Friday, February 18, 2011

exhorbitant prices may de-stabilise socio-politcal situation

There is a strong possibility that the rising inflation may destabilize socio-political situation of the country sooner than later. Soaring onion and other vegetables’ prices led to a sharp rise in inflation at 18.32 per cent for the week ended December 25, a development that may prompt the Reserve Bank to tighten monetary policy to check further escalation in commodity costs.

Food inflation jumped up by 3.88 percentage points from 14.44 per cent recorded in the previous reporting week, and edged closer to the high level of 19.90 per cent, last witnessed a year ago. The rise in food inflation has been mainly on account of 58.58 per cent rise in prices of vegetables in the wholesale market. While the average inflation on National level is around 19% the actual rte of inflation in North-east is more than 20% already. Our research revealed that cost of food products in Assam are much higher than in Kolkata , Madras and Hyderabad and marginally higher even than in Delhi and Bombay. Tinsukia district is the costliest district in food prices followed by Guwahati and Jorhat. While the cost of Onions in Kolkata is around Rs 55 a kg it is Rs 70 in guwahati.
Among the individual items, onion became dearer by 82.47 per cent on annual basis, while egg, meat and fish became costlier by 20.83 per cent, fruits by 19.99 per cent and milk by 19.59 per cent. The data further reveals that onion prices during the one week period ending December 25, rose by 23.01 per cent in the wholesale market. With food inflation accelerating, RBI may take more measures in its forthcoming quarterly review of the monetary policy on January 25. The central bank during 2010 had raised short-term key policy rates six times to
tame inflation. Meanwhile, in the non-food category, the prices of fibers and minerals have climbed by 35.53 per cent and 30.58 per cent, respectively.
Rising food prices will reflect on the monthly inflation data for December, scheduled for announcement on January 14. The overall inflation in November had come down to 7.75 per cent from 8.58 per cent a month ago but all indication now reflect that overall inflation during January 2011 would be much higher.

We have earlier also pointed out that it would be almost impossible to control inflation just by increasing the interest rate by RBI to contai9n money supply. The supply side must be tackled by Government effectively. During September itself it was known that that onion cultivation in Saurastra belt have failed. It was the responsibility of the Government to make necessary arrangement to import onions then itself. Should Agriculture Ministry took required steps on time present impasse would not have occurred.

A Minister of Government of India has commented that the basic inflation has been effected due to rise in price of Onion. Now it is impossible to take reform measures in diesel and gas. We are not convinced at all. Some time back it was crude oil which brought in inflation. Today Onion is the product which created inflation. Tomorrow it would be Metal and Dafter it would be milk that would create widespread inflation, if arguments of the Government is to be believed.

According to us inflation has been created due to Management failure of the government to maintain steady supply of commodities with proper planning. We should not forget the lesson of Indonesia that due to uncontrolled food inflation some years ago there was a great political upheaval and Suhurto had to abandon his position as the president. If inflation keeps on rising gneraly peace loving Indians may rise in revolt bringing in political uncertainty.

We appreciate the views of Kaushik Basu when he said that the increase in prices has tyo be tackled.True. But we cannot tackle it with blunt instruments; “it will lead to slowdown in Growth.” But what is way out ? Even if RBI increases the rate of interest to tackle inflation that would not result in better supply of onions. Pakistan is unreliable supplier. Then what is the way out? Either Government has to find out alternative source or people in general must stop depending on onions. After all onion is only a spice and garnishing and enriching agents for curries .It is not a food item like cereals and pulses. Onions do not stop hunger. Possible steps include price controls, subsidies for shoppers, a crackdown on hoarding and price gouging as well as a system where District Magistrates are made responsible for supply of a basket of food items. There are many people who avoid onions. Even mostly 65% population of Northeast does not usually use onions in their food preparation. It is impossible to understand how rise in price of onion can usher in general inflation of the basic products, as claimed by the central Government.

As a long term policy, we need to take a number of steps to improve the health of our economy. On top is the introduction of modern farming technologies, revamping of the public distribution system to do away with the loopholes which lead to pilferages and tackling subsides which take away a large portion of our revenues. Blaming non availability of onion, due crop failure, is only an excuse. The government lacked foresight in this instance. All this calls for strong foresight, planning for better implementation of economic reforms that need to be undertaken sooner than later.


What to expect from Union budget 2011

While the Finance Ministry gives the final touches to the country's biggest financial planning exercise, people in general are anguish over the government's inability to tackle inflation, bring back black money banked overseas and keep fiscal deficit in check.
The Finance Minister no doubt has a tough job on hand to bring down inflation, curtail the rising fiscal deficit and at the same time ensure that the economic growth is on track while withdrawing the stimulus measures.
Double-digit inflation rates have stayed on for two years. Food inflation is at all-time highs. Will the Budget offer any respite to the common man? Does the Budget have a solid plan for India's one billion-plus population?
With mounting pressure on inflation, the government will take steps to bring down prices. The government has already deferred price hike in diesel as it can impact prices of essential commodities.
The ban on onion export has already brought down the prices. With more sops for agriculture sector, the government will focus on increasing productivity and balance the demand-supply chain.
Food inflation, which is at a record high of 17 per cent in January, will fall further as the government will take steps to ease supply constraints, Finance Minister Pranab Mukherjee said recently.
Led by a smart recovery in farm output, the economic growth rate for the current financial year stands at 8.6 per cent, as against 8 per cent a year ago.
Agriculture and allied activities are likely to grow at 5.4 per cent in 2010-11, compared to just 0.4 per cent in 2009-10, according to Advance Estimates released by the Central Statistical Organisation. The ban on onion export has already brought down the prices. With more sops for agriculture sector, the government will focus on increasing productivity and balance the demand-supply chain. Onion cultivators of Nasik protesting on the ban of onion export as the whole sale price has crashed to Rs 12 per kg. According to a few Economists, the economy may grow by 8.5 per cent despite rising inflation. The ban is going to be lifted soon. While contribution of agriculture to the gross domestic product (GDP) is 14.6 per cent, about 65 per cent of the population was dependent on it. Hence, it may get more Budgetary push for increasing productivity.
The funding may go to areas of research, as for a long time there has been little improvement in terms of new strains of crops, an official in the finance ministry said.
The agriculture sector is also anticipating tax benefits on import of agricultural tools and other mechanization equipment. The Budget will unveil several measures to boost infrastructure projects and further strengthen the economic growth.
The income tax would remain the same as is now. Currently, income between Rs 1.6-5 lakh (Rs 160,000-500,000) attracts 10 per cent tax; Rs 5-8 lakh (Rs 500,000-800,000)20 per cent and beyond Rs 8 lakh 30 per cent.
The government is likely to retain these rates and wait for DTC Act to come into force from April 1, 2012. Since it is also in talks with states to bring Goods and Services Tax from the same date, the government might also not change indirect tax rates.
However, it may tinker with threshold limit. The lower income group may get more relief.
The software industry has been hit by the double taxation issue on software packages.
This Budget is likely to bring cheer to the software industry by rationalizing the tax structure.
The imposition of service tax and countervailing duty for software packages sold with licenses is a deterrent for software companies.
In 2010, the Budget introduced conditional exemptions from countervailing duty or excise duty on the import/manufacture of packaged software if the importer/manufacturer is registered for service tax.
The Indian IT industry has sought extension of tax benefits under STPI and simplification of the tax structure to encourage investments in the sector, among others as part of its budget wish-list. Big incentives await Small and Medium industries. The most of the enterprises of Northeast are in small and medium sectors as such entrepreneurs of North east may be able to reap benefit in terms of cheaper finance.
The $76 billion software industry has requested the government to extend the Software Technology Parks of India (STPI) scheme till the Direct Tax Code (DTC), which is under consideration, is implemented.
RBI is considering allowing new private sector banks, including participation by big industrial houses. A roadmap for the same could be announced in the annual Union Budget to be presented later this month.
While the formal and final guidelines would be announced by the Reserve Bank of India on who should be allowed to set up new banks and what should be the terms and conditions for them, a roadmap on the subject could be announced in the Budget speech on February 28 by Finance Minister Pranab Mukherjee, according a knowledgeable circle of Economists In his Budget speech last year, Mukherjee had said that there was a need for extending the geographic coverage of banks and improving access to banking services.

To mobile better resources, the government will tighten service tax regime and remove loopholes in sectors like construction, oil and gas, telecom and construction. The government is also planning to bring many new services under the tax regime.
In view of the present inflationary pressures in a difficult macroeconomic environment, it is likely that the rate of basic customs duty, could be brought down.
Surely, the present duty structure on oil will undergo changes, given the present high prices and the significant quantities of oil imports. In any event, median customs duties must be brought down, if we are to reach ASEAN levels in the near future.
Higher education is likely to get a big boost in the Budget. The finance Ministry has been asked to double the budgetary allocation for the higher education to over Rs 30,000 crore (Rs 300 billion) in 2011-12. by the party in power.
Sarva Shiksha Abhiyan, which has turned into a vehicle for implementing the Right to Education, has already got a boost in funding, as the Centre's share of funds has increased to 65 per cent from 50 per cent.
So, this year again, the allocation may see a slight increase from the Rs 31,000-crore (Rs 310 billion) allocation in 2010-11.It likely to get a 20 per cent increase each over their 2010-11 Budget allocations.

The government is likely to remove the loopholes in international taxation to add more money to the exchequer.
Black money has become a major headache for the government. With millions of dollars stashed away in foreign banks, Indian government is under pressure to stop the flow of money to tax havens. The Budget will bring about tax and administrative changes.The labour ministry may get a higher allocation for various programmes like the much-publicised health insurance for the poor.
Though social sector spending will continue to be the government's top priority with a major chunk of allocation expected to be made towards existing schemes like the Mahatma Gandhi Rural Employment Guarantee Scheme (MGREGS), many social sector ministries have got broad hints from the finance ministry that no new schemes would be entertained and the government's emphasis in the Budget is likely to be on the existing schemes in agriculture, education and infrastructure.