Tackling inflation: What should the government do? - CNBC-TV18 -
Tackling inflation: What should the government do?
With food inflation rising to 11.43% and headline inflation at 9.73%, the situation is very worrying for India. But does the government have a well thought out strategy for tackling it or is it simply floundering for an answer?
This episode of India Tonight discuss reasons behind the high inflation levels in the country, and the measures adopted by the Reserve Bank of India (RBI) for tacking said problem.
Joining Karan Thapar in this discussion is member of the Planning Commission and Prime Ministers Economic Advisory Council Saumitra Chaudhuri, the managing director of the Center for Monitoring the Indian Economy Mahesh Vyas and the well known and highly reputed food analyst Devendra Sharma.
Below is an edited transcript of the interview. Also watch the accompanying videos.
Q: Food inflation has raised up to 11.43%, a significant jump over 10.60% just a week earlier. How do you read this situation?
Chaudhuri: In the food space, the items for which the prices are going up is vegetables and to some extent in fruits. Vegetable inflation on year on year basis for the last week was 35% and the culprits are seasonal vegetables that have just entered the market like tomatoes, cauliflower, brinjal, etc. These are where you have inflation at 40-45%. Its likely possible that as the season develops these prices come down, but this is a matter of serious concern.
Q: Given that during the same week in October 2010 inflation was 14.20%, there clearly cant be a base effect exaggerating the 11.43% figure. So would you accept that this makes the situation a little bit more worrying?
Vyas: Yes, but let me add that its not only vegetables which can be blamed for this inflation. There is a whole basket of agricultural commodities whose prices have been rising sharply and they have remained kind of high for a very long time. It is not cereals and pulses as much as it is fruits, vegetables, milk, meat, eggs. These are very different kind of commodities where consumers make a choice of keeping the demand high.
So I think this is more to do with significant rise in incomes of households of India and they are making a shift from simple cereals and pulses to something slightly fancier on their plate. But the supplies of these have not kept pace like the demand has.
Q: Is this figure of 11.43% significantly fueled by festive season demand or is it part of a larger systemic problem which the government has yet to grapple with? Which would you say?
Sharma: I think its a part of a larger problem which the government has not yet figured out as to what to do. The common argument that I hear is that it is a supply-demand constrain; people have started consuming more nutritious food so there is a pressure. But if you look at the demand and the supply of fruits and vegetables, one of the major commodities where the price have gone up, I found out that on an average per capita availability is 480 gms per day of fruits and vegetables in this country. What we actually require is only 70-80gms, which means about 5-6 times more fruits and vegetables are available than what you require. So why should prices be going up?
The problem is that we are not able to really strike at the point to really bring down the prices or to control inflation. The RBI is trying various permutation combinations, but I dont think it knows what the impact of these measures will be.
Q: Ill come to steps that we need to take to tackle the problem in a movements time but first lets concentrate just a little on what the problem is. If the problem is not to do with supply, is it to do with constraints in marketing? Is it to do with the Agricultural Produce Market Committees (APMC) Act for instance?
Chowdhury: I think there is a lot of substance in what you are saying. It has got much to do with logistics. I am not really sure with Mr. Sharmas numbers but we do know that there is enormous amount of wastage and the wastage is paid for by the fact that the farmer gets a fraction of the consumer price. If he gets Rs 4, consumer pays Rs40 that accommodates the wastage and accommodates a lot of mishandling and the mark ups in the middle.
Q: The government has toyed with the idea of changing the APMC Act. Montek Singh Ahluwalia has even spoken about by a couple of times, but nothing has happened. Given that you accept that the constraint is in marketing, why is the government not speedily acting to remove the constraints?
Chowdhury: The APMC Act is a state act, but several states have either scraped the it or have amended it to exclude perishable material from its purview and several other Chief Ministers in discussion have agreed to do the same.
Q: Just a couple of days ago, the government sharply increased minimum procurement prices for a range of agricultural products. Many people, particularly industrialists, were worried anyway about the inflation situation saying that this is only going to make inflation worse. Would you agree with them?
Vyas: I will, but only partially. I dont think an increase in the minimum procurement prices will have a very significant impact upon inflation because there are many more large factors which are leading to an increase in inflation. For example, crude oil prices play a much bigger role. International metal prices play a very big role. So while this move will add to the pressure on prices, I dont think they will play as a big role.
Q: PK Joshi of the International Food Policy Research Institute has gone on record to say that he does not believe that inflation will come below 10% anywhere in the near future given what we have seen in terms of MSP (minimum support price). Given the constraints in terms of marketing, would you agree that we are destined to live with food inflation above 10% for another five-seven months?
Sharma: Before I answer this, lets look into the Agriculture Produce Market Committee Act (APMC Act). Montek Singh Ahluwalia has said that if every time you go to the APMC, you have to pay 10-12% tax or as commission. But if you look at what he is trying to replace it with
. in America, the Chicago Commodity Exchange or the terminal charges 18% commission. So we know that you cannot replace 10-12% with 18%....
Q: How do you know he intends to do this because all the interviews that I have seen of Montek Singh Ahluwalia, he hasnt said this at all? So where do you get this impression from?
Sharma: When you are saying you have to disband the APMC, what do you want to bring in place of that
you want to borrow the models from America?
Q: If the APMC is to be dismantled, what would replace it and can you give an assurance that it wont be the American model which could kick up taxes to 18%?
Chaudhuri: I would say two things. One is that we are now disbanding the APMC because as far as grains are concerned, state governments dont want to disband the APMC. But looking at it with regard to perishable items, and I will give you a second bit of information, last year in winter when onion prices went through the roof, the National Agricultural Cooperative Marketing Federation of India Limited (NAFED), which is a government corporation, was asked to purchase onions and send it to the retail market. They tried to sell it through the Mandi and they were not allowed to do so because they are license holders. I think when you have this kind of entry barriers in markets, they can never be competitive. So we want to replace this kind of a system with some kind of a competitive system.
Q: You have two reasonably opposite views though they do want to amend and correct it and create greater competition to bring prices down. Where do you stand on the APMC Act?
Vyas: I would agree with Mr. Chaudhuri. I dont think there is a case to dismantle the APMC completely and bring in something completely alien. However, I think there is a case to modify what we have right now quite significantly. APMCs are creaky, they are kind of exchanges controlled by strong traders. I think the introduction of the futures market through a very modernised system like the National Commodities Derivative Exchange (NCDEX) did make a big difference. That did lead to the dismantling of many commodity cartels which existed in the interiors, for example, castor in edible oils, soybean oil, guar seed
many of these have been disbanded and I think we will need to act in that direction to learn what we did on NCDEX and introduce more modern systems compared to what we have in APMC.
Q: On one hand you have PK Joshi of International Food Policy Research Institute saying he does not believe that food inflation will fall below 10% in the near future. On the other hand if you look at the food inflation figure for December last year, it was almost 20%. Doesn't that alone suggest that base effect will kick in December this year significantly reducing inflation?
Sharma: I think to say that it will remain 10% or hover between 12-20%, its not fair. If you really want to strike at controlling inflation you can do it.
I do not understand why is banana being produced and sold by the farmer at Rs 8-9 a kilo and what I buy in Chandigarh or you buy in Delhi is Rs 50-60 a kilo! That means that if you want to curb inflation, then we have to go at the level of mandis where nobody wants to go.
If you go to the mandi, the wholesale market based in Delhi, you will see the prices within one hour of the morning shoot up from 100% to 300% right there and that is where we need to strike. Nobody wants to go there, everybody wants to give all the economic solutions. I don't think the answer lies in economic solution, the answer lies in acting and use the danda.
Q: In other words harsh actions against middlemen in the mandi, that is the solution - a quick yes or no?
Sharma: Yes. We need to be tough on the middlemen. The wholesalers and the retailers both have messed up the entire situation that we are faced with today.
Q: The RBI governor has predicted that the headline inflation which is at 9.73% will fall to 7% by March, do you believe him or have such predictions gone wrong far to often to be credible?
Chaudhuri: They went wrong last year. This year we have a fair chance of hitting that target, provided we are not hit by some surprising developments in the intervening period.
Q: Can I ask what you mean by fair chance?
Chaudhuri: Last year for instance, I though we would be able to contain inflation at around 7.5% by March. The price developments till about middle of November suggested that we are on track till we got hijacked by the onion problems, the tomato and brinjal issues and everything went for a toss. As I said, expectations were severely derailed and we paid a very heavy price for that this year. So the large probability is if we dont get hijacked by some uncertain developments yet again, I think we can hit 7% target suggested by the RBI Governor.
Q: How confident are you that the RBI actually has a well thought out strategy for tackling inflation? After all, its hiked interest rates 13 times in the last 19 months by a total of 375 basis points and most people think the policy isnt working. Would you agree with that or do you think people are being unfair?
Vyas: I think the policy is not working and there is good reason for that because if you hike interest rates, you can curtail consumer demand only to the extent that the demand is leveraged. In a sense, it is based on borrowed money. Not much of consumer demand is based on borrowed money and therefore, the RBI may keep on hiking interest rates, it will have a very marginal impact.
According to our data, less than 15% of households have borrowings. So its really a very small proportion. Some part of this is even the richer households who will not be impacted by hike in interest rates. So I dont think its going to work.
I must add that inflation has started coming down in the last four-five months. The month-to-month growth in inflation, which is a more correct way at looking at the changes that are happening, has come down very substantially, and the correct way of measuring inflation by that measure on an annualized basis would be of the order of 6.7%. The 9.7% that we are seeing now is merely an accumulation of the inflation seen in November-December and March-April last.