Nothing like expensive onions to focus minds

Good roads can help prevent costly meals

Economists, politicians and ordinary people are united on this one: they see, respectively, high headline inflation figures, elections in key states and the price of onions as something to worry and complain about. The UPA government finds itself in their collective dock, and the economist at the head of it faces a mid-term test.

Whether or not inflation is a symptom of an overheating economy is one debate. In practice, this debate involves criticising the Reserve Bank of India’s monetary policy: tightening necessary, goes one side; unnecessary alarmism, says the other. It’s a good debate, but also a very technical one. The central government, for its part has engaged in variety of short-term measures using blunt tools. It has banned futures trading in some pulses, ostensibly to prevent speculation. It has lowered import tariffs on capital goods, steel, cement, chemicals and edible oils, and waived them entirely on wheat, pulses and sugar. And it has banned their export.

How much the Band-Aid will help is anyone’s guess. Yet there are plenty of things that the government can do to rein in inflation. So clear are these options that both the Economist and Economic and Political Weekly agree on them:

In the longer term, lower and steadier food prices depend on better roads and electricity. At present, about 40% of India’s fruit and vegetable harvest rots before reaching markets. One hope is that the current enthusiasm for organised retailing from Indian firms such as Reliance will lead to huge improvements in supply chains. Hopes would be higher still if retailing were open to foreign giants, such as Wal-Mart, which are currently restricted to launching wholesale operations in India.

To sustain India’s current growth, longer-term measures, such as cutting subsidies and building infrastructure, are needed. [The Economist]

Fragmented markets, lack of proper price discovery, bungling in the management of food stocks and a highly speculative futures market continue to dog the sector. Only long-term structural shifts in agriculture can eliminate the supply-side bottlenecks that are also impediments to a high-growth path. [EPW]

While they do differ on some points—the Economist supports opening up the retail sector while EPW blames speculation in the futures market—they both argue that poor connectivity between markets leads to inefficiencies that ultimately manifest themselves in the form of higher prices. It’s the roads, stupid!

4 thoughts on “Nothing like expensive onions to focus minds”

  1. The Band -Aid is i think necessary to get over the temporary bruises that economy is inflicted with. What author has quoted as Economist and EPW as saying, are the long term solutions to increase the overall immunity of the body of supply chain in country. Undoubtedly the measures are robust and everlasting.
    Touching the other aspect, i want to ask as how far the measures of RBI of increasing CRR will help the economy to cool down. By reducing the net to-be-lended money of banks is RBI not curtailing the money available to manufacturing sector. Though efficiency of the sector is rising still such a step is bound to make th supply chain more rigid.
    Further adding to above suggested solutions of author, agriculture sector’s demand side also need urgent attention of the policy makers. Irrigation, seeds, equipments, and MSP isues, role of middle-men etc are yearning to get much deserved attention.

  2. Ankur,

    Also from the EPW editorial cited above:

    The RBI has on its part been addressing inflation, insofar as
    it is a monetary phenomenon. In line with expectations, the
    central bank hiked the repo rate by 25 basis points to 7.5 per
    cent in the third quarterly review of the monetary policy. Since
    October 2004, the reverse repo rate has gone from 4.75 to
    6 per cent and the repo rate from 6.25 to 7.25 per cent, evenas
    the RBI was forced to adopt direct measures to cool the market
    by hiking the cash reserve ratio twice. It is clear that the central
    bank will not hesitate to raise interest rates until contractionary
    impulses set in, for it has been forthright in communicating
    in the quarterly review that “unequivocal relative emphasis on
    stability is warranted” in the balance between growth and price
    stability and that the desired withdrawal of accommodation has
    not yet taken place. So far the signs of a cooling down are far
    from evident: moneysupply until January 5 grew by 20.4percent
    in contrast to the projected 15 per cent. Credit growth at 31.2 per
    cent expanded at the same rate as last year and continues to
    significantly outstrip deposit growth at 22.5 per cent. This
    phenomenon also begs the question of how effective the
    monetary transmission mechanism is in India, as banks rely
    less and less on the RBI’s funds under conditions of surplus
    liquidity. [EPW]

  3. Yes, the supply side visibility is low. Inflation is worsened by subsidies, poor distribution practices, speculation in the futures market and over dependence of agricultural sector on monsoon.

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