Despite the illusions of grandeur that usually accompany a period of high economic growth, all is not well for a vast majority of our people. A nine-plus GDP growth along with high rates of domestic savings and investment and an unprecedented foreign exchange reserve notwithstanding, the UPA government itself has admitted two serious problems in this growth trajectory. The Economic Survey 2006-07, the President’s address to the joint session of Parliament, the Finance Minister’s Budget speech have all declared that the UPA government is seeking to maintain this high growth trajectory, which would be inclusive as well as non-inflationary.
The objective of inclusive growth has been discussed in these columns before. It will suffice to note that despite favourable economic parameters, sufficient effort is not being made to bridge the growing hiatus between ‘shining’ and ‘suffering’ India.
The declaration of intent by the government to control inflation and the slew of monetary measures (more on this later) undertaken by the government have not eased the price rise. According to the latest data released by the Central Statistical Organisation, the all- India consumer price index for urban non-manual employees rose 7.8 per cent in February 2007 compared to the same month last year. This index measures the average change in consumer prices of basic essential items that constitute the livelihood status of the people. The statistics released this Monday show that the index of food and beverages has risen the most with consumer prices having soared 11.8 per cent. Within this, the prices of vegetables rose by a whopping 23.39 per cent and of spices by 23.81 per cent.
Inflation, it needs to be recollected, is the classic instrument of re-distribution of incomes in favour of the profit-earner, away from the wage-earner. Clearly, therefore, if inflation cannot be controlled, then economic inequalities will continue to widen, making the objective of inclusive growth all the more elusive.
The official diagnosis advanced by the three high priests of economic policy — the Prime Minister, the Finance Minister and the Deputy Chairman of the Planning Commission — is that this inflation is the direct consequence of the high growth rate. The logic is as follows. Because of the high growth rate, there is greater liquidity in the economy and, therefore, greater demand for goods. This is not being matched by increased supplies. Hence the pressure on prices to rise. In other words, what is being advanced is that there is greater purchasing power in the hands of the people and, given the inability of the supply chain to meet this growing demand, prices are rising.
This is a cruel joke seen in the context of farmers committing suicide and the acute agrarian distress that stalks two-thirds of our country. The government’s diagnosis may, at best, be true for ‘shining’ India, but is way off the mark for ‘suffering’ India.
The current runaway inflation is being led by the rise in prices of essential commodities. And, this is occurring primarily due to the fact that futures trading had been permitted in essential commodities. Though this was a measure that was started by the previous NDA government, it needs to be noted that the world over, futures trading is allowed only in those commodities which are in abundant supply and not in those where shortage is known to exist.
To understand how this works, consider the fact that in December 2006, the total open interest shown in the futures trading market for guar gum was 10 times more than the overall production in the country. In case of chilli, total stocks in godowns was 1,500 tonnes, whereas the open interest in the market was more than 15,000 tonnes. As in the share market, the futures contract is settled in cash, i.e., nobody has to actually deliver the goods, only the price difference needs to be paid. This is a classic opportunity for manipulators and speculators to make merry at the cost of both the farmer producer (who only gets the price when he physically delivers his produce to the market) and the consumer (who pays a higher price as a result of such trading).
A former Governor of the Reserve Bank of India and a Rajya Sabha colleague, deprived of airing his views in Parliament due to the disruption caused by the BJP, correctly pointed out privately that more than the physical stock of a commodity in the godowns, it is the supply elasticity that is important in countering the inflationary pressures of futures trading. If, in response to the demand, the supply can increase, then there would be no problem. But when supply cannot increase, the inevitable result is price rise. Improving supply elasticity is the solution in the long-term, no doubt. But in the short-term, the only way to contain the price rise is to prohibit futures trading in all essential commodities.
After months of relentless pressure by the Left, the government finally removed initially pulses from the futures market and, alongside the Budget, removed wheat and rice from the list. Had it heeded this advice earlier, the election results in Punjab and Uttarakhand may have been different. However, even on the day of the Budget, when the announcement was being made, trading was allowed and the price of wheat increased by Rs 17 per quintal. As of today, there are contracts existing for the months of April, May and June. Unless these are unwound, a tangible impact on the price front will not be seen.
Simultaneously, stock limits for essential commodities must be fixed in order to check hoarding. Such limits were removed by the NDA government in 2002. The reluctance to fix such limits (though the Centre has now finally advised state governments to do so) is reflected in the Finance Minister’s statement, “Fixing stock limits goes against the spirit of economic reforms and works against the interests of the multinationals. But thanks to Madam Gandhi, the government had to make this difficult choice.” The issue is not one of apportioning credit for this move. The issue is to vigorously implement these measures to control inflation.
Instead, however, on the basis of the flawed diagnosis discussed above, the government has introduced measures to check the growth of credit and liquidity in the economy by increasing the re-purchase option (Repo) rates and the cash reserve ratio of the banks.
Apart from hiking interest rates, it is estimated that these measures have approximately drained out Rs 27,500 crore of liquidity from the banking system. By making access to credit costlier, the government may well dampen the investment rates in the economy. This will lead to a deflation and lower growth rates in the future. This, in turn, would mean higher levels of unemployment negating further the objective of inclusive growth.
The UPA government’s diagnosis and the consequent policy prescriptions need an urgent course correction if the objective of non-inflationary inclusive growth is to be achieved. If this is not done, then the growth rate itself is bound to decline.
Sitaram Yechury is a Rajya Sabha MP and member, CPI(M) politburo