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Policy
 
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POLICY FAILURE: INFLATION
Have they lost the common man?
The people of India continue to grapple with a back-breaking inflationary trend that the government at the centre has failed to understand, acknowledge and control
Issue Date - 24/11/2011
 
On the concluding day of the G20 summit at Cannes, Prime Minister Dr. Manmohan Singh deemed it fit to talk in defence of a major UPA II failure. Without bothering to explain the reasons behind persistent inflationary pressures, Dr. Singh noted that inflation was a reflection of demand for food items such as fruits and vegetables exceeding supply and, therefore, “to some extent, at least, (it) is a sign of growing prosperity of our country”. Finance minister Pranab Mukherjee, who on many occasions has rescued the Congress party from its worst crises, was quick to reiterate the argument. What is most clearly evident from these remarks is that the government of the day refuses to acknowledge this as a problem and the now common contention that the Congress is losing touch with the common man somewhat holds true.

As per the data on weekly food inflation measured by Wholesale Price Index (WPI), prices of vegetables increased by 29%, milk surged by 12% and egg, meat & fish prices increased by 13% (week ended October 22). Although India is one of the largest milk producers, it faces shortage of milk due to increased demand. India’s overall food inflation for the week surged to 12.21% from 11.43% in the previous week. Rise in petrol prices has only added to the woes.

Experts have suggested on many occasions that inflation is not just a result of a sudden shock (as the government continues to argue) such as a rise in food prices because of inadequate rainfall or a jump in fuel prices because the monetary easing in the West has sent a wave of liquidity into commodity markets. There are structural factors at play as well, which cannot be tackled with higher interest rates alone. This puts RBI in a spot. It cannot be a spectator as inflation expectations cut loose and it cannot tackle the underlying factors with its policy kit either. Since March 2010, the RBI has hiked its key policy rates 13 times, totalling 350 basis points, to tame demand and curb inflation. The rate of price rise has been above the 9% mark since December 2010. At its second quarterly review of credit policy last month, RBI projected inflation to moderate from December onwards and touch 7% by the end of the financial year. But it seems to largely be in vain. According to Anis Chakravarty, Director at Deloitte, headline inflation has remained above the 9.5% mark despite the steps taken by the RBI. “If you look at recent months, inflation is moving to 9.7%, which raises a large question on all the monetary policy steps, which the RBI has undertaken starting from January, then by raising rates by 25 basis points in March, then in May by 50 basis points, again by 25, then in August by 50 and so on & so forth till September,” he tells B&E.

 
Food inflation, which has been cited as one of the major contributors to the near two-digit inflation, could well be tamed through innovative agriculture business models, a KPMG report has stated. Reduction in farm investment, lack of infrastructure, lower productivity and sub-optimal technology usage are some of the key factors contributing to poor yields and food inflation. The report also clearly mentions that failed policy focus has been a major contributor, and factors on the supply as well as demand side are to blame.

India’s common man could breathe far easier if the UPA showed better sensitivity and understanding of his plight. In fact, the happenings in the corridors of power could be making the situation even more dire. Economic expert Dr. S. K. Dutta comments, “Whenever there is high level of corruption in government administration, it has a direct correlation with price rise. History has proved this across the world. Take the examples of Japan, Brazil, Portugal, Austria, Spain.” For instance, a working paper by the European Central Bank noted from its analysis in Latin America that an increase by around 1% in the corruption score for the political regime of a nation increases the probability of an inflationary episode starting by around 10%!

Financial services firm Nomura has said that inflation in India is likely to ‘drop considerably’ by the end of the current fiscal and RBI is expected to pause its policy of monetary tightening. It projects that lag effects of monetary tightening and ongoing moderation in commodity prices are expected to bring inflation down by March 2012. The FM has also indicated that supply side constraints are going to be addressed soon & inflation would come down in the November-December period.

After subjecting the people of the country to nearly three years of double digit inflationary pressures, all that the government can do is provide hypothetical deadlines and make us look at the sunny side of things. Ask them whether the RBI would raise rates again if the predictions didn’t come true, and pat comes the reply – “It is not possible to respond to hypothetical situations.” A sad irony, isn’t it?

          

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