentration of crop distribution, as more and more corporate entities, both national and international, get involved in this activity.

International experience suggests that their involvement in food distribution initially tends to bring down marketing margins and then leads to their increase as concentration grows.

This may have been the case in certain Indian markets, but this is an area that merits further examination.

Many people have argued, convincingly, that increased and more stable food production is the key to food security.

This is certainly true, and it calls for concerted public action for agriculture, on the basis of many recommendations that have been made by the Farmers’ Commission and others.

But another very important element cannot be ignored: food distribution.

Here, too, the recent trends make it evident that an efficiently functioning and widespread public system for distributing essential food items is important to prevent retail margins from rising.

So, one surprising element in the Budget is the reduction in the nominal outlay for Food and Public Distribution from Rs.56,721 crore in 2009-10 to Rs.56,133 crore in 2010-11.

This amounts to a significant cut in real expenditure.

The UPA government has pledged to bring a Food Security Act, but that needs to be universal in coverage (rather than confined to the Below Poverty Line population) and provide enough volumes to meet minimum requirements.

A universal system of public food distribution provides economies of scale; it reduces the transaction costs and administrative hassles involved in ascertaining the target group and making sure it reaches them; it allows for better public provision because even the better-off groups with more political voice have a stake in making sure it works well; it generates greater stability in government plans for ensuring food production and procurement.

But even before such a law is passed, it is clear that emergency measures are required to strengthen public food distribution, in addition to medium-term policies to improve domestic food supply.

A properly funded, efficiently functioning and accountable system of public delivery of food items through a network of fair-price shops and cooperatives is the best and most cost-effective way of limiting increases in food prices and ensuring that every citizen has access to enough food.

This, and therefore inflation control, is not a priority for this Budget.

The Hindu