CRISIS OF RISING PRICES

-THE TIMES OF INDIA

Rising prices of essential commodities coupled with wage deflation and increasing
joblessness are pushing the poor households in India to a point of distress. Cosmetic
measures of the government are unable to address the situation.
The government of the day is harping upon the idea that an annual GDP growth rate in the
range of 7% to 9% would be able to address the situation. The country has already
experienced a GDP growth rate of 7.9% in the second quarter of the current fiscal 2009-10,
but the situation has not improved. This is enough to prove that the GDP growth rate alone
would not solve the problem.
Governments heavy dose of fiscal stimulus can give a big push to the corporate performance
and post a good industrial growth which has already been possible in the second quarter of
the current fiscal year. The services sector, which accounts for 64.5% of the GDP, has also
performed well registering a growth of 9%, partly due to the implementation of the Sixth Pay
Commission award. The state governments and the public sector companies are likely to
align their pay scales with the Sixth Pay Commission award and hence a further push to the
services sector is expected. But this would certainly not address the wage deflation in the
private sector and the shrinkage in job opportunities caused due to the impact of the global
financial crisis.
However, the governments spending for some social and welfare schemes has given some
relief to the common man, particularly the Mahatma Gandhi National Rural Employment
scheme.
In this existing growth model, the magic figure of 7% to 9% GDP growth rate is achievable
but this would not solve the real problems of the common man as long as the price
inflationary pressure persists alongwith wage deflation and increased joblessness.
The retail prices of essential commodities are skyrocketing. In Delhi retail market the prices
of common rice varieties are ranging between Rs 22 to Rs 32 a kg, that of sugar at Rs 44 a
kg, that of different varieties of pulses are ranging between Rs 40 to Rs 100 a kg, that of
cooking oils are ranging between Rs 64 to Rs 80 a kg, that of common salt is Rs 12 a kg, that
of garlic is Rs 140 a kg, that of ginger is Rs 60 a kg, that of turmeric is Rs 160 a kg to cite a
few instances. Similar is the situation all over the country.
The price inflation measured in terms of the movement of wholesale price index (WPI) and
that of four consumer price indices (CPIs) became divergent soon after the impact of global
financial crisis was being felt in the country. The headline WPI inflation which was 1.2% in
March, 2009, declined to 0.83% in April 4, 2009 and after increasing to a maximum of 1.75%
moved to negative zone from June 6, 2009. It remained negative for 11 consecutive weeks till
August 15, 2009. It turned positive in September 2009, accelerated to 4.8% in November
2009 and further to 7.3% in December 2009.
But in the periods of decline in the WPI, the CPIs remained consistently higher almost at
double digit levels. The decline in WPI can be explained as due to the high statistical base of
the previous year caused by the impact of rising global commodity prices. But the pertinent
question is why it did not happen to the CPIs when the WPI subsequently declined. The so-
called experts explanation about the composition of the baskets and weightage in the CPIs
does not hold good.
The deceleration in agricultural growth due to poor monsoon rains is not much a cause for
price rise as there are enough stock of foodgrains with the government. There is ample sugar
stock in the country also.
It is high time to address this tragedy of errors the cause of huge divergences in wholesale
and retail prices if the policymakers really want to address the problem of the price
inflationary pressure on the economy. The disease in the supply chain from wholesaler to
retailer and to the consumer needs to identified and addressed, instead just talking about
shortfall in production
Moving towards a high-cost economy of a liberalized market is no solution. It would rather
aggravate the problem. The UN Report on the World Social Situation-2010 with the theme
Rethinking Poverty has already sounded a warning bell and has said that economic
liberalization across the world since 1980s has slowed down growth and poverty reduction
and increased inequality and vulnerability in most countries. The growth slowdown was
market in all the years except the period 2003-08
No viable yardstick exists to estimate poverty. The world is not on the track to meet the
Millennium Development Goals 1 of bringing down extreme global poverty by half by 2015.
The impact of the current financial crisis which began from later half of 2008 has only added
to the worsening situation. Economic liberalization has reduced the policy space of the
government and decreased revenue collection, both of which are necessary tools of the state
to combat poverty and hunger, the UN report said.
It is high time that the government pursue an alternative model for development and heed to
the UN report which observed that poverty magic bullets like micro-finance, property rights,
including land titling and Bottom of the Pyramid marketing have not worked well to eradicate
poverty.
According to the UN report as market failures are likely to occur, good governance with
social objective is necessary for poverty alleviation. Focus should be on alternative growth-
enhancing governance capabilities to address key development bottlenecks. Growth process
needs to be more stable by maintaining consistently counter-cyclical macroeconomic stance.
Measures should be aimed at reducing inequality. Targeting poor is often expensive and
politically unsustainable, while missing out many deserving and therefore the social measures
of the government, particularly for food, healthcare and education, should be universal in
nature.
The countrys central bank, Reserve Bank of India (RBI) has done a tightrope walking with a
view to rein in the mounting price inflationary pressure on the economy
In its third quarter review for the fiscal 2009-10 it has announced a hike in cash reserve ratio
(CRR) of scheduled banks by 75 basis points from 5% to 5.75% of their net demand and time
liabilities (NDTL).
The hike in CRR will be in two phases one by an increase of 50 basis points from February
13 and the other by an increase of 25 basis points from February 27.
The RBI has kept the bank rate unchanged at 6%. Also the repo rate under liquidity
adjustment facility (LAF) will remain unchanged at 4.75% and the reverse repo rate under
LAF will be retained at 3.25%.
Under circumstances the central bank has very little role in reining in the price inflationary
pressure. The effective role in controlling the price inflation lies in the pragmatic policies of
the government.
The RBIs compulsion of following the pattern of the existing model is evident when it
suggests for shifting the policy focus from managing the crisis (due to the impact of global
financial crisis) to managing the recovery and at the same time cites several risk factor for the
emerging scenario and expresses concerns over the price inflationary pressure on the
economy, in which it has a very limited role to play
The RBI has projected an annual GDP growth rate for the country in 2009-10 at 7.5% and the
baseline WPI inflation rate by end-March 2010 at 8.5%. Thus the WPI inflation rate would be
higher than the annual GDP growth rate. Then where is the relief for the common man
It is strange that the RBI instead of suggesting an alternative development model is trying its
best to sustain this existing model. While keeping hopes on the revival of the global economy
and it also says there is still uncertainty about the pace and shape of global recovery. This
paradox is evidently due to the fact that it has become both helpless and hopeless.
The RBI maintains the conduct of monetary policy will continue to condition and contain
perception of inflation in the range of 4% to 4.5%. This will be in line with the medium-term
objective of 3% inflation consistent with Indias broader integration with the global economy.
This can only be possible if the country follows a people-centric development model instead
of the existing corporate-centric development model.