Tuesday, June 1, 2021

Rising Food Prices

Deny signs of recovery 

Phenomenally rising prices and the disconnect between the wholesale price index (WPI) and the consumer price index (CPI) are impacting the country’s economy and development. The Reserve Bank has rejected the Government’s claims of “definite and robust signs of recovery”. 

The Reserve Bank is not satisfied with the Government’s explanation on the price situation nor does it share the euphoria on negative inflation. It is more concerned about the food price inflation as various CPI (retail price indicators) are ruling at elevated levels. 

Importantly, in its latest review of the economic situation, it has bared the myth that the WPI is in the negative. In its analysis it pointed out that the WPI on essential commodities has increased by 10.25%, food articles by 8.25% and primary articles by 4.96% though the overall projections of the WPI, based on all commodities, show a negative rise of below 1%. This convolution has been attributed to the low weightage given to food items in the WPI. The WPI on manufactured food items too have remained at a high of 9.8 %. 

The Central Bank has also busted the myth that rural inflation is less than the urban.  The CPI for rural labourers has spurted by 11.26% and agricultural labourers by 11.52%. The CPI for industrial (urban) workers hovers over 8.26 %. 

In fact, the analysis reveals that there is more propaganda on the WPI.  “The CPI inflation tracks the essential commodities component of the WPI quite closely”, the Bank states. 

The rising food prices have severely affected the manufacturing sector. Owing to the low surpluses with the people, the demand for manufactured items has gone down. It is reflected by negative 0.05% growth and is impacting the industry. 

The Reserve Bank is flummoxed at the trend. It makes a candid admission: “The divergence in various price indices evidently increases the complexity of inflation assessment.” 

Significantly, the prices also reflect on another grim scenario. The borrowings of the Government are breaking limits. The net Central Government borrowing till September would be Rs 265,911 crore --- higher by Rs 58,000 crore from the interim Budget. The Government till end July has already taken borrowings of Rs 167,911 crore or 63% of the first half projections. 

The RBI also provided the foreign exchange liquidity to the Government. It has caused concern for the Central Bank as its own foreign exchange assets have declined. The net foreign exchange reserves itself have declined by $20.1 billion and given that the rupee value has plummeted the actual valuation loss is estimated at $58 billion. 

Further, credit expansion has also been hit particularly by the private banks. The foreign banks have stopped extending loans. This is a pointer to the loss of faith in India’s growth projection. 

Thus the credit flow is coming only from public sector banks. It remains over 20%, more than estimated. But non-food credit, meaning largely industrial credit, has come down to 0.4% against a rise of 1.6% last year in the April-June period. The credit for the commercial sector remains subdued. 

The growth projection of 6% estimated by the RBI also looks unreal and it admits so as there is “absence of any firm signs of global recovery”.  It has noted the continuous downward revision in global growth projections by the IMF, which projected (-) 1.3% growth in April and (-) 1.4% in July. It is telling severely on India’s external trade and negative balance of payment --- higher imports and lower exports. 

Price stability has been stated as the key to any future growth. The food prices have to stabilize for a positive growth. A significant observation of the RBI is that the country does not lack in demand but it lacks in supply. Obliquely, what it states is that there is shortage of supply of some commodities and also there is a lack of supply side management. 

The latter is an important aspect. Most food prices are increasing because of the convolution of the production and supply chain. Since 1991, the Government has succumbed to the pressure of various lobbies working for their own interests and profits. Thus, conveniently ignoring the issues concerning the poor and common citizens. It has also almost abrogated the basic responsibilities that a State is supposed to have --- providing the basic necessities at affordable cost. 

The abrogation has resulted in hoarding of commodities, cartelization and applying all such blatant and subtle methods that could maximize profits and exploit the citizen. Systematically the public distribution system (PDS) has been sabotaged and instead it is being allowed to function as a market interventionist tool. Raising a pertinent question: Should the Government work for cartels and lobbies or the common man, who elects it? 

The nation has been talking of a second green revolution. It remains in the blabber box. Over the last 30 years, the nation did not think in these terms as it was not suitable for profit-oriented foreign firms and cartels who are gradually usurping agricultural land. 

The shortage of pulses, sugar and oilseeds further rakes in their profits. These firms control the global food grain market --- as producers, traders, sellers and buyers through their various shadow firms. 

Keeping India short of supply is their international strategy. As a billion plus people suffering from food insecurity is driven to the international market the prices rise and their profits swell. The political leadership irrespective of Party affiliations tends to ignore it. The result is not only higher prices but overall deceleration in growth. 

In the final analysis, the country has reached a stage where we not only need to review our supply side management but also the1991-type so-called reforms. It may have ensured growth of the billionaires but for the aam aadmi it has meant an organized system of exploitation, unemployment, oppressive price regime and deceleration in overall growth. 

Clearly, the Government has to ensure the necessary correction. Food prices have to be effectively brought down if it is serious about the overall growth.