Inflaaaaaaaaaaation................................

Rising inflation is causing serious concerns. The inflation as per the official figures has crossed 7%, the highest for a long time. The ground reality for the common man is much worse, as the inflation of food articles is anywhere between 15-20%.

There are many reasons for this. In the euphoria of Indian economy growing at greater that 8%, the eminent economists who are heading the government, the Prime Minister Manmohan Singh, Finance Minister P Chidambaram and the Deputy Chairman of Planning Commission Montek Singh Ahulwalia, overlooked a simple fact. The agricultural sector was not growing. Likewise the core sector had started stagnating. The growth was spurred by the manufacturing sector and the services sector.

The problem with this is that the wages started rising resulting in more disposable income which led to an increase in both conspicuous and non conspicuous consumption. Conventional wisdom states that for every 1% rise in GDP, the food consumption will rise by 0.7%. In the case of India, due to pent up demand, it was close to 0.8%. This means that since the economy was growing at 8%, the agricultural sector should have grown by at least 6.4%. Unfortunately, this sector has been growing at a very low 2.6% due mainly to lack of credit, reduction in arable land, absence of technological and farming innovations, thoughtless import policies, poor support prices, high input costs, obsolete storage facilities and volatile weather patterns. This has resulted in supply side constraints and the offshoot is the food shortage and the rising prices.

Having blundered on long term planning for the farm sector and oblivious to the rising prices, Government woke up when they realized that rising inflation can cost it dearly in an election year. In a knee jerk reaction, Government raised the interest rates to squeeze the money supply in the market. While it served the purpose of reigning in inflation for a brief period, the flip side of foreign money flowing into India from low interest rate regimes negated the gain. Inflation dipped, then broke free and is galloping uncontrolled. Government cannot again raise the interest rates as the economy has already started slowing down because of the earlier interest rate hikes. Any further hike will be suicidal for the growth prospects.

The profligacy of the Government in allocating huge sums of money for non producing social development programs like National Rural Employment Guarantee Scheme which has resulted in increased money flow without counter balancing returns has added to the inflationary pressures. One dreads to think what the situation will be once the pay commission report is implemented as this will ensure enhanced money flow in the market. With hardly any effort made in controlling non plan expenditure despite lip service being given, this government has pushed itself into a corner.

There are no short term solutions unfortunately. The least government can do is hold back the ridiculous pay commission implementation. It should immediately start taking tough measures on reducing fiscal deficit and non plan expenditures. That means downsizing. What it should not do is raise interest rates and ban exports of food. The farmers are already at their wits end. Food prices are at an all time high in the world market. When there is a glut, government allows exports which give minimal returns to the farmers, but when they can make money, government bans exports. This is ridiculous. The government should also put in place a long term agricultural policy that will lead to the next green revolution. Our farming is still stuck in the 1960’s. No sector can afford to be like that.

Any crisis provides and opportunity. Will this government grab it with both hands? I doubt as its track record on being visionary is pretty poor.