Click to play videoInflation has hit a 13-month high with prices of edible goods hitting the ceiling. Though currently at 6.68 per cent, inflation is inching towards the seven per cent mark. Manmohan Singh’s Government is currently under intense pressure from the Left and the Right, both of whom have threatened nation-wide agitations if prices are not brought under control immediately.
The Government, on its part, has cut duties and taxes and has banned the export of food, and Commerce Minister Kamal Nath even spoke of cutting duties to zero if necessary.
The last thing the Government needs in a big election year is to combat spiraling price rise.
Such a scenario is making this election year a shaky one and gives rise to the question – will rising prices spell doom for the Manmohan Singh Government?
Discussing the issue on CNN-IBN's Face The Nation were Rajya Sabha MP and Chairman of National Commission for Enterprises in the Unorganised Sector, Dr Arjun K Sengupta; Economist and agriculture specialist Devinder Sharma; and BJP Economic Cell Convenor, Jagdish Shettigar.
Inflation levels are making inroads into the unacceptable territory so rapidly that urgent steps are needed to bring down prices.
It is ironic that the Government, whose target was the aam aadmi and who pushed forward the staggering Rs 60,000 crore loan waiver for farmers as well as the Sixth Pay Commission, should now be hit on the head with the issue of price rise.
"Well, I’d say this particular price increase is really the effect of certain situations in the international economy," said Dr Arjun Sengupta.
Refuting the suggestion that he was passing the buck, he declared that solving the problem necessitates understanding its cause.
"The problem that has been caused recently is metal price increase," he explained, "Wheat prices have started slackening, the essential commodity prices are not going up as fast. There is a major problem and it is what to do with the essential commodities," Sengupta pointed out.
"The mistake that everybody is making — according to me — is talking about inflation in general. This inflation is not a monetary phenomenon because our domestic demand has not got out of sync with international demand," he said.
Accepting that for certain commodities, there was the problem of supply, Sengupta added that the Manmohan Singh Government was perfectly capable of addressing supply problems.
Manmohan Singh: Economist-turned-politician
There are many who feel that despite being an economist, Manmohan Singh is managing the economy like a politician. He’s using the Budget as a political tool and he is using popular measures like the loan waiver and the Sixth Pay Commission but not doing anything to manage the economy.
"This Government has so much of economic talent — I don’t think that any other Government in the past had so much economic talent — but unfortunately they have not been able to tackle the major problems like inflation," said Jagdish Shettigar.
"The main thing is that they have not been able to diagnose the reasons for that," he said.
Shettigar accepted Arjun Sengupta’s statement that the inflation problem was not monetary but had to be approached from the supply side.
However, Shettigar added, "In the last two years, inflation problems started with essential commodities. The problem has come mainly because of mismanagement of food by the Government, and so they have not been able to diagnose why the essentials’ prices are so high."
Agricultural stagnation
Stagnation in agricultural production has been going on for some time. According to figures, pulses have been stagnating for a long time; wheat production is down, as is rice production. In fact India has, since quite a while, been building up a crisis in food.
It is surprising why the economist-Prime Minister did not understand this and take steps to bolster agricultural productivity.
Devinder Sharma pointed out that Manmohan Singh has been aware of the issue since years.
"If you look at the first speech he made in Parliament in 1991, he had sung all songs for agriculture, but in the end, he said it’s a state subject and states will take care. And what he went on to do was help prop up industry," Sharma noted.
Agreeing that food production has been stagnating, Sharma did not think there is a crisis in agriculture.
"We are producing enough wheat and rice, we don’t have a shortage of wheat or rice in the country," he said.
"We are importing wheat not because there is a shortfall in the country but because the Government has allowed the private sectors to come and buy, which means that the private sector godowns are full, but the Government godowns are empty," he explained. "Now that’s the kind of policy which has gone completely haywire and the Government has to be held responsible for that."
Going in for the kill at the right time
But that does not mean that the crisis is one of distribution, said Sengupta.
"It is true that agricultural production is stagnating; it is not true that we have enough rice and wheat. But the inflation problem is not entirely due to that; inflation problem is because of a supply and demand mismatch. With the kind of foreign exchange reserves we have, and the tradable goods, there is no reason why this supply-demand mismatch should take place if we could import at the right time and the right commodity," he stated.
"We have a buffer stock policy. In 2006, the warning was given the buffer stock is coming to an end. We should have gone into the import market at that time," Sengupta noted.
Shettigar did not completely concur with this view.
"The buffer stock is inadequate and it is mainly because of the failure on the part of the Government to procure from the mandis (wholesale food market) and that is mainly because of the competition the Government has started facing from the private sector. Government should have diagnosed this problem and should have reviewed the policy of Minimum Support Price, which has become irrelevant today after the organised retail sector entered," he explained.
If the Government is facing acute competition from the private sector, it may be in its best interests to then give incentives to the producers. If prices are high, there needs to be a system by which the producer gets sufficient incentive and produces more.
Agreeing to that, Sengupta said, "We should give the right kind of incentives and that is why the Agricultural Prices Commission is recommending a price which takes into account the incentive price. This is the recommendation that has been given."
Unfortunately for the producer, they never know when the Government decides to import or to ban exports. There is no rationale for what the Government decides to do when.
"You decide on the price before the sowing season. But after that you decide what is the amount that you have actually been able to procure. If you have not been able to procure enough, then you decide to import," said Sengupta, adding that private traders follow the same process.
"We should do this thing in a properly planned manner. When the prices were very low, we were not allowed to do that. There was substantial opposition from every political party against the import," he added.
What can the govt actually do to benefit producer and consumer. What is the middle path that can be tread between growth and inflation?
Other political parties such as the BJP did not have a very good record for price management during their tenure. In 1988, the BJP lost the elections in Delhi and Rajasthan after onion prices rose by 600 per cent to more than Rs 60 per kilo.
In this particular situation, if one looks at the growth-versus-inflation debate that is going on, with the Finance Minister saying we have a large number of poor people who don’t feel anything about growth, they’re just concerned about prices. So, inflation has to be moderated without affecting growth.
Can it be said, then, that the Government is neglecting growth just to keep the inflation down?
"Inflation often encourages the investors and that leads to growth but it is wrong to say that the growth will be responsible for the inflation," said Shettigar, "If there is higher growth, the supplies will improve."
But if the RBI cuts interest rates, there will be more money in the economy and that money would compound the agony of inflation.
"Because this is not due to the demand side," declared Shettigar. "I can understand if you’re following the tightening monetary policy, if the inflation is due to the excess demand. But this is because of shortage of supply."
He added that the problem with the Government is that most of the economists in the Government are monetary economists, including the Chief Economic Advisor.
Production with a difference?
Swaminathan Aiyar wrote that there is no future in cereal production any more. India’s 600 million people are dependent on 250 million hectares. India must stop producing cereals, we must buy cereals from abroad. Instead, we must shift to cultivating fruits, vegetables, flowers and medicinal herbs, which other countries want to buy.
"If you look at the global political economy of agriculture, this is what ‘they’ want. ‘They’ means the rich countries. This is what they want because they go on producing wheat, rice, soyabean, milk, on and on and on. They don’t diversify. Only developing countries must diversify to staplehood which would meet the luxury requirements of people in those countries," Devinder Sharma pointed out.
"Is this the right policy? That you earn dollars and then you buy food? Why can’t you ask people to produce food for themselves?" he demanded.
To a suggestion that there was nothing wrong in buying food, he said, "There is no food now. Now we know that the global stocks have come down, food prices have gone up 300 per cent in the last five years. Where is food available now? Even if you want wheat, you have to pay Rs 1,800-Rs 2,000 per quintal!"
Arjun Sengupta disagreed with the assessment.
"Food is there but at a high price and that is because we did not buy the food at the right time," he said.
"The Government will have to pay the price for not taking the decision at the right time when they should have. All our economists pointed out that when the buffer stock was down, it was the time to buy food. They didn’t do it because there was substantial opposition," he said.
When the price is right
"If we have a lot of foreign exchange, which means you have a lot of goods to buy, you should be able to buy food," he said
Devinder Sharma interpolated the question, "Why shouldn’t you provide the right price to your farmers? Let them produce the wheat for the country. In India, the producer is the consumer," he declared.
Sengupta accepted that the right price needed to be paid to the farmers but there was a caveat.
"The whole question of giving the right price to the producers should be in parity with the import prices. This is the normal position that we have been talking about. But we have not done that. If we have not done that, today the situation is that there is a shortage — there is a supply and demand gap and we have to meet that," he explained.
As for the Government, it’s position was summed up by Sengupta: "Today the Government’s only policy is go out and buy the food, buy other products, not only the food, so there is a domestic shortage and the domestic shortage has to be met."
Final SMS Poll: Will rising prices spell doom for the Manmohan Singh Government?
Yes: 63 per cent
No: 37 per cent
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