For more than one-and-a-half years, official economic astrologers have been moving the goalposts from time to time for predicting a reduction in inflation. The latest is the shift to rabi where wheat is the major food crop. Among pulses, only the minor crop of chana is important, and its price is coming down as is that of wheat. Rabi rice accounts for just 10-15 per cent of the annual output. How can a good wheat crop bring down the prices of rice or pulses or vegetables or fruit? They are not substitutes. At the height of the mango season, even inferior quality mangoes cost Rs 200 per dozen in Mumbai. Alphonso is for the aristocrats. Capsicum and banana, the poor man’s lunch, sell at Rs 20 and Rs 3 per piece, respectively. Manufacturing inflation is not going to be helped much by a good wheat crop. Steel prices are on the rise — 90 per cent of steel is used as an input in industries. It is time for the astrologers to try another tack and say that inflation will come down after kharif, provided the monsoon is normal.
The major culprit is excessive money supply. For the last 25 years, money supply growth was in excess by more than Rs 3 million crore after reckoning with the growth rate of the economy and assuming a liberal Income Elasticity of Demand for Money (IEDM) at 2. It is an underestimate since the IEDM has come down to around 1.5 over the years.
RBI talks about unwinding excess liquidity. The sensible thing to do is to bring down the growth rate of money supply so that the excess gets absorbed by the increase in GDP. The tragedy is that it continues to provide for an annual 4-5 per cent inflation in its monetary policy. It is also focused on ensuring the success of government borrowings at a minimum interest rate. Will someone ask the authorities what would happen if inflation is not provided for? Would it be bad or good for the economy? The only way to bring down inflation is to change the base year for the price index. And that is what the government is doing.
A Seshan, on email