The official response to the sustained spell of inflation is like treating patient A for tuberculosis to cure B of cholera, even if A has no illness since A is the only patient under its control and the medicine to treat tuberculosis is all it has in its stock. If anyone thought this genie is going back into the bottle anytime soon, they are deluding themselves.
Between 2008-09 and December 2010, the food articles price index shot up from 135 to 187, a 39 per cent increase, foodgrain and processed foods by 19 per cent each, whereas fuel and manufactured products grew by a much lower 11 per cent and eight per cent respectively (Table 62 of Economic Survey, 2010-11). Official credit for foodgrain at about Rs 36K crore is less than 1/100th, while total direct agricultural credit is less than 1/10th of total commercial banks credit. Agriculture relies heavily on informal credit, moneylenders and self-financing, all of which are beyond the Reserve Bank of India’s (RBI’s) diktat. Monetary tightening in the other sectors that have hardly contributed to the inflation is sure to prove a growth-anaesthetic.
Much ink has been spilt on various causes and sources of the current price spiral; this article examines how political actions of increasing minimum support prices (MSPs) have created a monstrous villain and lessons for the future.
| CASH FLOWS Minimum support prices of key crops (Rs /quintal) | |||||
| 2002-03 | 2007-08 | Annual incr (%) | 2008-09 | Incr (%) in 2008-09 | |
| Paddy | 530 | 645 | 4 | 850 | 32 |
| Cotton(F414) | 1675 | 1800 | 1 | 2500 | 39 |
| Jowar | 485 | 600 | 4 | 840 | 40 |
| Moong Dal | 1330 | 1700 | 5 | 2520 | 48 |
| Groundnut | 1355 | 1550 | 3 | 2100 | 35 |
| Soyabean | 795 | 910 | 3 | 1350 | 48 |
| Sesamum | 1450 | 1580 | 2 | 2750 | 74 |
| Note: Wheat prices were increased by 33% in 2007-08 Source : Economic Survey 2010-11: Table A67 | |||||
Monetary policies can have an effect in well-functioning markets in which business decisions are impacted by the cost and availability of credit from banks. In our agri-rural space, the price of fertiliser – a key input – is government-controlled: there is hardly a semblance of decisions at the farmers’ level being influenced or impacted by bank credit. MSPs – the price farmers get, which may decide the cropping pattern – is decided by the government. Public distribution system (PDS) prices are again determined by the government and are hardly a function of the market, cost of credit or its availability. Under these conditions in which neither the major input decisions nor the production or consumption decisions are subject to credit costs, what impact or control can our monetary policies exercise?
Data showing the history of MSPs reveals forcefully the dominant cause of the current heat and of farmer suicides earlier (see table). In just one year – 2008-09 – MSPs of most foodgrain have been increased by 30 per cent to 75 per cent. Why MSPs stayed stuck for nearly five years before that is a mystery. Surely the cost of living in rural areas would have gone up between 2002-03 and 2007-08. Even the cost of farm inputs, transport costs of marketable surplus would have gone up. This inaction of not adjusting the MSP is condemnable, especially since the officialdom has not allowed independent markets to develop in the rural areas and farmers have come to heavily rely on subsidies, MSPs and PDS systems for their sustenance. The year-on-year fall in real incomes for nearly half a decade should be the chief suspect for rural suicides.
The steep increase in 2008-09 could only be the result of political arithmetic with ensuing elections. Add to this the money injected by the National Rural Employment Guarantee Scheme programme. When such large-scale injections take place over such a short time in insulated markets, the inflation genie gets created as an inevitable end result. This genie is not the handiwork of market forces where either demand grows faster leading to supply shortfalls or cost inflation in key inputs create price spirals: it is solely the by-product of administrative action.
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Rural consumption habits cannot metamorphose in a short time, mired as they are in deep traditions; nor can the industrial and urban sector to build the supply chain to the rural sector to offer alternative products and soak up the additional rural incomes in just one year. Sure, some of the incomes will get spent in urban areas and long standing “investments” like gold, marriages and so on. But a large portion of additional incomes is bound to get spent on the dominant item in their traditional consumption basket – foodstuff – which may be of a much better quality than the ones from ration shops.
Lessons for the future
First, there should be a more graduated approach to fixing MSPs. It should be indexed to rural cost of living, indexed cost of inputs and should be periodically revised and not used as a political tool with long spells of inertia followed by sudden spurts. Such actions fail to send proper price signals, cause price spirals that affect even those landless labour who are net buyers of food besides affecting urban poor.
The second and more immediate need of the hour is to facilitate the industrial sector to set up supply chains in the rural sector. This requires an expansionary policy – even if sectorally-focused – rather than a contractionary monetary policy. In any case, the squeeze on industry and the urban sector is hardly the right recipe for the current inflation fever.
And finally, the additional MSPs should have been, at least in part, distributed ideally in deferred payments — say, through pension or provident funds or even long-term time-deposits through organised sector banks. This would have reduced the immediate liquidity pressure in rural areas and might have increased the reach of formal systems.
The author is CFO of a large paper company. These views are personal.
kumarviru61@yahoo.co.in