Economic
Highlights
New Delhi, 22 February 2007
Growth or
Inflation?
PRICE RISE
CAN’T BE CHECKED OVERNIGHT
By Dr. Vinod
Mehta
If the choice is between growth and inflation, it
makes sense to choose growth and ignore inflation, for inflation can be tackled
through short-term measures like imports in weeks or months but if we lose
growth momentum it will take years to get back that momentum. It has taken almost fifty years to raise the
growth rate by almost three times from almost three per cent to nine per cent
today.
Inflation strains the budgets of the families with
more or less fixed incomes and
erodes their real incomes, while higher growth impacts the whole economy
bringing in more revenues to the Government, leading to creation of more
productive assets and more
jobs. An ideal situation is one where
the growth rate is higher and the rate of inflation is modest. In real life we seldom get such ideal
situations. The Governments of the day has no option but to manage the
situations with the options available to them at that particular point of time.
The rate of inflation which was about 5.5 per cent a
month back is today 6.5 per cent and may go up to seven or 7.5 per cent. But
the growth rate is more than nine per cent as of today and may even go up
further. There is no magic wand to
control or bring down the rate of inflation overnight as the people would like
it to be. There is always a time lag;
steps taken now will have the desired effect a month or two months or even
three months later. And even if the
Government does not take any corrective measure, inflation will slow down when
the supply situation improves.
Inflation is apolitical phenomenon but loaded with
serious political implications for the government in power and that too when
the elections are due. The trouble,
however, is that the Government either tends to find scapegoats where none
exist or takes inane measures which it knows fully well that it will not control
inflation overnight. The banning of
future trading in certain agricultural products is one such example; there is
no statistical evidence to show that the spurt in the prices of agricultural
products is due to future trading in commodities.
Similarly, banning of export of milk powder or allowing
freer import of certain agricultural products will show its impact after a few
months and by that time the arrival of rabi crop in the market would have
started dousing the inflationary pressures.
The international prices of essential
commodities are higher than the domestic prices as of today; therefore, does it
make an economic sense to import them to fight inflation with such measures?
In most of the developed countries inflation is
generally due to money expansion and the Central Banks try to control it by
raising interest rates and restricting credit growth; for a central banker
inflation occurs when too much money is chasing too few goods. By restricting growth of money supply
inflation can be brought under control.
The Reserve Bank of India has done precisely that in
the past one month. It has raised cash
reserve ratio twice within a month. Both
the borrowing and lending interest rates have gone up. As a result credit off take will be less and savings in terms of tenure deposits will increase.
But there has been no let up in the rate of inflation. However, any further increase in interest
rates can adversely affect the growth rate.
It is now for the Government, and not the RBI, to ensure that inflation is brought under
control. The main reason for the
increase in the price level is the mismatch between the demand and supply of essential commodities. This mismatch has not occurred overnight but
has been gradually developing for the past few years. For instance, the acreage under foodcrops has
been shrinking, productivity of agricultural crops is stagnant; there is still
no freer movement of agricultural products within the country.
In short nothing has been done to increase the supply
of essential commodities. And the
supplies cannot be increased over night to control inflation. The Government will have to take certain
decisions now so that the prices of essential
commodities remain relatively stable over a longer period of time.
This calls for large investments in the agricultural sector
and rural infrastructure. This also
calls for raising the agricultural productivity by providing farmers with
improved seeds and other inputs, timely credit, chain of cold storages, market
information and so on. A large number of volumes have been written on this
aspect in the past 50 years but the need is to implement them. Can one ask if
there is any blueprint for this?
Since agriculture requires massive
investment and it may not be possible
for the Government alone to bring all the necessary
investment. In fact, outlays on agriculture have been going down. For instance, the outlay on the agricultural
sector was 16.7% till the Fifth Plan but it came down to 11.3% in the Tenth
Plan. Private sector will have to be roped in if we have to provide a big push
to this sector. To allow private sector
to invest in a big way we may have to change our land laws to facilitate contract
farming on a big scale. It may be a good
idea to give wastelands to the private sector so that they can develop these
lands to produce agricultural products.
Apart from increasing investments in the agricultural
sector and improving rural infrastructure including supply chain, there is an
urgent need to develop techniques to detect impending shortages at least eight
to ten months before they assume
alarming proportions. In other words,
the Government must have a system in place to monitor production and
availability of essential
commodities on daily basis on a regional and national level with an inbuilt
warning system to indicate an impending shortfall in supplies of certain
commodities. This will help the
Government to take timely measures to check sneaking inflation. It should not
be difficult for a country like India
to develop a customized software for this purpose and put the system in place.
The point is that inflation or price rise cannot be
checked overnight; it can be checked by ensuring adequate regular supplies (or
what economists call supply side management).
Therefore, there is no point in sacrificing growth to control
inflation. At this point of time growth
rate should be guarded while making efforts to control the price rise. The past experience shows that inflation
automatically comes down the moment supplies improve. The current inflation will also come down the
moment rabi crops start coming to the mandis.---INFA
(Copyright,
India News and Feature Alliance)
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