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External factors feeding into price rise

February 07, 2011 12:29 IST

Exogenous shocks like rising global fuel prices and bad weather can start feeding into the general price level, if food prices rise sufficiently for labour to demand higher wages.

When the Union minister for what was then a comprehensive portfolio covering both Food and Agriculture said he was responsible for the prices of five stockpiled commodities, and not for "tomatoes, onions or lady finger", he put his finger on the central structural problem with the current inflation, which is that no one really seems to know where responsibility lies.

It became necessary for the Prime Minister to convene meetings of officials concerned, when such a group should have been routinely wired into the system.

A government cannot function if it requires the personal intervention of the prime minister to sort out problems ranging from unfinished sports venues for major international meets, to the price of onions.

There is the macro problem of the general price level, which at its core measures the inflation-generating dynamics in the system, responsibility for which is shared between the Reserve Bank of India (RBI) and the Union Ministry of Finance.

Superimposed on the core are the exogenous shocks that can come from a rise in world fuel prices (going on right now), or from adverse weather events (like the unseasonal rains which destroyed the onion crop in Maharashtra).

These non-core elements in the price rise can begin to feed into the core, if food prices rise sufficiently for labour to demand, and succeed in getting, higher wages to preserve some fraction of their earlier purchasing power (also happening).

Decisions with respect to fuel and food carry difficult trade-offs. Whether to let the rise in world fuel prices pass straight through the system, or protect the consumer with a subsidy buffer or reduced domestic fuel taxes, is basically a fiscal issue.

There are also trade balance implications of a subsidy buffer, which prevents the consumption response to a price rise from restraining imports.

Everything depends on how long the world fuel price rise is expected to continue. Then there are choices within fuels, of whether to subsidise diesel but not petrol, whether to phase in the price rise and at what rate, and what long-run structural changes in the transportation system are planned as an alternative if the personal fuel-powered vehicles are ruled out as an option for most people.

The exogenous shocks in agriculture this time, it is true, came from the horticultural fringes rather than the main foodgrain crops.

But it is this fringe that needs the closest monitoring. Crops in India are divided into those carrying minimum support prices (effectively, not just nominally) and the rest.

The situation is further confounded by the fact that effective support is operative only in selected regions.

When the farmer is faced with a choice between price-protected and other crops, the choice is dictated wherever the land is capable of producing both.

Horticultural crops carry the highest price volatility, as all consumers know, and from a purely risk perspective, would be the least attractive crop for a farmer to grow.

These, therefore, need the closest watching for area sown, expected arrival on the major mandis, and contingency options for failure of arrival.

The onion crop failure this time should have been fully foreseen officially, but was not. The wholesale traders on the other hand did, and stepped in to hoard.

There clearly was a key absence of the kind of official market intelligence which should have picked this up.

The rain which destroyed the crop signalled the problem sufficiently in advance for imports to have been arranged well ahead of time.

Data feeds of this kind into price projections have to be routinely structured into the system, completely protected from the political coloration of whoever may hold the ministerial portfolio at the time.

The information basis for inflation control must be technically driven, with no possibility for political interference.

At the end of the day, inflation control is a political issue, where inflation tolerance and the willingness to test that tolerance are necessarily subordinate to the ideology of the government in power.

But the technical information that feeds into it has to be clearly separable.

While it is true that foodgrain inflation has currently tapered off, foodgrain price levels today, relative to five years ago, reflect stagnation in productivity, at a time when rural wages have risen.

Whatever the nature of the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) works in place, they have not had any discernible impact on agricultural productivity.

The poor offtake of employment under the scheme in some states like Goa and Punjab is a reflection of the disparity in rural incomes over the country, and should have been a matter of pride to the states concerned.

Instead, the MNREGA is being seen as an entitlement to public employment that should be equally accessed across states.

As initially conceived, the scheme was meant to redress inter-regional inequalities at a nationally uniform wage.

Even though the original Act of 2005 specified only a uniform nominal floor, and explicitly stated that the wage offered could differ by region, the implicit intent was to permit cross-state wage variation with reference to a spatial price index, such that there is real uniformity in the offered wage across the country.

The underpinning for the cross-state pattern of new wage rates legislated in January 2011 is not clear at all.

Food has now very simply been priced beyond the reach of many people in terms of levels, even if food inflation has slowed relative to non-food.

The boundaries of entitlement to food security have to be drawn in such a manner as to benefit those who cannot get food security through a workfare scheme like the MNREGA.

Unless the direct food entitlement is directed to the residual poor, who are unable to access the MNREGA because of disability, or locational disadvantages, there will be a horrible divide between those with access to both, and those with access to neither.

The MNREGA by its very design requires a clustering of claimants.  If the Food Security Bill targets the scattered poor, it will be both fair and fiscally manageable.

The author is honorary visiting professor, ISI Delhi.


Indira Rajaraman