If the state of an economy is a true barometer of the health of economic governance in a country then the captains of ship India seem to have lost control on the rudder. The unfortunate paradox of the current situation is that with each attempt to tide over the choppy waters of inflation, the panicky captains of the Indian economy are pushing the ship further into a tailspin.
In past 15 months, the Reserve Bank of India (RBI) has hysterically slapped 10 successive rate hikes on the banks with the hope that the jump in the banks’ lending rate by 400 basis points will tighten the flow of money and help bring inflation under control. Sadly, things have gone from bad to worse. A quick look at the recent trends in consumer goods, energy and food, the three main segments that directly impact inflation and hence the ordinary citizen’s life, will expose the ground reality.
An unprecedented ballooning of the middle class in India and the new dimensions it has added to disposable income has its own impact on inflation. The steps taken by the government like the Sixth Pay Commission payouts, schemes like the National Rural Employment Guarantee Act (NREGA), farm loans waivers and high compensations for farm lands for new projects in the rural areas, too, have placed more money in the consumer’s hands. This percolation of money across the social spectrum is reflected substantively in consumption patterns of food and manufactured consumer goods.
It deserves to be underlined that the present trends in price rise are driven by supply constraints, while the steps actually taken are focused on containing demand. The RBI’s tight monetary policy to control inflation can, at best, bring a temporary check on the demand of consumer goods and energy by restricting the supply side. This will only thwart new investments and worsen the supply-demand gap in the not-so distant future.
On the food front, too, the impact will only be negative because families cannot postpone expenditure on this account. Rather, increased food prices will only soak money away from family savings and investments. So inflation is bound to resurface with a bang.
If we are to evolve a long-term structure to control inflation, we need to create adequate supply in all sectors, which is doable provided there is adequate will and honesty to tackle the problem at the political level.
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The spiral in food price is largely on account of our faulty policies in regulating the prices of foodgrain; over-dependence on the Food Corporation of India for storage of primary foodgrain; the pathetic condition of transportation infrastructure between villages and consumer areas; the lack of special warehouses for perishable items like vegetables and fruit; and the near absence of a food processing industry at the village level. All these activities demand huge investment and an environment of competition. Opening this sector to private participation is a logical answer to this problem.
Government policies on minimum support price opening the food market for imports and export of agricultural products also need to be revisited in the changing situation. Our recent experience in cement, steel and automobiles is a good example in this direction.
Over a period of time, the holding per family has fallen below an economic unit. A structural shift on this front will improve productivity through the introduction of cost-effective technologies and modern practices in the arable land. But the real question is — does the leadership have the spine to stand up and deliver instead of sticking to the outdated socialist model of the early 1950s? It is a shame that while many sectors in the Indian economy have gained tremendously through liberalisation, the agricultural sector continues to remain an exception.
To check inflation on the fuel front, it is high time we start looking at our energy usage patterns. Instead of relying on successively increasing petrol and diesel prices, we should encourage hybrid automobiles that can also operate on batteries. This is being promoted extensively across the world, though we have yet to make a beginning. We need to introduce energy-saving practices at all levels. For example, the US has already started a movement of retro-fitting/remodelling buildings and structures. This will not only bring down the energy bills but will also generate additional jobs. We, too, can adopt similar plans and develop new sources of energy. For example, we have large reserves of coal from where we can extract coal bed methane on a large scale for domestic use. Incentives should be given to producers to develop this within a time frame and make this gas available for domestic use.
Finally, what we need is a strong political will and focus on improving the supply line if we have to tackle inflation on a sustained basis. This can only happen if the government is genuinely involved and bites the bullet to keep inflation under check.
The author is Director of the Essar Group. These views are personal.