By Professor Dipak Basu, Professor in International Economics, Nagasaki University, Japan.
Inflation in India, including food and energy, or other volatile components, is still rising but the current Chief Economic Adviser or the Finance Ministry has no clue how to solve this serious problem, which is pushing people to the verge of starvation. In addition, there are signs of overheating in real estate and labour markets. The Public Distribution System has virtually collapsed and, as a result, the avenue that was available at least in theory, to protect vulnerable sections of society has been lost. Politicians continue to make tall and unrealistic promises and India’s Rightwing economists have no clear answers to the problem. There is a tendency from the so-called Leftwing economists to relate the rising price in India to the state of the World economy or the neglect of the agricultural sector in India, but these are not the relevant clues if we examine the issue carefully.
Statistics hiding the sufferings of the people:
India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. Most developed countries use instead CPI (Consumer Price Index) as a measure of inflation. CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, thus providing a more realistic measure of inflation.
The CPI cannot be used in India because there is too much of a lag in reporting numbers that constitute the CPI. The lag of reporting in India is at least 24 months. India constituted the last WPI series of commodities about a decade ago but has not updated it till now. As a result, that WPI has lost relevance and cannot be the barometer to calculate inflation. The main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important for the consumers. That is the reason when the people on the streets are experiencing huge increase in prices; the published figure from the government indicates only an increase of about 10% per year. Thus, the fundamental issue is that the official calculation of inflation rate in India is hiding the real sufferings of the people.
In addition to consumers, farmers had also been hit hard due to the huge difference in wholesale and retail prices as the monetary benefits are mostly cornered by middlemen and traders.
High oil prices can affect agricultural costs directly because of the significance of energy as an input in the cultivation process itself (through the costs of fertilizers and irrigation) as well as in transporting food. Due to the rising oil prices governments in the US, Europe, Brazil and elsewhere have promoted bio-fuels as an alternative to petroleum. The result is a diversion of food products to the production of ethanol in USA. Brazil uses half of its sugarcane production to make bio-fuel. The European Union uses the greater part of its vegetable oil production in addition to the imported vegetable oils, to make bio-fuel. This has naturally reduced the available land for direct food production and availability of food. However, these arguments are invalid for India.
India is estimated to have produced a record in food grains for year after year but at the same time per head availability of food grain is falling year after year, due to inequitable distribution of food among the people. The increase in output is due to some favourable factors such as good rainfall and favourable temperature during the crop seasons. Thus, there is no reason to assume that overall shortages of productions led to increased food prices in India. Even though global stocks have been falling, they are still at a comfortable level of about 18 per cent of global production and India has no restrictions on food imports any more. The abnormal and sharp increase in food prices in India in recent years cannot be explained by the fall in the home production of food products.
Rising cost of transport due to the higher and higher price of both diesel and petroleum in India has added to the cost of basic food products. In India, the increased price of oil is mainly the result of the high level of taxation imposed by the government on oil products. Although the original purpose of taxation during low oil price and subsidies during higher oil prices were to stabilize the prices of imported oil, this system is now being used as a source of finance for the government, which is reluctant to reduce taxation but wants to wash its hands of this administrative price in preference for the international market price, which would make the oil prices more volatile and will certainly make inflation much worse by increasing the costs of transport if the international oil prices were to go up.