Sunday, June 22, 2008

Inflation – Not the last straw on the back yet

It appears that the Govt. considers the Aam Admi of India as the beast of burden with the strongest back. By failing to manage the developing inflation situation with enough sensitivity and alertness and blaming it on everything else but its own actions and inactions, the Govt. seems to be trying to test the endurance of that pack animal to the utmost. However, knowing that worse may be yet to come, the shocking high of Inflation at 11.05% for the week ended 7th June 2008 may well not be the last straw yet to break the back of the Camel called Aam Admi.

For the record
The Inflation at 11.05% is at a 13 year high.

Between 29th Dec.2007 and 7th June 2008, it has gone up from 3.8 % to 11.05 % i.e. by 7.22 %. This is 291% of Dec. 2007.

In last one week, the inflation increased by 2.3 % from 8.75 % to 11.05%, i.e. by 26 % over previous week.

Around 1.2 % out of the 2.3 % is accounted for by the increase in the group Fuel, Power, Light and Lubricants.(Index of this group went up from 7.90 % in previous week to 16.25 % i.e. by 8.35 %. With a weight of 14.22624 % the impact is 1.19 % in the total increase of 2.3 %)

In the householder’s expenses diary, the actual increase in his day-to-day necessities is over 30%, nearly three times higher than the WPI inflation even before the diesel and LPG price increases.

The overall inflation continues to be alarming and there is a serious risk of escalation, unless the rain Gods help, as they normally do when Governments fail to do their job well.

The responsibility
The Finance Minister had said just a few months back during his budget speech, rather immodestly albeit in a lighter vein in the context of high revenue growth that “having a lucky Finance Minister may have also helped!” It seems that luck is not helping as far as inflation is concerned.

In seriousness, the Govt. as a whole as well as the parties that are part of or supporting the Govt. must surely take responsibility for the situation. But it is not fair to place the blame fully on the entire Govt. or the Prime Minister. Two of the Prime Minister’s men in particular hold the largest responsibility for having let down the Prime Minister in this regard.

Main Hoon Naa..

Sharad Pawar, President of BCCI

The first is P. Chidambaram, the Sage of Sivaganga camping in the Finance Ministry. The second is Sharad Pawar, the President of BCCI and President-in-waiting of the ICC, who happens to be holding additional charge of the Agriculture Ministry.

Chidambaram, cocky and conceited with little pretense of humility, as those who deal with him including colleagues describe him, has to bear a good part of the responsibility for the current situation. With his obsession for GDP growth, Stock Exchange Indices and a keen desire to win approbation of foreign investors for the wonderful earning opportunities his policies were giving them, he got so carried away as to become unmindful of what was happening on the ground. As he gleefully went about proclaiming high growth of GDP, rising Sensex indices, foreign investment inflows and increasing tax revenues, he came to believe that the Aam Admi was so much the happier and grateful for these achievements. No doubt, some good work that he has done under the guidance of the Prime Minister should not be overlooked. But for the people at large, what counts is the real impact the Govt.’s policies have on their lives. The wonderful dreams of a good life after a few visits to modern shopping malls quickly turn illusory and short lived happiness evaporates when the money in the pocket buys less and less with each passing day.

Even the Prime Minister brought this point home when, on one occasion he said,”Merely because the external profile of our economy is robust does not mean that we can neglect domestic challenges in fiscal management.”

Montek Singh of the Planning Commission had earlier observed in March 2007 “Overheating of the economy was a reflection of the fact that the demand for goods was pushing ahead of capacity in certain sectors. This, in turn, was leading to the rise in prices.” It just seems to be a problem of too much money chasing too few goods.

Chidambaram seems to have taken an approach that favors encouraging more and more consumption without ensuring the supply side. At every opportunity he is trying to boost consumer spending and losing sight of the implications of trying to do so. For example, in end of 2006, the Govt. was actually considering a reduction in the duties on large cars that would surely have encouraged more and more people to buy large cars with high petrol consumption. Thankfully, this did not happen and, in fact, recently the Govt. was forced to increase duty on large cars. But recently, he suddenly thought of making India a global hub for making small cars. He reduced the duty on small cars to encourage more people to buy and apart from straining the inadequate infrastructure, increase petrol consumption significantly relative to public transport. He is trying to encourage more cars in the country ostensibly to make India a global hub! He has also been pressurizing banks to reduce interest on loans for consumer durables, trying to induce people to buy things today with tomorrow’s income, to sustain his high growth plank.

These are only instances to show that apart from tackling the immediate issue of inflation, it is time to have a serious and deeper look at the direction of Govt. policies. The growth that is being achieved seems to be tenuous and the economy quite vulnerable to even minor hiccups.

Chidambaram, it seems has been losing sight of larger issues in the pursuit of his own fixations. In doing so, even after fully visualizing the potential for high inflation, he failed to be alert or ignored warning signs and perhaps did not even think that anything could go wrong. And when inflation took off, he virtually presented a sense of inevitability about it blaming it on this and that.

Castles in the air

As regards Sharad Pawar, during his time in the Ministerial chair, the country has suffered considerably in agriculture with no worthwhile initiatives coming from him to maintain food security with the result that despite record production, the prices of food articles are showing continuous increase.

The situation of agriculture, the base of our economy, has been going from bad to worse. The food crisis being faced is the worst in thirty years. The per capita availability of food grains is back to the 1970s’ levels. An expert like Dr. Swaminathan was forced to observe that stagnation in output is a public policy failure. Whether it is availability of fertilizers or procurement or production, the story is one of lack of due attention and purposeful long term actions. The PM had been cautioning Pawar for the past three years about a food crunch staring the country in the face. Even Chidambaram has been making repeated references to the food situation and supply side issues in his budget speeches and elsewhere. The country’s food security has gone for a toss. Yet, just in March 2008, he told the Lok Sabha that "except for pulses, the country would remain self-sufficient in food grains during the 11th Plan period”. Even taking his statement at face value, what has been done for pulses and edible oils? Are these products not part of the food security?

The problems were aggravted by resorting to unwarranted high cost imports of wheat that turned out to be rotten, the cost of which has to be borne by the people. It is yet another indication that the Govt. considers the Aam Admi as a pack animal who can also be fed on rotten food grains. Incidentally, it is not known whether the Govt. has officially sought compensation from the supplier for the rotten shipments and, if so, whether it has come in the Govt. kitty. Justifying the imports, he had said that import of agriculture products did not make anyone happy but the government has to resort to them to create "strategic reserve"!! Or, was it shortfall in procurement?

When there are problems, he firmly believes in the adage “Money makes the mare (or stallion) to go”. For every problem, characteristically Pawar thinks of money as the solution and his easy answer is that of providing monetary sops or compensation, thus temporarily pushing back a problem instead of finding a lasting change. Should the rain gods play truant, he may well sing what he learnt as a toddler: “Yere, yere, paoosa, tula deto paisa(Come, come, O Rain, I will give you money)” Though he is himself largely responsible for the farmers’ distress in the first place by having failed to address the problems of agriculture and the farmers, Pawar went about town claiming credit for the huge loan write-offs. Rather than realizing that he has a responsibility for the huge cost of Rs.71,000 crores, he has been trying to derive political mileage out of the Govt.’s moral compulsion to alleviate the farmers’ plight. If anyone should get credit for the write-off, it is the people of the country, the famous pack animals that will bear the burden.

For his inability to do much in his Ministry, Pawar may take shelter of his preoccupation with cricket. Ever since he was defeated in Sept. 2004 in the BCCI presidential elections, he has been fully immersed in the BCCI, at first to avenge his defeat and then in its management and introducing the money spinning 20 overs game. His focus on cricket is continuing, by trying to become the President of the ICC. If he says that cricket has not diverted his attention and that he has been fully involved in carrying out his responsibilities in Govt., his position becomes more untenable as he has little to show for it.

Excuses, Blame Games and Buck passing
Ever since the Govt. was caught napping and woke up from its dream sequence, it became the first priority for those in Govt. to frantically search for excuses rather than taking urgent actions to check the inflation. In their desperation to offer the public some palatable reasons for the surging inflation and for being remiss in taking actions, they came up with different versions and started saying things that were only unbelievable, even farcical. Many of the lame excuses and contrived explanations may eventually find their way into political joke books.

In the early stages, the Govt. glibly assured the people that steps were being taken and that inflation will come down soon. As it became clear from their subsequent explanations, the Govt. actually knew that the problem was going to last for quite some time. All along, Chidambaram has kept on uttering inanities and platitudes like “India has been able to contain inflationary expectation”, “steps will be taken to moderate, contain and reverse headline inflation” “inflation is worrisome” etc. He even said once, “The rise is not statistically significant”. He should know that what matters more is psychological significance in the minds of the people, rather than statistical significance.

Starting their excuses Chidambaram asserted that inflation was occurring in other countries too. Well, inflation happens in all countries and some have low inflation while some others have higher inflation. Such comparisons cannot be used at will as justification for high inflation in our own economy. The inflation in each country is determined by a host of factors to which it is subject and if it is higher in some countries than in India, it gives no solace to the people. Such misleading and fallacious reasoning does not wash.

Thereafter, they started saying that the rising prices of oil were responsible for the rise in inflation, trying to confuse people into believing that the inflation was primarily due to this reason. It is a fact that the rising oil prices will impact inflation to the extent that it exclusively affects prices including those of downstream products. It is understandable that no one has control at present on oil prices and that it is a serious issue, but the entire blame for the inflation being placed on oil prices is not understandable. This also raises the question that as the oil price has been rising for some time; did the Govt. not see its impact on the inflation coming? Chidambaram should also answer as to why did he reduce duties on cars that would lead to increased consumption at the same time and even as oil prices were rising and the long term situation appeared uncertain?

Another explanation given is that the country being part of globalization could not be insulated from what was happening globally and it was importing inflation through imports of goods. This may be true only to the extent that the country is reliant upon imports. But several questions arise. What is the proportion of basic imports in our total consumption and what is the actual incidence of the increased cost on the overall Index comprising of 435 products? Why does the country still have to import agricultural products including wheat, reminding people of the PL 480 imports of the 1950s, and that too rotten wheat? Again, why did the Govt. not take prior actions to reduce duties on imported products like edible oils to soften domestic prices? And what is the relevance of globalization to the prices of eggs, milk and vegetables?

The next words of wisdom from PC were that GDP growth and low inflation could not go hand in hand. ”We cannot have Inflation control measures and GDP growth at the same time.” he told Rajya Sabha on 16th April 2008. "The choice is clear. If we want to check inflation, we must be prepared for a slightly lower rate of growth,". This is true to some extent but raises disturbing questions. It shows that the Govt. was always aware that inflation would rise substantially when planning for a high GDP growth. Did the Govt. not consider what would be a desirable balance between GDP growth and Inflation? It shows also that it did not take any preemptive steps on inflation simply hoping rather irresponsibly that it would not happen. Furthermore, granted that the Govt. and the experts are aware of a relationship between GDP growth and inflation, what about the Aam Admi? Did the people have a chance to choose between high growth and an adverse impact on their day-to-day existence? And if high GDP growth inevitably means high inflation, then where is the relevance of global factors which was the first excuse?

Another reason he gave was the heavy inflows of foreign funds through FDI, FII, private equity, remittances, export earnings, ECBs, etc. What has all along been considered a virtue and an achievement is now being seen as a contributor to the rising inflation.

With Chidambaram continuing to proffer his explanations, Minister Kamal Nath bluffed on 15th April, “I don’t see inflation going up; I see it coming down soon,”.

At some stage during this time, the chorus of excuses inevitably shifted to the previous Govt. and comparison between “what happened in their time and what they did and what we are doing” - a thoroughly immature piece of argument! In order to ensure an 'inclusive blame' game (like 'inclusive growth') the States, especially the non-Congress States, were next made the scapegoats. Everyone from PM to Sonia Gandhi to Pawar blamed States. They also blamed hoarders, forgetting that hoarding is a result of anticipated or actual shortages not vice versa. If there are no shortages existing or foreseen, hoarders have little incentive to hoard.

When nothing seemed to work, the Prime Minister and other worthies in his party started saying “there is no magic wand”, a catch phrase that was also used earlier in February 2007 in similar circumstances by the Congress Party.

Sharad Pawar, the second lead role, was at first casual and when questioned as to when the inflation would halt or come down, he said, “I do not have (any) idea, I am not (an) astrologer”. Later on, he said that prices in other countries were higher than in India, using the same argument used by Mrs. Indira Gandhi decades back in relation to sky rocketing price of sugar. On May 3, he told Parliament that “in countries like Vietnam, Thailand and Pakistan, there is an increase of over 100 percent in the prices of rice and wheat, while in India the prices of rice and wheat have increased by 17.2 percent and 7.2 percent respectively. It is the minimum in the world.” On what basis did he chose these three countries and what does the situation in these three hand-picked countries have to do with the rising prices in India?

Further, attributing inflation in the country to global foodgrain crisis, Pawar blamed the sharp rises in prices of wheat and edible oil because many countries have started cultivating grains like corn and shifted oils towards production of bio fuel. He also proclaimed "Being an integral part of the global economy, it is but natural that world market will have an impact on the domestic price line. The government, however, due to its proactive polices, has been able to insulate the Indian market to a very great extent. Rising petroleum prices and increasing cost of farming have resulted in costlier food grain availability.” Much of this is just poppycock without much substance as basically if the reasons are true, it shows that the Govt. was aware of all this before and did nothing.

Giving internal reasons, he said that the North Indians are now eating rice also while South Indians are eating more chapatis and due to this change in food habits, the situation has worsened. Some days after the "change in use pattern" excuse, Kamal Nath the Minister for Promotion of Luxury Imports and Patron for foreign retailers, went a step further implicitly accusing the poor of eating two square meals a day instead of one meal before. Did this realization dawn upon the Govt. only when inflation started hurting the Aam Admi and excuses had to be invented? If the Govt. was already aware of the changing food pattern and worried about people eating two meals a day, what did it do? Why does it claim now that there is no shortage? “There was no plan to import as there was ample availability backed by bumper production.”

More hilarious justification from Pawar was yet to come: On a TV program he said, “yesterday I was watching a program on TV where they are showing that even in USA there is a shortage of some food items” The reference was to a TV clip where a US store which had temporarily run out of stocks was restricting individual shoppers to a certain quantity. This had nothing to do with any US-wide shortage, just a problem in a particular store. Strangely, he appeared to be justifying shortage in India while according to him there is no shortage.

On 23.4, he promised to "write to Chief Ministers for reducing value added tax (VAT) and mandi tax on agricultural commodities in their respective States to bring down the prices,", a clear effort to shift blame. If these taxes were indeed responsible for inflation, why did he have to wait till inflation surged ahead?

While the Govt. has taken several actions, they appear to be a result of knee-jerk reactions and panic driven rather than according to any well-thought out plan. In the panic that followed, the Govt. came up with some unconventional solutions too. In fact, at one stage in sheer helplessness, they started talking of artificial controls that were prevalent in yester years and long since given up.

The PM at a CII meet in which he requested the members to assist in Govt.'s efforts by taking various measures, also made a moral call to introduce a ”measure of sobriety in corporate lifestyles and accept reduced compensation to cut costs and maintain price levels, self imposed ceilings on salaries and expenditure.” While pleading with the corporate high fliers to tone down their life styles, he seemed to have forgotten that his deputies the FM and Commerce Minister have been trying all along to encourage a spendthrift lifestyle to artificially boost demand.

The Govt. continues to threaten action against steel and cement makers and referring them to the Competition Commission but has done nothing in this direction. Lalu Prasad the rustic genius, who blamed the 6th Pay Commission for the price rise, offered his own brand of solution saying that Railways won’t load grains for private parties, a wholly arbitrary and illegal action.

As the measures taken so far have so far not yielded much and realising that problem may not be capable of quick resolution, the buck passing has begun in right earnest. Earlier on 18th June, Chidambaram had said, "Inflation is high. RBI must take steps and it has taken,". Again on 22nd, the Finance Ministry said”We expect the Central Bank to take some more action. It is for the RBI to take a decision and do so when it is appropriate” putting the onus on RBI and washing its hands off.

When the index rise of 2.3 % came on the 20th, deftly trying to shift the blame on the Cabinet, Chidambaram said, “we had cautioned the cabinet of the impact on inflation if petroleum prices were revised” as if he was opposed to the price rise and the jump in inflation was attributable to the Cabinet. In fact, at the time of revision in petroleum product prices, he was the one who kept on refusing to yield till the end on reducing duties on petroleum products.

Pawar’s NCP adopted an economic resolution calling upon Finance Minister P. Chidambaram and the Reserve Bank of India to take “more stringent measures” to contain inflation. An AICC press statement tried to set the record straight on the agricultural stuation and said “A combination of demand, supply constraints has resulted in low buffer stocks and record prices. What can, however, save India from the menace of food-related inflation, most experts believe, are augmented investments and better agricultural policies,” Not to be outdone, Pawar recently followed up on his blame-placing, A press report dated 20th June said, "In the wake of the unprecedented rise in inflation graph, Agriculture Minister Sharad pawar on Friday had telephonic talks with Finance Minister P Chidambaram and asked him to take immediate steps.”

This charade will continue for some time. Once the situation is brought under control, hopefully, the Sage from Sivaganga will retreat to his abode to contemplate till the next elections and hopefully, Sharad Pawar, once he becomes ICC President, will opt to shift to London where he may also have a chance to spend his hard earned money in peace, having already worked out the succession plan for his party.

The prognosis for the near future is none too bright. Apart from oil prices, the falling rupee and internal factors will also continue to keep up the level of inflation. If the Govt. is unable to handle the situation in a purposeful way, there may be serious consequences on the economy. Hopefully, sooner or later the rate of inflation will come down. Sadly, even after that happens, the prices which have risen will never come down to the earlier levels and the people of this country will have to continue to carry the burden on their backs.

For the next Goverment, the two important lessons are: to be on top of the situations at all times as they develop and not to insult the people who have elected them to serve, by inventing excuses for failure to act diligently, as the present Govt. is doing.


At June 23, 2008, Blogger John Pinto said...

too much space devoted to too little stuff... inflation can be countered easily.. Expect less for wat you give. charge less for your services.. Start with yourself and dont blame others .. Its easy to put the blame on Chidu and sharad Pawar. and the Govt as a whole.. but are you willing to work for 10% less than what yu made last year. then you can contribute to reducing inflation...

At June 23, 2008, Blogger John Pinto said...

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At June 23, 2008, Anonymous minisha gupta said...

Reference John Pinto's comment about the article being long.

It is better that the article is little longer because it is necessary for ppl to understand how the govt. ministers have been twisting things around just to fool the ppl. it is good for bringing out the contradictions in teir stories.

At June 23, 2008, Anonymous Dr. Satyen, Mumbai said...

One of the readers above has presented a very simplistic solution.

My friends, today's economics is a more complex subject though it was never a simple subject.

If u are having to pay 30% more for yor daily needs, reducing your pay by 10% is neither relevant nor makes any sense. One has to understand all factors behind inflation.

i hope these comments help.

At June 24, 2008, Anonymous Kishan Daswani, Mumbai said...

You have highlighted some of the lame excuses given by govt.

There are many more silly utterings which have been excluded though.

i firmly belive that the govt. was too overconfident and felt everything was alright. They made the same error of judgment that NDA made with "India Shining".

The difference is that NDA lost power and sufferred themselves but this Govt. has made the PEOPLE suffer due to their casual approach.

At June 28, 2008, Anonymous Gopinath Mavinkurve said...

While you have dealt at great length upon the inactions and inappropriate actions and also the reactions of the politicians, you have not talked about the core cause of inflation, the unabated printing of money. Of late I understand that Governments have been printing money even without sufficient gold reserves to warrant for them. If you thought that the economy depended on the actions or utterances of Ministers, think again!

Dont for heaven's sake propel them into such high pedestals, or send them into some celestial orbits - we need them on earth to entertain us while being tortured.

I recommend readers of this blog to also read the "Swaminomics" column "Excess speculation or excess Money?" in TOI today (29.07.08.

I wonder what steps any Government is taking against hoarders of foodgrain? Would they be able to take such steps when Governments are themselves participating in hoarding on oil, natural reserves and foodgrains (by banning exports)???

At June 30, 2008, Blogger Mavin said...

Inflation, as we see in India today, is a result of a complex interplay of many variables. A lot many of these variables do not trace their origin to India.

On liquidity, the USA saw massive increase in liquidity during 1999 - 2003. Coupled with low interest rates, it made a lot of sense for smart investors to invest in Indian stock markets. An unprecendented inflow of US$ 90 - 100 bn over the last four years has meant huge increases in our forex reserves and large increases in domestic liquidity.

The direct consequence of this was seen on the real estate sector where prices touched the sky. A small flat in Mumbai costs around Rs.1.00 crore.

You then have a domino effect on cement, steel and other inputs.

Cost of Power generation has also increased due to sharp spike in cost of imported coal and sea freight rates.

You now have real serious inflation setting in at this stage.

What puzzles me is the increase in food prices inspite of good monsoons and harvests. Obviously, there is something that we are missing here.

Now add the inept and amateurish handling of the economy by the "Dream Team" and RBI. What we get is a perfect mish-mash today.

There is no easy way out from this. Correcting this situation will involve a lot of pain and uncertainty. This has, however, to be done. We have no choice.

At July 04, 2008, Anonymous madan singh said...

Reader John Pinto does not seem to understand economics!

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