Tag Archives | inflation

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.)

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Slapping cess

How you should react if the government increases taxes to subsidise petrol

Over at Barbad Katte, Ramesh makes a startling call:

Here is a possible response to the Petroleum Minister’s proposal to levy a cess on income tax payers in lieu of a hike in the price of fuel. Get hold of your neighbourhood Congress man and give him one tight slap. [Barbad Katte]

No, no, it’s not a partisan thing. Go read his post to understand why.

Now, this blog deplores the use violence to make political points (and this has to be said, because there are always some irony-deficient, metaphor-deaf people). Instead, it recommends that taxpayers to line up in large numbers and vote against the simians making economic policy.

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How wrong Manmohan Singh is

He advocates a false morality to disguise his government’s failures

Dr Manmohan Singh the prime minister has routinely relied on platitudes (instead of on incentives) to motivate the UPA government’s policies. But he is getting even the platitudes wrong. In a country where the average annual per capita income hovers around an unacceptably low US$1000, he wants people to earn less. Why? Because, according to him, earning less, and expecting to earn less, is a national duty.

By equating a degree of self-sacrifice with national duty, the PM has tried to make a moral argument. He has said that this is what corporates and highly paid executives owed in the endeavour to contain prices and keep the overall growth momentum on track. While this has a populist touch and will appeal to an opinion that is ready to view corporates as “fat cats”, private employment is increasingly the preferred option for most educated persons.

Sectors characterised by “significant market power” in the hands of a few producers have a societal obligation to assist the government in moderating inflationary expectations, the PM rounded off. [TOI]

He has gotten it exactly wrong. The national duty of every citizen is to make as much money as legally possible. Anyone who suggests otherwise cannot have the best interests of the Indian people at heart. Oh, he’s only referring to the top executives, you say? Well, first, depressing wages at the top will cascade down and result in lower earnings for everyone in the pyramid (just as increasing wages at the top will increase wages for everyone). And as a matter of principle, just how does making the rich earn less help the nation? In fact, it does just the opposite. It would have been one thing for Dr Singh to call upon the rich to deepen the culture of philanthropy. But to equate “self-sacrifice” with “national duty” is dangerous nonsense.

Dr Singh shamelessly masks his government’s failure to ensure free, competitive markets—and prevent the build up of significant market power—by claiming that monopolists have societal obligations. That’s dangerous nonsense too. The solution to the build-up of market power is further liberalisation and effective regulatory oversight. Dr Singh’s admission that there are sectors where companies have significant market power calls for moving forward with the economic reform process. Just what happened to the privatisation (okay, disinvestment) agenda?

We have said this before, and we say again: Dr Manmohan Singh has done immense harm to India’s future. The evil that he has done will live long after him. The good was interr’d with P V Narasimha Rao’s bones. Corporate India would do well to ignore the shameless moral poseur. Yes, it’s late in the day for this government. But Dr Singh should go. [See previous calls.]

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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.

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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.

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Inflation and the junta

The regime in Dhaka “tilts at windmills”

The dictatorships in the subcontinent have had to contend with public unrest due to the global rise in food prices. They’ve done it in characteristic style. The Burmese generals cracked down hard on protesters. The Pakistanis sent troops to warehouses and flour mills, acting rather late in the day. The Bangladeshi regime, meanwhile, is caught between going the repressive way and the costs of being bracketed with the ill-reputed juntas of the region.

Mashuqur Rahman writes that they blamed ‘a foreign body’ for stoking labour unrest, arrested Mehedi Hasan, a trade unionist, and forced him to confess. Confess what? Well, that he did his usual job of collecting information of collecting information about worker’s problems and reporting it to Workers Rights Consortium (WRC), which “represents 178 American colleges and universities who buy garments from brands with factories in countries like Bangladesh. WRC defends the rights of garment workers against abuse. Its reports hold the garment factories’ feet to the fire”.

Meanwhile food prices are rising, and calls for subsidies are becoming louder. Bangladesh’s generals know that they need international assistance in order to make food available and affordable. So it is not surprising that they decided to release Mr Hasan.

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Anger over wheat flour

Pakistan’s food crisis

Since yesterday, Pakistani paramilitary forces have been assigned new duties (via Chapati Mystery). Troops from the Pakistan Rangers—generally used for various internal security duties—and the Frontier Constabulary are guarding wheat warehouses and flour mills. That’s because the government has identified hoarding and smuggling as the reason behind Pakistan’s worsening wheat supply crisis. Not only has the price of wheat flour risen—the supply shortage has led to long queues and public anger. The food crisis (and the parallel power supply crisis) is adding one more dimension to Pakistan’s growing instability.

Now, world prices of foodgrains have risen in the last several months due to a variety of reasons: from increased demand in emerging economies to poor harvests to the effect of US biofuel subsidies. But Pakistan is a wheat producing country and shouldn’t have had to face an acute shortage. So how did it get to this stage?

The proximate story of this crisis started in early last year, with the government announcing a very rosy estimate for the 2007 wheat harvest. Exports were permitted as forecasts, and early harvests, suggested domestic production would outstrip domestic demand. But when prices continued to rise, the government decided to import wheat instead. But this was insufficient to prevent the crisis from reaching this stage. So what is the government to do but point fingers at the usual suspects and deploy troops?

Let’s look at the inside story. In theory, the Pakistani government purchases wheat grains from farmers at the “support” price. In practice, it didn’t do so effectively. One complaint was that the government purchasers delayed their purchases, allowing traders and middlemen to buy it from worried farmers at a discount. They may even have cornered the supply of gunny bags preventing farmers from selling directly to the government. This racket invariably involved collusion between the feudal landowners and government officials: during the 2006 sugar crisis, Pakistan’s National Accountability Bureau named Chaudhry Shujaat Hussain, Asif Ali Zardari, Nawaz Sharif and Humayun Akhtar, among others, as the leading culprits.

The effective result this was that bumper harvest or not, the government’s warehouses were not as filled up as they should have been. The bouyant world price for wheat and Pakistan’s weak border controls meant that those who had purchased the grain could export it illegally.

By end November 2007, queues started forming outside stores selling wheat flour. The government decided to import wheat from the international market, but prices had risen by this time. It had to subsidise these imports in order to keep the prices low enough: but as expected in such situations, traders and sellers found ways to divert the subsidised wheat into the open market, where it would sell at a higher (“market”) price. The government now hopes that paramilitary troops will curb this behaviour. Flour millers too have been seen as profiteering from the episode. [Related articles in Business Recorder and Khaleej Times]

Clearly, the principal beneficiaries from the wheat crisis are the usual suspects—the politically connected big farmers and traders. Some analysts have speculated that the proceeds of this crisis will fund the coming election campaign. All the same, the crisis highlights the simple fact that for all the accolades former prime minister Shaukat Aziz received for managing the economy, the Musharraf regime has failed to ensure that markets are free and competitive. Pro-business it might have been, pro-market it was not.

Will importing wheat solve the problem? Not unless it is accompanied by a policy that seeks to reduce the difference between the official price and the market price. Senior Pakistani officials have complained about having to subsidise wheat—prompting commentators like Ayesha Siddiqa to ask why they should complain about this at a time when the Pakistani army is lavishing money on new gear and a spanking new headquarters.

The issue of ‘sharing’ the subsidy load among the four provinces is politically fraught, as intra-provincial divides have sharpened. Given that wheat prices are likely to remain high over the next few years, the food subsidy burden can weigh down Pakistan’s budget. Yet, doing nothing is hardly an option: for a hungry population is an angry population. And anger is one commodity that the Pakistan is not short of.

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