How the UPA government’s policies caused inflation

Gargantuan spending without addressing underlying supply bottlenecks

Inflation is like fever — it is not the disease itself but a symptom of an underlying disease. The right approach is to treat the underlying disease and not focus on treating the symptoms.

Supply bottlenecks are the underlying problem
Inflation is the direct result of the UPA government’s failure to put in place the necessary policies that could sustain the growth spurt that started during the NDA’s term. When an economy grows at 8% year on year all classes of people — poor, middle-class, rural and urban — will demand more goods & services. Yet, the UPA government has failed to ensure that the economy can produce and efficiently distribute goods & services. This is the core cause of inflation.

The anaemic growth in infrastructure industries is an indicator of the policy failures that have led to inflation. Better infrastructure can moderate price rises by better connecting buyers and sellers. Despite the economy growing at 8%, the infrastructure industries growth has been only 6.7% under the UPA government. In fact this has further fallen to 5% in mid-2010. The shortfall in power supply has worsened from 8.5% in 1992 to 12% in 2008-09. Worse, capacity addition in thermal power is a mere 4.4% of the target.

NREGA has contributed to price rises in many areas because the UPA government has failed to make rural markets competitive. In a village with a few shops, any rise in income of the villagers will cause shopkeepers to increase their prices. If rural areas are better connected to each other with good roads, electricity and cheap transport, villagers can purchase goods in adjacent villages if the goods are cheaper there. Despite the claims by the promoters of NREGA it is unclear if NREGA has benefited the rural poor. The UPA government has shown much less enthusiasm to complete the Golden Quadrilateral programme and extend it to rural areas.

The UPA government has failed to enable farmers to participate in India’s growth. The failure to dismantle barriers to agricultural marketing and failure to integrate India into a single market for agricultural goods not only contribute to food price inflation but undermine the welfare of farmers. (Farmers receive only 50 paisa for a kilo of tomatoes while consumers pay Rs 20).

It is a matter of basic economics that when demand rises faster than supply, prices will rise. By neglecting this basic reality, the UPA government has created the conditions for inflation

Regarding fuel prices
The UPA frittered away the chance to complete the process of fiscal consolidation started by the NDA government, otherwise credit rating agencies like Moody’s would have upgraded India’s sovereign credit rating a long time ago, rather than in 2010.

The removal of fuel price subsidies was done without adequately preparing the nation for the same. The UPA has not revealed that it intends to rectify the fundamental problems in the petroleum sector because of the patchwork of pricing policies. Furthermore, despite it being clear for the last few years that energy prices are rising globally, the UPA government failed to create the framework for a massive improvement in public transportation.

The removal of petrol subsidy and rise in prices does not directly affect the poor — mostly they use buses and trains. Those who use two-wheelers are affected. However, despite presiding over a healthy economy for over 8 years, there is no sign of the UPA government evolving a integrated public transport policy. Instead there is a continuation of the licence-permit raj that leads to the harassment of auto-rickshaws and other private bus operators, and increasing inconvenience for ordinary people.

The fuel pricing policy has damaged our public sector and private sector oil & gas companies. Reliance had to close down 2000 petrol stations because prices are non-remunerative — this is a major waste of capital. While the UPA government is damaging our oil & gas companies in this way, the Chinese government is throwing its weight behind their state-owned companies to corner energy resources around the globe.

UPA’s fascination with pet projects is diverting attention from the necessary ones. For instance, instead of thinking of only building a pipeline to buy natural gas from Iran, and paying money to the Pakistani government to safeguard our lifeline, we should have invested in building LNG terminal & pipelines along our coastline. Investing in ports, refineries and pipelines in India would not only increase the income of Indians but also improve our energy security. We can still buy the gas from Iran without having to depend on Pakistan.

(This note was prepared and privately circulated in July 2010. It is published here as it is still relevant, unfortunately.)

The absurdity of restricting Basmati rice exports

Why is the UPA government helping Pakistani exporters at the cost of Indian farmers?

Imposing an export tax on rice was a bad idea; the Indian government should never have done it. It only hurts India’s rice farmers. (see these posts)

And in the international market for the high-end Basmati rice, the Indian rice tax gave a competitive edge…to Pakistani rice exporters.

The Indian government lifted the absurd export tax today. It also lowered, but still retained a floor price on Basmati exports. It is inexplicable why there should be an export restriction on a premium variety of rice. And it is unfathomable why the UPA government should think that hurting Indian exporters and lending a hand to Pakistani ones is somehow a wise thing to do.

The Other Vidarbha

When villagers are free to do what they want

Jaideep Hardikar of DNA reports something that P Sainath somehow manages not to (linkthanks Neelakantan). A village in Vidarbha that refused to take up the UPA government’s “debt relief” measures and…is doing rather well for itself.

The Girata SHG, to which he’s a mentor, is imitating his mode—farming and live stock management that reduces risks and shields them from volatilities. “We transport milk in autorickshaws to Washim, where we sell it,” informs Prakash. The dairy collective clocks a monthly income of Rs4 lakh with a net profit of Rs1 lakh, which is shared equally by its 20 members. That comes to a modest Rs5,000 a month-per head or Rs60,000 per annum, in addition to the returns from agriculture. Each member contributes Rs100 to the collective as his monthly saving. Thus the 20 members save Rs2,000 every month, or Rs24,000 annually.

A majority of the villagers are now linked to this activity. Now, the neighbouring 23 villages have decided to follow the model, with Girata as the epicenter. “We’ll increase our production, form a 23-village federation, and diversify into processing,” says Prakash. The collective that owns an autorickshaw, a tractor, and a deep-freezer now wants to buy a van with a chiller for better milk transportation. The SHG has also set up an outlet at Washim to sell milk to consumers. Two women’s collectives of the village have taken on the responsibility of keeping the financial records of the village dairy. [DNA]

Imagine the UPA government’s policy initiatives had focused on building good roads and reliable power supply instead of seeing the problem as one of “debt”.

The Girata initiative is an experiment—it’s too early to tell whether it will succeed. But what it shows is that people take the initiative to help themselves. Imagine the government stopped discouraging from doing so.

Related Links: Vidarbha whodunit; half-baked solutions; and Suvrat Kher’s post on groundwater management that was published in Pragati.

Groundwater management and farmers’ suicides

Poor management of groundwater resources contributes to agrarian distress—but is anyone listening?

Over at Reporting on a Revolution, Suvrat Kher throws more light on an angle that is almost entirely missing from the national discourse on farmers’ suicides.

…if the wells themselves are dry then there is no backup for failed rains. A Tata Institute of Social Sciences report on farmer suicides found that farmers had little or no groundwater available to them during times of rain failure. A combination of complex hydrogeology and poor management of groundwater resources has exerted a powerful influence on the lives and livelihoods of Maharashtra farmers.

(Tushaar) Shah makes the following recommendation for complex hydrogeological terrains:

What hard-rock India needs is a new mindset of managing dug wells as dual-purpose structures, for taking out water when needed and putting water into the aquifers when the surplus is running off. Recharging aquifers needs to get the first charge on monsoon run off. Unfortunately, government planners give it the last priority.

Water available for recharge is estimated after allowing for the requirements of existing and planned surface reservoirs. This is absurd in a country where 70 percent of irrigated areas and 90 percent of drinking water needs are met from groundwater.

Is the government listening? The Prime Minister of India’s special relief package for Maharashtra farmers wants to attack the problem on a broad front which includes tinkering with the economics of cotton farming, encouraging a diverse array of crops and reducing dependence on pesticides and fertilizers. But water underlies any successful agricultural strategy. In terms of water it lists irrigation development as the only long term solution to the water problems faced by farmers and doles almost 10 times more money to irrigation development than to watershed development. Irrigation development in the language of the government of India means canal irrigation (read mega infrastructure projects) and not local groundwater irrigation.

This despite the revealing statistic that even though thousands of crores of Rupees have been spent on canals, they irrigate just about 15% of arable areas over the landmass of India and marginal farmers and farmers with small landholding benefit most not from canal networks but through groundwater irrigation. [Reporting on a Revolution/What’s with the Climate]

My op-ed in Mint: Pomegranates, polls and power

Why India must strengthen its military presence in Afghanistan

In today’s op-ed in Mint Sushant and I call for India to increase its troop levels in Afghanistan. A slightly edited version of the following appeared in print.

Image: Malay Karmakar/Mint
Image: Malay Karmakar/Mint

Afghanistan exported US$1 billion worth of drugs last year. In contrast, its pomegranate exports amounted to only US$1 million. Poppies or pomegranates, the Afghan farmers who grow them earn around the same amount of money—around US$2000 per hectare every year. If somehow they could be made to grow a lot more pomegranates, and a lot less poppy, Afghanistan, India and the world would be a much better place indeed.

That’s because growing pomegranates and other legitimate cash crops requires water, electricity and most importantly access to foreign markets. Now, much of the international assistance flowing into Afghanistan aims to build and repair dams and connect villages to the electricity network. India, for instance, is financing irrigation projects in Northwest Afghanistan and power projects in Herat and Kabul.
But the one Indian project that could transform Afghanistan’s economic landscape is the just completed 218km road link connecting the town of Delaram on the Kandahar-Herat highway to Zaranj adjacent to the border with Iran. From there Iranian roads run to the port of Chabahar on the Persian Gulf. This will be Afghanistan’s fastest overland route to the sea. Last year, because they had to be air-flown, only 1000 of the 40,000 metric tonnes of Afghan pomegranates made it to markets in India, Dubai, Singapore and Pakistan. With the new road, Afghan farmers can export a larger fraction of their produce to the rapidly expanding Indian market. The competition from this route will compel Pakistan to review its policy of throttling the Afghan transit trade. In time, the Zaranj-Delaram road can be expanded into a trade and energy corridor that connects landlocked Central Asia to Indian and global markets.

This sounds wonderful, and it is. The problem, however, is that its success hinges on two key factors: on Afghanistan’s stability and on the nature of relations between India, Iran and the United States.
Continue reading My op-ed in Mint: Pomegranates, polls and power

Pragati July 2008: A better connection with Israel

Issue 15 - Jun 2008
Issue Contents

PERSPECTIVE

“Adamant for drift, solid for fluidity”
India needs leadership and a renaissance in its foreign policy
Harsh V Pant

Business interests vs national interests
As Indian companies grow abroad
Sameer Wagle & Gaurav Sabnis

The myth of illiberal capitalism
Multi-polarity, democracy and what the US might do about them
Dhruva Jaishankar

FILTER

A survey of think-tanks
The post-American world; Asian geopolitics
Vijay Vikram

IN DEPTH

The India-Israel imperative
Indo-Judeo commonalities: the symbolic and the substantive
Martin Sherman

ROUNDUP

Fruits of knowledge
Apply knowledge-economy processes for food security
Mukul G Asher & Amarendu Nandy

Needed: A new monsoon strategy
The focus should be on groundwater recharge
Tushaar Shah

BOOKS

Know your consumer?
A review of Rama Bijapurkar’s We are like that only
Aadisht Khanna

Read excerpts | Subscribe

Goodbye cotton, hello soyabean

The rational farmers of Maharashtra

Just how does P Sainath position facts that show how Maharashtra’s farmers are capitalising on the opportunity created by rising global foodgrain prices? Oh, by saying that they are replacing one type of volatility (planting cotton) by another (soyabeans).

After pointing out how farmers are reaping the benefits of growing soyabeans, he goes on to point out the risks of growing soyabeans, and the dangers of planting the same crop season after season. As if there are crops that somehow defy these risks.

Mr Sainath, unsurprisingly, fails to underline three really important points: first, that given a chance, farmers can help themselves by taking advantage of available opportunities. Second, information about prices, weather and market conditions enabled this. And third, following from the above, just letting them do what they like (and not placing value judgements on what they should grow) is the best solution.

Related post: Rising foodgrain prices present an opportunity for Indian farmers

Rising food prices = opportunity for India’s farmers

And the cost of lost opportunities

For all its rhetoric about protecting rural India, when the real opportunity came, the UPA government decided to deprive the farmer of a chance of making a better livelihood.

Now everyone knows that rising food prices are bad for the economy, and very much so for the poor. Yet it is possible to protect those at greatest risk through the use of targeted food subsidies and even direct cash transfers. Such an approach would have been doubly beneficial: first, farmers would have enjoyed greater incomes from high international prices and second, farmers would have responded to the price signal by growing more food-grains, thereby increasing the global supply and helping check inflation.

Barring exports was the dumb thing to do. It harms farmers. It prevents them from making more money at a time when they could have made more money. It prevents them from investing in better seeds, fertilisers and farming technology that could increase agricultural productivity (India’s is among the lowest in Asia). Capturing productivity gains would have had long-term benefits.

In its “new deal for global food policy” the World Bank says as much:

While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to medium-run growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector.

Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.

However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market-based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term. [WB]

Related Links: In addition to the World Bank’s excellent backgrounder see this post by Alex Evans at the Global Dashboard. Update: Paul Collier’s op-ed in the Times makes some very good points.

From helping farmers to hurting them

Who gets hurt when grain exports are banned?

Swaminathan Iyer took the words out of this bloggers mouth. The UPA government, he writes “has suddenly shifted from protecting Indian farmers against cheap imports to protecting the consumer by cheapening imports”. He is referring to the ban on rice exports (which follow the export of wheat late last year, followed by the ban on export of maize and pulses).

The April 2008 issue of Pragati called for the government to free the farmers. The UPA government did just the opposite—far from allowing Indian farmers to benefit from selling their produce at record prices, the government is forcing them to sell at artificially low prices. So who is hurting the farmer? And why is silence replacing Sainath? And next year, when farmers find themselves unable to repay their loans, the UPA government—if it is in power at that time—will simply increase payouts and write-offs.

In the end the consumers pay the farmers: only the government gets itself into the equation causing unnecessary leakage and wastage.

Unnecessary? Why, isn’t it at least helping curb inflation? Not quite. As Mr Iyer explains:

The lesson is clear. Curbing exports is a form of national hoarding. If every country tries to hoard food, food prices will naturally rise. Governments would like to believe that hoarding by traders is terrible, whereas hoarding by governments promotes the public interest. But the impact on prices is exactly the same in both cases. Indeed, when governments start to hoard food out of panic, the panic itself stokes further inflationary fears.

That is why I am not optimistic about the Indian government’s anti-inflation package. The government thinks it is improving domestic supplies and hence bringing down prices. In fact the government is adding to the global hoarding problem, and stoking panic too. So, expect food inflation to keep rising in coming months. [TOI]

It’s all very well, you say, but what should the government do when poor people can’t afford food? Well, it should buy food grain at market prices and distribute it to those who need it. That way it will least distort the price signals that farmers receive and allow them to benefit from the good times. And by spending taxpayers’ money in a targeted manner—only the poor will enjoy cheap food—it will spend less. That is, if the government actually wanted to address the policy challenge, and not flail about paranoid of losing votes.

Pragati April 2008: Give them their freedom

Issue 13 - Apr 2008

Issue Contents

PERSPECTIVE

The unkindest cut Salil Tripathi
The loan waiver keeps poor farmers where they are

Waiver of mass debt Vijay Mahajan
How that money could have been used to really change lives

Concerning senior citizens Mukul G Asher &? Deepa Vasudevan
Budget 2008-09 and the implications for a greying population

Waiting for modernisation Sushant K Singh & Nitin Pai
The dismal state of long term defence procurement planning

Letters
On the arms race in outer space

FILTER

Foreign aid to Afghanistan; Water and climate change

IN DEPTH

Dealing with China’s power projection Harsh V Pant
A rising China will not tolerate a rising India as a peer competitor

ROUNDUP

It matters what generals say K S Madhu Shankar
The army chief’s worrying remarks on the India-China border

Options in Sri Lanka T S Gopi Rethinaraj
And the risk of Sri Lanka falling sway to outside powers

New language formulas Sujay Rao Mandavilli
From an unsatisfactory compromise to a liberal decentralisation

BOOKS

Tagore in China Stephen S Hay
Edited excerpts from Asian Ideas of East and West

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