T N Ninan: Take credit for inflation

Is the stubbornly high rate of inflation (roughly 10 per cent annually for more than five years) a reflection of the government’s failures, or successes? The general drift of opinion – of the ordinary consumer as well as the expert – is that it is a sign of failure. But it might be just as true that the high rate of inflation, led by food, is an index of the government’s success. It depends on your frame of judgement.

Back in 2004, when Manmohan Singh assumed office, one of the big issues was farmer suicides. The underlying problem was stagnation in farm incomes — total agricultural production (not just foodgrain) in 2004-05 was no higher than a decade earlier. The government’s procurement policy had not helped; from 2000-01 to 2005-06, the wheat procurement price was increased by a miserly 6.6 per cent, from Rs 610 per quintal to Rs 650. It was only when the procured quantity began dipping alarmingly that the Singh government hastily raised the price, mid-season, to Rs 700.

So the prime minister visited Vidarbha and announced a relief package. His government took the sweeping decision to write off all bank loans taken by farmers, and which had become overdue for repayment. It also jacked up grain procurement prices from year to year — a cumulative total of 72 per cent in five years. Finally, it introduced the rural employment guarantee programme. In short, more money was pumped into the countryside than at any other point in recent history.

The results? First, agricultural production zoomed – by over 35 per cent in the last six years – which is one reason why government granaries are full to overflowing at the start of the procurement season, even after substantial quantities were exported at huge losses some time ago. Second, agricultural wages shot up — by 20 per cent a year in the last two years (prompting the chief economic advisor in the finance ministry to point out that poor farm workers have seen their incomes rise faster than the rate of inflation). And, finally, rural demand shot up — for everything from food to consumer durables. Ask any company where demand has been growing consistently in recent years, and it will point to the villages. Rural bank credit too has grown by leaps and bounds. The contrast with the period that went before couldn’t be sharper.

When demand surges in the areas where 70 per cent of people live, prices will go up unless supply keeps pace. As it happens, the sharpest increases in food prices this year (and in some past years) have been in the items whose supply too has been growing rapidly. The production of milk, eggs, fish, poultry, sugar, tea and fruits/vegetables has been growing much faster than the population growth rate (typically, four per cent or more, whereas the population growth rate is down to 1.6 per cent).

Now come the questions and policy dilemmas. When prices have shot up, why isn’t demand tapering off for what, in the poorer homes, would become non-essential food items? Or is it that prices are high and climbing higher because generally better-off consumers can afford to pay? Since the bulk of the retail price gets added on after the wholesale selling point, would more retail chains in the organised sector, or co-operative stores, have narrowed the price gap between farm and fork? Would steeper hikes in interest rates by the Reserve Bank, as advocated by C Rangarajan, have made a difference? And is there, in all this, hidden evidence of a trade-off between inflation and economic growth? If you think you have the answers, you may be wiser than even the experts.