30 May 2011

The Inflation Conundrum...

So the RBI has raised interest rates 9 times this fiscal year; the last one by 50 bps. The GoI and RBI claim this is being done to counter inflation, which seems to be steady between 8 – 9%. Developed countries suffer from stagnating capital markets, while developing countries have to combat inflation.
Inflation is mainly of two types – supply driven and demand driven. Supply driven inflation means the supply outscores the demand, leading to a reduction in price due to abundance and surplus of goods & services in the market. Demand driven inflation, on the other hand, leads to increase in prices as the demand is larger than supply. The Indian government seems to be treating the existing inflation issue as demand driven. It believes there is surplus liquidity in the market and hence asks the RBI to raise interest rates to make money more valuable. But this action seems to be doing very little save adversely impacting our country’s growth figures. Hoarding of some primary food items has been occurring on quite a few occasions (sugar in 2009, onions last year, etc.). The demand is thus, much higher than the presence of those commodities in the market and this leads to increase in their prices. But a 150% price jump? And that too for basic food items? Does the GoI think the poor, who form 60% of India’s population, will be able to afford it? And does the GoI think this problem will get sorted by increasing lending and deposit rates in banks? Think again.
The lower class needs food to survive, and this dwindling of food supply is the primary cause of food inflation, which I can presume is in double digits. 22 lakh tonnes of food grains get wasted annually due to sub – standard storage facilities set up by the governments. Infrastructure (highways, railways, connecting roads, etc.) are in appalling conditions. Over 1 lakh litres of rain water annually get wasted per city because the government has no storage set ups for it. Imagine the wonders reduction on dependence of rain water could do for farmers. They could be lesser worried about uncertainty, food harvests would be close to bumper crops every year, more mouths could be fed and proper infrastructure could ensure the food commodities reach all the people.
The central government needs incentivize farmers to produce more crops. Private companies like Reliance, Future Group, ITC are doing something on those lines by offering farmers more money for their produce and eliminating middlemen. This is also increasing supply chain efficiency and benefiting the urban customer. Companies like Jain Irrigation can build a lot of water storage areas and ensure that the farmer is less dependent on rains and ground water and feels more secure at his profession. Tax benefits need to be increased to companies which work on developing hard and soft infrastructure (the latter includes hospitals, toilets, schools, colleges, etc.) in backward villages. The government needs to encourage companies carrying out such activities which will lead to overall growth of rural areas and still maintain our food production and supply, so that we do not have to depend on foreign countries some decades later for food grains.
True, the suggestions I have made may sound a bit farfetched as India has a lot of leaks in its system. But if anyone can make it possible, it is the team of Dr. Manmohan Singh, P. Chidambaram, Montek Singh Ahluwalia and Pranab Mukherjee. We have a very formidable team at the head of the Central Government, along with a very able chairperson of the RBI. It is about time these leaders pay attention to glaring problems in the Indian economy. These development policies will not only help India continue on its growth drive avoid getting stunted, but also ensure that happy and satisfied citizens of India revote the Congress into power for at least the next 2 terms. It remains to be seen what the politicians of India really want from this country and their positions.

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