Subir Roy: Declare an economic emergency?

VALUE FOR MONEY

A crisis of sorts is upon us in terms of the availability of food and food prices but too much attention is being focused on whether monetary policy should be tightened to bring down inflation. That is undoubtedly important but even more so is taking urgent action to make sure that the next kharif crop is better than what it will be with a business as usual attitude.

A sharp rise in global commodity prices has caused inflation to surge across countries. Had Indira Gandhi been around, she would have felt vindicated in calling inflation a global phenomenon. India is in very respectable company as it tries to determine what to do as inflation hits a 40-month high and growth slows down. The dilemma is more acute for Indian policymakers as the present inflationary bout is in good part made up of rising food prices, which deal a severe blow to the fight against poverty. Inflation does nobody any good, least of all the poor. Simultaneously, the lower the growth, the longer the battle against poverty.

The case for tightening monetary policy is weaker for two more reasons. One, the money supply growth rate has already moderated at just over 20 per cent for 2007-08, down from a peak in January. Two, there are no asset bubbles in the key areas of equity and real estate. Stock prices are down 30 per cent from their January peak and real estate prices are either stagnant or marginally down in geographies where they had been the most robust.

So, what is to be done? In the short run, not much more than what already is being done. Export incentives have been moderated, import duties have been selectively brought down and key industries like steel are being hectored to hold back their price rises. A sharper economic slowdown will mean fewer new jobs at the least. A resultant lower demand for food at the bottom of the pyramid will indeed put a downward pressure on prices but at the cost of rising distress.

But this is not how the government or anybody wants to bring down inflation, which is currently being fuelled by sharp rise in the global prices of food and key raw materials. In fact, the rise in food prices plus poor global availability removing the option of importing our way out of a bad patch of food scarcity, create conditions of an economic emergency. Should we be making contingency plans for universal food rationing? Current hopes of not coming to such a pass rest on looking at the sky and consulting the astrologer for a good monsoon.

While hoping for luck, a key policy initiative urgently needed is to raise economic incentives across the board for farmers to grow more food. Higher support prices for not just wheat and rice but a range of coarse grains and oilseeds need to be announced and urgent plans drawn up with state governments to mop up more food (time to change buffer stock norms?) and procure extensively in case there is a post-harvest glut in any of the crops for which support prices are announced.

Simultaneously, emergency concerted action, again in tandem with state governments, needs to be taken for a quick improvement in water harvesting (it is almost too late to begin taking pre-monsoon measures for this) and availability of the right mix of fertilisers. Whatever else may happen, if the farmer is a bit better off in terms of water and fertilisers, it will have an immediate positive impact on the next kharif crop.

This brings us to what can be done to raise food and agricultural output by better managing the rabi crop. There is unanimity that the farmer needs better seeds and better advice on what sort of soil nutrients he requires and what he should be planting to maintain soil nutritional balance. Everyone knows vastly better extension services are needed but we are yet to crack the riddle of how to deliver them. Probably this needs talking to chief ministers more and outlining and widely publicising a simple agenda of a few points on what everyone needs to be done. All this becomes credible only if the feeling grows that there is a national emergency on the food front.

Once a harvest is in, the next question is how to price and distribute it. There is a strong case for sharply raising food subsidy by keeping the issue price of food in check, particularly for the poor (those below the poverty line). Not raising the issue price will put a damper on open market food prices, which have a strong impact on the level of distress. Along with the administrative initiatives mentioned, a massive effort is needed to issue BPL (yellow) ration cards to all those who qualify for it and make sure that ration shops are properly stocked. The emergency analogy is again needed to ensure that the rationing system does not break down.

Since this implies a hike in the likely budget deficit, a revised estimate can and ought to be issued so that analysts and economists know what is coming and what to expect. All this does not address the issue of galloping global energy and mineral prices, as also those of basic manufactures like steel. For these, in a globalised world, conventional economics has to play itself out. The government and public agenda to make things better is really axiomatic "" improve energy efficiency. Has SAIL adopted continuous casting for its entire steel output? Has Tata Steel made all the investment needed to use all the iron ore fines that it comes by? Are we all using only compact fluorescent lamps in our homes? Are we all mostly travelling by bus, and not private cars, to work?

subir.roy@bsmail.in