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.


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