Angry Manmohan misses inflation
target By Paranjoy Guha
Thakurta
NEW DELHI - India's coalition
government, which is moving firmly to curb
inflationary trends in the run-up to a general
election next year, continues to blamed a poorly
managed international financial system for
spiraling food and energy prices at home.
The Reserve Bank of India (RBI) this week
moved to increase the cash reserve ratio (CRR), or
the proportion of bank funds that has to be
compulsorily kept with the central bank, by 0.25%
to 8.25% to rein in inflationary expectations.
Hours before the RBI increased the CRR for
the second time in less than a fortnight to suck
out liquidity from the financial system, Prime
Minister Manmohan Singh complained bitterly that
the international community was not heeding
India's advice to
calm down the world's
turbulent financial and commodities markets.
"India's voice must be heard. Be it the
management of the world food economy, be it the
management of the energy economy, be it the
management of the financial system or indeed be it
the management of global security," Manmohan, a
former World Bank economist, told a meeting of the
Confederation of Indian Industry, representing
India's business elite.
Manmohan pointed
out that although the international demand for
crude oil had gone up by just 1% over the past two
years, crude prices have shot up by over 90% in US
dollar terms and 40% in euro terms.
"I am
deeply dismayed that the global response to this
third energy crisis has fallen short of our
expectations and compares poorly with the response
to the first and the second oil crises," he said.
Manmohan was of the view that the
international community had been slow to come to
grips with the now visible structural weaknesses
in the functioning of the international financial
system. "The management of the financial sector in
the developed economies, especially the US, has
been less than satisfactory," he remarked, adding
that international financial institutions have
also not played an active role in tackling the
consequences of the problem.
India has yet
to witness the food riots seen in some other
countries, but high prices of cereals, edible oil,
milk and dairy products, vegetables and fruits in
recent months have made the ruling elite in the
world's largest democracy and second most-populous
nation-state apprehensive of a voter backlash.
The official wholesale price index has
exceeded the 7% mark, and retail prices have gone
up much higher. According to official data, edible
oil prices in New Delhi have jumped by 40% over a
year, rice prices by 20% and prices of certain
lentils by 18%. (Rice and lentils comprise the
staple diet for many Indians). Milk prices too are
up by over 11%.
The government has
initiated a slew of measures to curb inflationary
expectations. Such measures include a lowering of
customs duties on imported palm oil and subsidies
on its sale, curbs on exports of particular
categories of rice, a ban on exports of wheat and
pulses, besides curbs in money supply by the RBI.
While the Indian economy as a whole has
been growing at an average of 8.5% over the past
five years, for the first time since the country
become politically independent 60 years ago, this
growth has been mainly confined to manufacturing
industry and the burgeoning services sector.
In contrast, the farm sector has grown by
barely 2.5% over the past five years. The trend
rate of growth is even lower if the past decade
and a half is considered. Thus, per head
availability of cereals (wheat and rice) at
present is more or less at the level that
prevailed in the 1970s.
"The government
has allowed the condition of the public
distribution system for food and other essential
commodities to deteriorate and this is hurting the
poor very badly," says S P Shukla, a former
finance secretary.
In an interview with
Inter Press Service, Shukla said "inadequate
public investments in rural areas, especially in
irrigation facilities, have contributed to low
farm productivity". The situation has worsened on
account of poor storage facilities resulting in
high levels of wastage.
Historians point
out that there has never been an acute shortage of
food in India, not even during the infamous Bengal
famine of 1943 in which more than 1.5 million are
estimated to have died of starvation. The problem
has always pertained to access or entitlement to
food at prices that are affordable.
Although agriculture provides a livelihood
to around 60% of the country's 1.1 billion people,
this sector accounts for barely 18% of India's
current gross domestic product (GDP).
India has also mismanaged its cereal
stocks that were at record levels six years ago.
Amartya Sen, the Indian economics Nobel laureate ,
had pointed out at that time that if all the bags
of wheat and rice with the government-owned Food
Corporation of India were placed end to end, they
would reach the moon and back.
Stocks came
down drastically two years later because of
exports and also on account of low domestic
production. Consequently, India had to import
wheat in 2006 and 2007. The problem compounded
because the landed price of imported wheat was
nearly twice as high as the minimum support price
the government pays its own farmers.
Indian cultivators are particularly
vulnerable since 60% of the country's total
cropped area is not irrigated and is dependent on
the four-month long monsoon during which period
80% of the year's total precipitation takes place.
The government is hopeful that this year's monsoon
will be normal and that wheat output will touch a
new high.
"The RBI's decision to suck out
excess liquidity would mute inflationary
expectations to a certain extent," said Abheek
Barua, chief economist with HDFC Bank (formerly
Housing Development and Finance Corporation). "The
prices of commodities are being driven by
speculation through leveraged positions based on
borrowings". Such speculation would come down and
lead to a moderating effect on the rate of
inflation, Barua hoped.
Until late-2006,
inflation in India was driven largely by high
prices of petroleum products. The country imports
three-quarters of its consumption of crude oil.
Subsequently, however, inflation has been driven
by high food prices.
This is bad news for
ruling politicians because the poor in India votes
in much larger numbers than the affluent. Roughly
one out of four Indians lives on less than US$1 a
day and three out of four earn $2 or less.
Finance Minister Palaniappan Chidambaram
has stated on a number of occasions in recent
weeks that the government is willing to sacrifice
growth to curb inflation. Critics say he does not
have much of a choice.
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