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The Worm Is Acting Pricey

Inflation is on a high and the UPA government looks clueless. Only the rain gods can save us.

The Worm Is Acting Pricey
Tribhuvan Tiwari
The Worm Is Acting Pricey
outlookindia.com
-0001-11-30T00:00:00+0553

On A High Horse

  • Monsoon forecast good, but impact to take time to percolate
  • More demand for high-value perishables like fruits, vegetables and dairy products
  • Higher costs of services like education, transport, rentals
  • Farmers, consumers pay the price for poor supply chain
  • Sharp rise in commodity prices will fuel input costs, which may be passed on
  • Big gaps in implementation of infrastructure projects, capacity constraint in many industries

***

The UPA government’s winning over of rivals to defeat the cut motion brought by the Opposition in Parliament would have done Kautilya proud. But did it bury the concerns the latter raised of persisting high inflation and rising consumer costs? Far from it. It’s ironical that despite repeated attempts by the Opposition to take the issue “to the streets”, the government has shed no light on when it thinks it will be able to  stem rising inflation. In fact, going by earlier assurances and statements, the government doesn’t seem to have a clue on how to tame the beast.

“Overall, inflation has peaked, should be on a downward trajectory.”
Pranab Mukherjee, Finance Minister, 20/4/10

From the drought in 2009 to a spurt in rural demand due to rise in incomes of NREGA beneficiaries, various reasons have been dished out for the persistent high inflation. But there’s been no cure in sight. Despite having been reassured again and again that inflation would decline in a few weeks or at least after the April harvest, the reality is that prices have been rising, of not just vegetables and fruits but almost all products, including milk, toiletries, steel and cement.

As CPI(M) leader Basudeb Acharia says, “Just making these statements won’t work.” The reality is that food inflation is hovering at over 17 per cent. Even the headline wholesale price index (WPI) is ruling close to 10 per cent, much higher than any forecast. The consumer price index (CPI) too is moving on a trajectory not anticipated by planners. Are we then resigned to living in a period of prolonged inflation?

Stressing that globally no one has got a complete “hang of inflation”, India’s chief statistician Dr Pronab Sen insists the present trend has nothing to do with the inefficiency of the government system. Instead, it apparently signals a shift in consumption patterns, from low-value to high-value foods (mostly perishables), the high base effect (when comparing monthly inflation to year-ago data) and higher input costs. Of immediate concern is “that high input costs will add to manufacturing costs. If the manufacturer absorbs the cost, there will be no effect. But if they pass on the costs to consumers, it will add to inflation”, Sen says.

“Inflation is now broad-based and spreading to areas other than food.”
Subir Gokarn, RBI, 11/3/10

It looks ominous. Though volatility in global prices of most commodities has tapered off, they remain high due to pick up in demand, particularly from China and India. Economic revival in developed countries may lead to a further spike in crude oil prices, putting pressure on import-dependent India. Already capacity constraints in infrastructure like the food chain, and lack of government control on input costs of coal, electricity and iron ore are pushing up domestic prices of most commodities.

So when BJP economic cell convenor Dr Jagdish Shettigar accuses the government of mismanagement and giving “the very same traders who were responsible for the shortfall licences to import”, he is bang on the mark. In the case of both sugar and pulses, overseas purchases were made after global prices had heated and consumers paid the price. He goes on to question why the government isn’t releasing foodgrains in the open market. “It’s a real puzzle. Obviously, there is some understanding with the traders,” he says.

Blaming government policies for the high prices and inflation, Krishan Bir Chaudhary of the Bharatiya Krishak Samaj (incidentally, a Congress supporter) fears that prices of food products are unlikely to come down “due to corporatisation of the agri sector and no benefits accruing to the farmers”. He says with NREGA drawing away workers, small farmers have been forced to use thresher machines run by tractors to harvest wheat. Unfortunately, the prices they get for produce doesn’t in many cases reflect the input costs.

“I believe that the worst is over as far as food inflation is concerned.”
Manmohan Singh, PM, 3/1/10

“Our experience in the field is that there is a downward trend in almost all products except pulses,” avers Dr C.V.   Ananda Bose, MD of NAFED, which has launched a “farmgate to homegate” project through around 10,000 retail outlets across the country. The NAFED chief, however, adds that “though wholesale prices of a lot of produce like onions have come down substantially, the retail prices did not reflect it”.

Actually, experts point out that prices at retail levels are softening. And one can’t deny that—although prices of sugar, edible oil and pulses are still way above what people were paying till early last year. Also, consumers are shifting from high-priced pulses and edible oil to low-cost varieties. Ever the optimist, former chairman of the PM’s economic advisory committee Suresh D. Tendulkar says, “The WPI should start going down soon. We have possibly reached the peak. Hereafter, we might see downward movement.”

What is propping up consumer demand, feel experts, is the optimism of India re-entering an eight plus growth rate in 2010-11. Retail major Future Group, for one, is seeing improvement in demand for consumer durables and fashion. Food too is doing well despite inflation—but “Indians are becoming discretionary spenders”, points out MD and group CEO Kishore Biyani.

“Retail prices won’t come down before Sept-Oct. But WPI should by Jul-Aug as the monsoon sets in.”

But who can blame consumers at a time when many other essentials have become more expensive? As Ajit Ranade, chief economist, Aditya Birla group, points out, “For the aam aadmi, there is added inflation from services which is not captured in the headline WPI.” So whether it’s education, healthcare, transport or even rentals, the pressure on household budgets has been rising.

So when exactly can we expect a change in the price scenario? Currently, the only silver lining is the forecast of a good summer monsoon, which holds promise of a good winter harvest cooling prices and improving the financial health of millions. “I don’t see retail prices tapering down before September-October. But WPI prices should start coming down by July-August depending on when the monsoon strikes and how it progresses,” says V. Shanmugam, chief economist at Multi Commodity Exchange.

With high global and domestic prices seeping down the system, experts don’t expect much relief for consumers, at least not till September. But for any unforeseen calamity, Sen feels, “It may take a year for inflation to come down to the desirable comfortable level of 5.5 per cent”. More immediately, one can only hope the monsoon triggers a downward trend and cools prices. That may perhaps quell this perfect storm.


By Lola Nayar and Pragya Singh

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