MANAGING
FOOD SHORTAGE
INFLATION
BY
Dr.Guruprasad Murthy
Director, Dr.VNBedekar
Institute
of Management Studies, Thane
( Dr.VNBRIMS)
INDIAN ECONOMY AT CROSSROADS
The Indian economy is suddenly at crossroads: from India shining with higher and higher
growth rates, in lieu of the erstwhile, rather slow, rates of growth, to India losing ground
on both counts viz. inflation and growth rates. The complementarity between the two is
well known.
Inflation is caused due to the excess of the aggregate monetary flows over the available quantities of goods and services at base prices, in the economic system. In other words inflation is the result of too much money chasing too few goods. Inflation could be encouraged by rather weak flow of supplies – deficient, low, slow or non-existent supply line. Inflation gets exacerbated due to hoarding – in anticipation of further bullish tendencies in a particular commodity. The motive is profiteering via speculative motive. Inflation is also triggered due to panic buying – precautionary motive in action like housewives buying in excess to avoid shortages at home, or anticipated increases in prices. Again, when supply lines are choked or not smooth local environments may face gaps between local demand and supply resulting in price increases.
Moderate inflation produces the necessary hidden tax to act as an effective catalyctic agent to induce salubrious economic development. On the other hand, a spiraling inflation develops fear psychosis and generates abnormal expectations about the current and future. Of course, speculators pursue efforts to make “enterprise a bubble in a whirlpool of speculation” in the development process. This is noxious to economic development.
Inflation management is a top priority for every Government :
Keeping inflation under check
is one of the cornerstones of our policy. Recently, the Prime Minister
declared, “ I think no Government in our country can be oblivious to the
objective of ensuring reasonable price stability without hurting the growth
process”. There can be no clearer enunciation of policy. However, since the
downside risks have increased worldwide, we must be vigilant and prepared to
make swift adjustments in our policies to achieve the goal of growth with price
stability.
Speech of the Finance Minister, Mr.P.Chidambaram – Union Budget 2008-09, 29.02.2008
Again, in the budget speech of
28th February, 2007 the Finance Minister Mr.P.Chidambaram had said
“When the UPA Government assumed office in 2004, the inflation graph was on the rise; but we succeeded in moderating inflation and we are confident that we can moderate the present inflationary trend too”.
The current inflation of 6.68 % for the week ended March 15th, 2008 would then be an inheritance for the successor Government. In fact, for the 39 months ended 22nd March, 2008, the inflation rate at 7% is the highest ever since December 2004.
The fear psychosis of inflation in India is much more than the nausea of an impending recession which might be actually more frightful. The double digit inflation of mid-seventies seem to have gripped the minds of the Indian population. Hence, post 1991 any rise in the inflation rate above the benchmark of 4-5 percent is looked upon with fear and a lot of suspicion and distrust about the ability of the Government in power to manage the economic affairs of the country. Incidentally, Germany in the post Nazi era witnessed a hyper inflation. Germans again have a greater fear and hatred for inflation rather than impending recession. Perhaps in the US the adversities caused by a recession have left since 1930s a dreadful impact. Recessions are feared by Americans.
Choice of instruments of economic policy also get narrowed down when inflation raises its ugly head which in turn has its own adverse, concomitant, impact on the pace and direction of development efforts.
Inflation needs to be controlled at least partly by a dear money policy to plug precautionary and speculative motives while accelerated economic development requires a cheap money policy. Again, inflation management requires a fiscal policy of constraint - either enlightened self restraint on consumption (an illusory expectation) or forced restraint through taxation both direct and indirect. Today, at least on 29.02.2008 the mood of fiscal pronouncements is expansionary --- anticipated high levels of consumption via the multiplier effect and accelerated rates of investment, to support emerging consumption levels, putting the accelerator concept, as enunciated by the great economist John Maynard Keynes many years ago, into motion. Keeping these concepts in view, purchasing power has already been unleashed through increased disposable incomes, raised exemption limits for assessees in various categories, reduced indirect taxes, continued subsidies without budgetary support and loan waivers creating acute pressure on the asset portfolios of lending institutions. Last but not the least we have the carrot of the sixth pay commission, once again unsupported by the stick, or a charter or agreement which can increase productivity pari passu. In this background there are ab initio constraints, on choice of economic policy making or deployment of instruments of economic policy.
On the one hand we have a monetary policy whose exclusive raison d’etre,nay dharma, is managing price stability and on the other a fiscal policy with forces unleashed and to be unleashed, assuming a diametrically opposite posture viz expansion,adventurism into new ventures, consumption driven development, investment led stimuluses to supply lines in medium and long term, subsidies, reductions and to reiterate increased disposable incomes and other populist moves, some causing incremental cash inflows in the hands of people others causing reduced cash outflows (loan waiver).
In this contrasting combat and role plays of the Exchequer and Chancellor of the Exchequer along with the supply line inelasticities stemming from global food grains shortage (immediate context) and lack of wisdom on the agricultural front (post NDA scenario), the ordinary man has to face the guillotine of the unconscionable increase in prices of essential commodities. The wholesale price index itself shows a spiraling effect. The retail price levels are indicative of runaway inflation, even over the last 3 years particularly the basket of items constituting day to day needs of life-bread, and or butter and or jam as the case may be. It is not without reason that there was a high level meeting of the Cabinet Committee of Prices on 31.03.08 to address the issue not of spiraling inflation but runaway inflation. In these kinds of situations the policy makers at the center may easily pass on the blame and buck to the State Government because delivery systems particularly of day to day needs to the grass root level fall at the door of the States. Thus, today, instruments of economic policy have to be chosen from amongst those which are outside the realm of fiscal and monetary policies and even incomes policy.
In the immediate context the only options open seem to be good quality governance which can plug leakages and deficiencies in the entire supply chain management from Suppliers Supplier, Suppliers, Your Country, Customer, Customer’s Customer. Do the Governments (BJP/Congress/State Govts of any coalition or party) have the managerial competence and administrative astuteness and probity to manage supply chains so smoothly as to deliver across the entire consumer network of the subcontinent from Kanyakumari to Himalayas and from the eastern depths to the western parts of the country. The answer is a big no. Though the challenge before the administrators, notwithstanding which Government in power, is Herculean, its implementation will leave much to be desired, judged by recent or past performances of the State. In the circumstances even if supply inelasticities are eased by immediate imports (thanks to the swelling foreign exchange reserves), the supply chain management is a formidable, indeed an uphill task. In the medium term if supplies have to increase, particularly in the agrarian sector, appropriate strategies need to be evolved without loss of time to simultaneously keep the export engine and production line moving in a fast direction. The focus is therefore on Agriculture - this is an Indian as well as an Asian Issue. In a recent article Mr.Ramgopal Agarwala had said “ The second and subsequent rounds of domestic demand creation through investment may well add $ 1 trillion stimulus to the world economy over the next five years and go a long way to counter the risks of world recession emanating from decline in US domestic demand. Participation in the rescue operation of the US economy by Asia is in its own interest”..This can help to divert the World demand from advanced countries particularly the US to investment and consumption in the Asian countries. ( The Economic Times 24th March, 2008)
Historically agri-sector has had many credits -- the green revolution, the blue revolution and the white revolution. The green revolution was seen as a panacea, a permanent one at that, for India’s food problem. The only issue was distribution. However, bad years 2003 and 2005 have disfigured the food surpluses and the stocks have gone below the buffer zone. A food surplus situation is now a food deficit condition. Hence the different revolutions of the agri –sector need to be rejuvenated and agri-production and productivity has to increase by leaps and bounds with marketable surpluses capable of attractive aggregate realizations not in terms of price per unit but in terms of volume of sales. Profit margins for the farmer have to be sustained through effective and efficient management of factor costs. Only then can agri -- produce be available to the common man at affordable prices. This will automatically bring inflation under control. More and more people including the rejuvenated farm population will have increased disposable income to be a part of the consumption driven boom. This in turn will logically sustain investments by making them profitable to the enterprise venturing into increased investments to capture the multiplier effect of a consumption led development process. At this stage an increase in interest rate to curb demand will be self defeating both to consumption demand and investment demand. The disposable incomes may once again find favor with financial assets instead of consumer goods, savings may increase but there will be limited reinvestment opportunities for the loanable funds because cost of capital would be high. At these high rates of cost of capital no entrepreneur will be able to justify investments as the returns will not be above the cost of capital. Moreover since demand gets curbed and consumption disincentive sets in, the very purpose of making investments to capture increases in consumption gets defeated. Loanable funds may get diverted to financial assets may be myopic, sterile, unproductive and even speculative.
For once the debate on inflation management is not curbing consumption. The onus of bringing about solace in the short run and transformation in the medium term and long term rests not on mere choice of economic philosophy (Structuralists versus monetarists,) or instruments of economic policy (monetary versus fiscal policy or incomes or price policy) but on common sense economics and political governance. If the direction of demand management is already known, equilibrium can be established only through supplies. If this logic fails to materialize, a series of imbalances between the key parameters of the economy via consumption, savings, investment, national income production and employment will hold our growth prospects at ransom either through inflation or reduced growth or dwindled foreign exchange reserves or an unwanted
and unacceptable combination of all unfavorable elements. This will lead to moods
of despondency, instead of India shining, growing and surging to be a super economic power.
R.B.I Reeady for Action.
It is gratifying to note that the Government has launched a multi-pronged attack on inflation and that RBI is ready to take action.
To quote the RBI Governor Dr.Y. V. Reddy
“ Any decision to act has to carefully assess this extremely complex situation…. We have a range of instruments available with us to manage liquidity…. And we do not hesitate in using them. Liquidity management has to be consistent with monetary policy and with management of aggregate demand ” Yet it is not untrue to say that demand management necessarily comes with curbing economic enthusiasm on the demand and supply side and therefore on medium and long term investment decisions. If RBI presses the panic button the otherwise surging, overall growth rate per annum, will suddenly experience a brake and the remedy may be worse than the disease. In fact between April 2006 and February 2007 the disbursements of loan have increased by 22% compared to the last year’s same period. This is indicative of the growth rates picking up to move ahead rather than overheating requiring cooling through repressive measures.
The real challenge lies in managing the supply side of the demand-supply relationship.
Supplies have to increase in the immediate period, short run and long run. This is true across the entire economy – primary, secondary and tertiary sectors alike. Since many economies including India, are growing fast and effective demand for consumption will continue to rule high, and global supplies are weak it is the economics of supply management that should hold the roost and be at the center of economic decision making as well as operational strategy viz. -- increased imports and production along with productivity supported by proper logistics of deploying available supplies to the right destination in the right quantities, appropriate quality within decreasing reaction time and of course at right prices – indeed a tall order. Demand management will only repress inflation and is not necessarily an answer except for very short period.
If interest rates are raised it may reduce hoarding and bulk buying or advanced purchases to an extent but not to make a significant dent - because inflation rates can occur and get expressed as per cent per month, or week or even day. At one time in Brazil, when hyper inflation had seized the Brazilian economy, inflation changed every minute if not every second. Interest rates are expressed always as percent per annum. Hoarders, black marketer and profiteers would hardly be discouraged, to continue their nefarious ventures. The Government authorities have come out with warnings against hoardings and related delinquencies as inevitable concomitants viz. black-marketing and profiteering. Hoardings of items vulnerable to inflation, in the present context, food, cement or steel have been condemned. Harsh action invoking provisions of law may also follow if delinquents are identified. Of course hikes in interest rates would affect the cost of capital on a post tax basis and to reiterate will adversely affect motivation for capital investment decisions.
The question of supplies is not national in character. It is global by nature. World supplies are facing acute shortages and exporting countries which were riding at the crest of high food prices, to earn foreign exchange, found that local population had to face the heat of global spiraling of food prices. Thus, countries which exported were also simultaneously, may be unknowingly, importing inflation. Even if exports are banned or reduced, at least for some time India, and other countries too, will have to import inflation. In India, this imported inflation will be an addition, cascading or otherwise, to the inflation which after creeping in has spiraled beyond the 5 % in to a runaway figure, to reiterate , a 3 year high of 7 percent.
Global shortages due to drought in Australia, change in the crop mix in the USA ( ethanol instead of maize), restricted exports of Ukraine wheat and reduced exports from almost all exporters of foodgrains - India, Vietnam, Indonesia, Cambodia and Thailand, have all added to the woes of a lean supply position of foodgrains. And India’s problem may not be easily solved – increased production may or may not take place. Lesser production and low inventory levels will bring in greater realization per unit and also increased aggregate profits. Surplus production may not find entry as marketable surplus because holding, if not hoarding, is more profitable than releasing supplies. Indian farmers even without internet have taken informed decisions based on sound principles of economics. Onion producers in Maharashtra have always managed demand supply imbalances by destroying supplies, if necessary, to hold the price line of realization per unit and also aggregate profits.
Today’s farmer is well informed – thanks to internet and e - chaupal. In the circumstances unless increasing production volumes really materlialise, which seems to be difficult, the food shortage driven inflation may persist. The solution to such situations rests always outside the domain of rules of demand and supply. Can the Government increase the procurement prices adequately to motivate higher volumes in the local markets and release supplies in tranches at lower price. The gap between procurement price and released price being the price Government is willing to pay to manage and control food driven inflation. If farmers deserve a loan waiver the average citizen also deserves a small subsidy for a short period of time which may be a possible win-win situation. Further, the public distribution systems have failed. There is a need to disperse and decentralize food management decisions – fiscal incentives including weighted allowances for amounts spent on food for employees may reduce the burden on the Government partly and also ease the pressure on citizens facing the brunt of the damage to household budgets. Similarly other forms of organizations which can manage food distribution to the population within its domain may be provided with fiscal incentives to tackle the issue of effective and efficient supply chain management. Organizational structure is key to performance. The resources, initiative and capabilities of the people need to come to the fore to tackle the key issue on hand – food driven inflation.’ An altered structure which can migrate peacefully, successfully and quickly to a new decentralized food distribution system with appropriate fiscal incentives and other support systems may be the answer. Similarly the entire network of non-profit organizations may be used to participate in the decentralized food distribution system. In short improved governance and astute administration leaving little room for managerial incompetence and administrative delays could possibly be a viable option to tide over the crisis. However, once again corruption, leakages, complacency, incalcitrance and contumacy of the people working and operating across supply chains could be a great inhibitor.
However improved governance, on the lines indicated above, can bring miracles. Thus:
‘At a macro level, good governance at the central, state and local levels can push up the overall growth rate. Imagine that Bihar brings its law and order situation to what normal people would like to call normal, becomes home to at least half the country’s sugar production and, in the process, jacks up its growth rate to at least the average growth rate for all states. That alone would add nearly two percentage points to India’s growth rate’.
( T.K.Arun – Growth: Over to Politics -- The Economic Times 13th March, 2008)
It is hoped that the authorities and all stakeholders will rise to the occasion to manage the supply line on a pro-active basis rather than demand levels through reactionary and repressive measures.