Challenge of Controlling Inflation
Dr Ashwani Mahajan Thursday January, 15 2009
Source: Daily Excelsior
Rate of inflation dipped to 6.38 percent in the week ending December 20, 2008. This is important that in the month of August 2008 it had climbed to near 13 percent. Recession is ruling the world today. May it be steel or cement, cars or scooters, wheat or rice or even petrol and diesel, prices of almost all commodities are falling world over. This sharp decline in the prices is not due to any Government policy; rather it is due to fast declining purchasing power with the people in this era of recession.
Rise in rate of inflation in the past one year was the result of host of reasons. Prices of crude oil, steel, cement, edible oils, food grains etc. were on rise due to large scale speculative activities by financial institutions world over. Grow financial indiscipline of US banks and investment banks, declines in price of crude oil and lot of other reasons including rise of emerging economies led to the wide spread recession in US and other economies integrated with it. Incomes and employment in these economies started declining. Fall in prices of commodities was obvious outcome of this recession.
Secondly in India steel, cement and even paper manufacturing companies started taking undue advantage of spike in prices of these products world over. They started making cartels and gave effect to even further increase in prices of these commodities. These companies who even refused to listen to the advice of the Government are now forced to reduce prices in tune with international prices.
Thirdly prices of food grains have been rising for the last few years. This has been mainly due to near stagnant production and falling per capita availability of food grains and government's apathy in procurement of food grains. This was accompanied by low level of production of pulses and edible oils in the country, forcing international dependency in this sphere. In light of all this prices of food products have been constantly rising in the past few years. About twenty years ago agriculture used to get nearly 27 percent of total Government expenditure. This used to facilitate the provision of infrastructure for agriculture apart from subsiding agricultural inputs. Government used to make heavy purchases of agricultural commodities to help farmers fetch remunerative prices for their produce.Today the naked reality is that Government has taken its hands off from all agriculture related activities and hardly 6 percent of Central Government expenditure is allocated to agriculture. The obvious outcome of all this is that farmers not only have to purchase seeds, fertilizers, pesticides and agricultural equipments at high prices, they are also not able get remunerative prices for their produce.Farmer is also seen testing his luck by producing cash crops in certain pockets but that too have brought misfortune to farmers. At some places farmers are even forced to commit suicide.
Non agricultural activities are being encouraged on fertile agriculture land. If we look at the figures of per capita food grain availability, it has actually declined to only 186 kilogram during 2004-07, from 190 kilogram during 1976-80. This year record procurement of rice helped keeping the prices of these products low. But this policy of large scale procurement does not seem to continue as the same does not auger well with the declared policy of the Government.
Fourthly large influx of foreign exchange by foreign institutional (FIIs) and Foreign Direct Investment (FDI) on the one hand and increase in Government expenditure on the other resulted in heavy increase in money supply breaking all records.
Price rise was obvious outcome of rise in money supply. But in last few months FIIs have been withdrawing from stock markets and are pulling out foreign exchange from India (though this trend has reversed a little bit in the past few weeks), and signaling a decline in money supply. Although RBI has been making all out efforts in the form of lowering of Cash Reserve Ratio (CRR) but no significant change is there in terms of demand for loan from banking system. All this indicate decline in money supply, causing slowing down of inflation.
Fall in rate of inflation recorded in recent weeks is due to immediate causes. In any way it is not due to any concrete efforts on the part of the Government. Except for sizable procurement of wheat and rice by the Government, there have not been any serious efforts on the part of the Government to stem inflation. We should not be pleased by decline in the rate of inflation recently, as it does not seem to continue in the long run. If in the coming days prices again start rising at the global level or FIIs return, inflation may again start raising its ugly head. If we need to curb inflation, we will have to control monopoly tendencies and have to keep vigil on further monetary expansion. We should also bring an end to indifference towards agriculture and make positive efforts for agricultural development. Rise in production of food grain, pulses and edible oils are key to their price stability. If in future there happens to be any spurt in price of crude oil, Government should not allow the domestic prices of petrol and diesel rise by sacrificing its taxes.
