At last, there is an official admission that there is double-digit inflation in food articles, even according to the Wholesale Price Index. Till about a few weeks ago, this was downplayed on the ground that the total index showed a low inflation level; there was even a fear about deflation setting in! There was a standard, perhaps funny, explanation that the high inflation rate was due to the low base effect. One hears this nonsensical explanation only in India. One would not find it in any article on the subject in an internationally-recognised professional journal. This is an arithmetical and not an economic or technical explanation of the problem.
That it was due to the base effect is good news for the future. This year’s high base would keep inflation at a low level next year and the Reserve Bank of India (RBI) need not worry! Till some time ago, this explanation was trotted out mostly by economists in the banking and private sectors who were not familiar with modern quantitative techniques in economics. It is depressing now to see even RBI referring to the base effect. There are others who talk about the supply-side problem.
Demand and supply are like two blades of scissors. Both are important for a cutting job. If there is a supply constraint, the expansion in aggregate demand can aggravate the problem. This is what has happened. The strong growth in prices of vegetables and fruits is a result of the injection of large amounts of money in rural areas under the employment guarantee scheme, which has been extended to the whole country.
While it is certainly a relief to know that the poorer sections of society are able to improve their nutritional levels through the consumption of vegetables and fruits, the government should have made sure that supply arrangements were sufficient before announcing the expansion of the scheme. In the normal course, any suggestion to extend the scope of the scheme would have led to the appointment of a committee to examine all its implications. In this case, this was not done because it was Rahul Gandhi who made the suggestion. Now the consequences are being felt not by him or those who decided the matter, but by millions of aam admis. Besides, how does one explain the rise in the prices of wheat and rice despite the godowns of the Food Corporation of India overflowing with stocks?
A Seshan, on email
