Taming Inflation

For taming inflation, long-term planning, regulatory support and c-oordinated efforts by the government, businesses and better consumer-awareness may have to get much more attention than they are getting now

Many of us are averse to buying things which have no fixed price. Especially post-LPG (liberalization, privatization and globalization, circa 1991), the opportunities for such aversion to manifest have grown manifold and made the life miserable for people belonging to a class which is contemptuously called middle class by the rich and looked upon with envy by the poor. If one has to buy things at reasonable prices, whether it is toilet soap or an air ticket, one has to be a market wizard. Like operating in the stock market, one has to select the time, day of the week, outlet and various other variables before carrying out a transaction.

 

The controversies about sale of 2G spectrum bandwidths and auction of mining rights revealed that whether in buying or selling, governments are also facing dilemmas similar to the one being faced by the middle class. Kapil Sibal initially gave us a bagful of relief when he argued that if Peter has been robbed, it is for paying Paul. His argument was: “Nothing to worry. The losses to the exchequer are the gains of mobile users”. There were many takers for this explanation and millions of mobile users are likely to vote for the candidate of Sibal’s choice in future elections. We may get some ‘idea’ when the results of current elections come!

 

These days, there is lot of discussion in the media and elsewhere about food inflation.

Last year, sambar dal (tuar dal) of almost equal quality was available in Thiruvananthapuram at Rs34 a kg at a Public Distribution System (PDS) outlet and at Rs106 a kg at a well-known departmental store. There were takers for both. If someone is able to research and explain the sources and uses of the difference of Rs 72 (Rs106 minus Rs34) it would be much easier to resolve the conflict between CPI (Consumer Price Index) related inflation and WPI (Wholesale Price Index related inflation which is a perennial worry for policymakers. No, it is not my purpose in this article to mediate between the two groups of economists fighting on this issue.

 

The word ‘subsidy’, because of the way in which it is being used by economists, analysts and planners, has got a bad reputation in India. When flowers are destroyed in Holland market to manage prices, or costs of cultivation are supported in US to ensure production of certain commodities, or food coupons are given at reduced rates or free of cost to certain classes of people in developed countries, there is not much hue and cry over the cost to the taxpayer or ‘subsidy’ factored in, in different forms. So long as a rational costs-prices-wages-income policy is not in place, so long as starvation wages, unemployment and under-employment remain at ugly levels, any government, even a government with former FM as president and the BPL (Businessman-Politician-Lawyer) leader as FM will not be able to go ahead with reforms just to support the upper middle class and rich people who account for less than 20% of India’s population. ‘Subsidy’ will resurface in one form or the other.

 

Distortion and therefore exploitation of the consumer is the highest in sectors like housing and healthcare. For obvious reasons, these two sectors get the maximum policy support or support by not having a transparent and rational policy. One need not be an economist to understand the porous marketing mechanism for sale of essential drugs, costs and margins, the vested interests in pharmaceutical industry and how they manage or frustrate even the genuine moves to control prices or improve availability of such drugs and how slow public distribution system works. Similar is the case in the real estate sector which remains in the game with no rules of the game that creates any trouble or any umpire watching.

 

Generally, neither the doctors nor the patients want or trust generic drugs. There have not been sufficient efforts to create awareness about the availability of ‘genuine’ generic drugs which can be substituted for branded ones. Even wholesale users of generic medicines like the CGHS outlets, by going for the low-cost (or high-margin?) products and compromising on quality, end up in enhancing the fear-psychosis ruling the patient’s mind. At least to expose the greed factor, authorities should periodically publish information about availability of quality generic drugs and the prices at which essential drugs are available at wholesale and retail outlets.

 

Going a step further, one is tempted to suggest that Indian Medical Association or any other authority or agency responsible should undertake an awareness programme for the benefit of both doctors and patients about the costs and prices of essential medicines and availability of low cost good quality substitute drugs in place of costly branded medicines. Sometime back it was reported in the media that the price differential in respect of Insulin can go down to Rs52 (from the present range of Rs140-230). Such revelations should be an eye-opener for the government to initiate quick remedial action which can save several lives.

 

For taming inflation or plainly to retain prices within acceptable  levels, long-term planning, regulatory support and coordinated efforts by government and stakeholders in the market and better consumer-awareness may have to get much more attention than they are getting now. Periodic wide fluctuations in onion prices are one indicator to show how those who gain control over stocks of goods that have a longer shelf-life manipulate prices. The government may not need an economist to tell that the position of demand and supply has an impact on prices. Procurement by processing industry and wholesalers who have ongoing responsibility to maintain supplies to retail outlets like departmental stores and supply-chains, purchase by affluent pockets/states within the country which can afford to pay higher prices and export commitments affect prices of vegetables, meat and eggs. A long-term policy on the food front may have to factor in improving productivity of land under cultivation, encouraging multiple-cropping patterns wherever feasible, ensuring remunerative farm-gate prices, estimating in advance the state-wise requirements for consumption, processing and export and regulating inter-state movements taking into account the potential for increasing local production. For such a change in approach, grass-root-level planning by sharing responsibility with state governments and local self-government bodies has to become a reality. There is a limit up to which sermons and directives from Delhi can help improve the position.

 

The managers of fiscal and monetary policy cannot be blamed as inflation is only one of the indicators that tell them the results of various fiscal and monetary policy measures they initiate. Depending on the direction they look, they are always able to either venture an optimistic prediction or tell us where either of them need correct the next step. This partly explains the ongoing debate among economists, bankers and political leadership about the direction monetary and fiscal policies should take. Problem is also about various categories of inflation, the methods of calculation of inflation and how the inflation (CPI or WPI inflation, for instance) affect different sectors of economy and different income-groups. There is no clarity or uniformity in perspective on such things among those who are responsible to prescribe corrective measures. The ‘Inflation elephant’ is perceived as a different monster by scholars from different schools of economics.

 

To read more articles by MG Warrier, please click here.

 

(MG Warrier is former general manager of Reserve Bank of India.)

Comments
Akhil Kodali
1 decade ago
The author is not well versed with what causes inflation.
RBI and RBI alone causes inflation.

Inflation is a result in increase in credit and money supply.

If it has the will power it can cure it in less than a year.
M G WARRIER
Replied to Akhil Kodali comment 1 decade ago
So, Akhil had no specific steps by RBI to control inflation in mind except bringing down money supply (and credit!)! He is depending on the will power of RBI. This was just a casual comment, I suppose.
M G WARRIER
Replied to Akhil Kodali comment 1 decade ago
Fine. Dear Akhil, please suggest three things RBI should do, which RBI has not done yet, which will 'cure' inflation in the timeframe of less than one year.
Akhil Kodali
Replied to M G WARRIER comment 1 decade ago
Better late than never
Distinguish between types of credit -
consumption(govt borrowing and individual loans like housing, personal) and
investment (anything that can increase productive capacity)

1. Discourage consumption credit and boot investment credit.

2. Stop messing around using OMO to subsidize govt borrowing at the expense of investment.

3. Remove the archaic rule - money lenders cannot borrow but can lend. Let them borrow and lend this will bring down credit cost of the poor who desperately need their services or their working capital requirements

Of the 3 the 3rd one will have the greatest impact
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