| The venue: 10 Janpath, residence of Congress President Sonia Gandhi. It was around 7 p.m. on February 20. The high-powered group, the Congress Working Committee (CWC) was meeting to discuss the possibility of imposing President's Rule on Uttar Pradesh and the ramifications of the terror attack on Samjhauta Express where 68 people were killed. The focus, however, shifted to a more pressing concern, price rise. For over an hour and 20 minutes, Finance Minister P. Chidambaram explained in detail the situation, the causes and the steps the Government was taking. But much of what he said was in the esoteric domain of classical economics for most Congressmen. It mattered little that the economy was slated to grow at a record rate of 9.2 per cent, that corporate profits were booming, that tax collections were high and salaries were rising. They showed little patience with explanations of how inflation does accompany growth. The party that came to power riding the now-famous "Congress ka haath aam aadmi ke saath" slogan was now gripped by price paranoia. Prime Minister Manmohan Singh too intervened to assure that prices would stabilise after the rabi crop but the CWC members were not interested in the 25 steps that the Government had taken over the past year. As a senior Congressman asked, "All this is fine about New York and world rates, but when will we see the prices of vegetables and pulses come down at the mandis?" The question was marked with anger and frustration. Anger, because the issue had assumed political dimensions. Frustration, because despite the placebo of fuel price cuts, prices continued to spiral. Indeed, this was the third time that the CWC grilled the finance minister over what the Government was doing about the sustained increase in prices. It is not just the Congressmen who are agitated. Rising prices have been poll issues in Punjab and Uttarakhand. In fact, Shiromani Akali Dal (SAD) chief Parkash Singh Badal has acknowledged that rising prices gave the party a readymade plank. Not surprisingly, one poll promise made by SAD was atta at Rs 4. Last week, CPI General Secretary A.B. Bardhan and Secretary D. Raja raised the price issue with Sonia Gandhi. On Tuesday, BJP President Rajnath Singh sent a 21-page letter to Manmohan focusing on rising prices among other issues affecting the aam aadmi. In that sense, the question Chidambaram was asked also conveys the urgency that the political class felt over prices getting out of control. And prices are going out of control. Nothing signifies this better than the numbers. The wholesale price index (WPI) touched 6.73 per cent year-on-year and consumer price index was at 6.9 per cent for urban consumers. But the real story is not so much in the indices as in the absolute figures. Consider these: the price of moong dal have shot up 118 per cent from Rs 22.50 to Rs 49 and those of urad are up 82 per cent. Wheat is up 33 per cent while atta is up 44 per cent. Perishables are doing no better. Political tear-jerker onion prices shot up 186 per cent before stabilising last week. Family budgets in urban homes have seen expenditure on just food and groceries going up by as much as 25 to 40 per cent. It is not just consumables. Home loans are up 21 per cent and steel and cement prices are adding to home-seekers' woes. While the vocal urban consumers have raised the banner of anger, it is the rural folk, who spend over 50 per cent of their income on food, who are the worst hit. Small wonder, the opposition is gleeful even as the Congress and its allies are gripped by price paranoia.  | | KOLKATA Pulses: Rs 55-60/kg (Rs 35-50)
Onion: Rs 20/kg (Rs 10-12)
Tomato: Rs 18/kg (Rs 8-10)
Rice: Chamarmani, the most popular rice in Bengal, is at Rs 20/kg, almost the same as last year
Atta: Rs 17/kg (Rs 13)
Sugar: Rs 20/kg (Rs 16-18)
Rohu fish: Rs 120/kg (Rs 80)
Cumin: Rs 120/kg from Rs 100 two months ago | BANGALORE Carrot: Rs 16/kg (Rs 6)
Tomato: Rs 14/kg (Rs 9)
Onion: Rs 20/kg (Rs 14)
Wheat: Rs 17/kg (Rs 15)
Rice: Rs 11/kg (Rs 10)
Gram: Rs 37/kg (Rs 32)
Tur: Rs 41/kg (Rs 35) | | CHENNAI Sugar: Rs 16/kg (Rs 12)
Moong dal: Rs 54/kg (Rs 45)
Urad dal: Rs 63/kg (Rs 52)
Tur dal: Rs 39.50/kg (Rs 22)
Chana dal: Rs 40/kg (Rs 23)
Sugar: Rs 16/kg (Rs 12)
Wheat flour: Rs 12.50/kg (Rs 10.50)
Onion: Rs 20/kg (Rs 6) | MUMBAI Onion: Rs 18/kg (Rs 11)
Wheat flour: Rs 28/kg (Rs 15)
Tur dal: Rs 44/kg (Rs 34)
Urad dal: Touched Rs 72/kg before easing to Rs 60 from Rs 52 six months back
|  CM SPEAK
"We are trying to help stabilise vegetable prices so that they don't affect the public."
H.D.KUMARASWAMY
CHIEF MINISTER, KARNATAKA | 21%
is the jump in home loan rates which are up from 7% three yrs ago to 10% | | HYDERABAD Tamarind: Rs 35/kg (Rs 25)
Rice: Rs 14.75/kg (Rs 12.25)
Tur dal: Rs 36/kg (Rs 28)
Urad dal: Rs 50/kg (Rs 48)
Moong dal: Rs 40/kg (Rs 35)
Onion: Rs 9.80/kg (Rs 6)
Tomato: Rs 5/kg (Re 1)
Groundnut: Rs 37/kg (Rs 28)
Sunflower oil: Rs 58/kg (Rs 47) | CHANDIGARH Chana dal: Rs 37/kg (Rs 28)
Moong: Rs 44/kg (Rs 36)
Rajmah: Rs 58/kg (Rs 38)
Onion: Rs 26/kg (Rs 10)
Tomato: Rs 24/kg (Rs 10)
Wheat: Rs 10/kg (Rs 6.90)
Atta: Rs 15.50/kg (Rs 12.50) | | WHY ARE PRICES RISING? Monetary classicists would say too much money is chasing too few goods. The booming economy has swelled incomes and put money in people's hands to pay more for goods and services that are in short supply. Money supply grew year-on-year at 15.6 per cent in January 2006 and an astounding 21.1 per cent in January 2007. The real side story is that a combination of supply side bottle-necks and adhocism has fuelled a sustained growth in prices of primary goods-foodgrain, vegetables and pulses. GROWTH PANGS
Full capacity usage and globalisation drive manufactured goods inflation By definition, growth creates the impulse for inflation. Indian manufacturing rode the momentum of world economic growth over the last five years and quickly achieved full capacity utilisation. As demand grew beyond peak production capacity, more money is chasing fewer goods. As India has opened up, one would assume imports would quell prices. But that was thwarted by two factors. Duties and international prices-for instance, of steel or cement where inflation has grown by 12.5 per cent and 11.4 per cent-were high. So when the Government slashed import duties on a range of products, it didn't quite make a dent as the international prices of these goods were high too. Ergo, manufactured products' inflation rose from a decent 2.2 per cent in January 2006 to 5.6 per cent in January 2007 contributing almost 3 per cent to the current 6.73 per cent WPI. New investments triggered credit demand to rise by 24.8 per cent. Demand for credit has been high on the personal and home loan side too. Money supply is high as the deluge of dollars chasing investment opportunities and high Indian rates of returns on assets-ranging from shares to deposits to real estate-has created a liquidity overhang as the Reserve Bank (RBI) converts every dollar into rupees. The RBI stepped in to raise repo rates (the rate at which banks borrow from the central bank) and the cash reserve ratio (CRR) which reduces the float available with banks and makes loans expensive. It calibrated the dose to keep the economy chugging. As capacities are added, manufactured goods inflation is expected to come down. That is the theory but really the jury is yet out on this. | 38%
less wheat was procured by the Government in December 2006 over the previous year |  CM SPEAK
"The Centre has failed to take any interest in arresting the all-round price rise which is pinching the pocket of the common man." MULAYAM SINGH YADAV CHIEF MINISTER, UTTAR PRADESH | | LUCKNOW Chana dal: Rs 40/kg (Rs 23)
Sugar: Rs 16/kg (Rs 12)
Wheat flour: Rs 12.50/kg (Rs 10.50)
Onion: Rs 20/kg (Rs 6) | MUMBAI Onion: Rs 18/kg (Rs 11)
Wheat flour: Rs 28/kg (Rs 15)
Tur dal: Rs 44/kg (Rs 34)
Urad dal: Touched Rs 72/kg before easing to Rs 60 from Rs 52 six months back | | HYDERABAD Tamarind: Rs 35/kg (Rs 25)
Rice: Rs 14.75/kg (Rs 12.25)
Tur dal: Rs 36/kg (Rs 28)
Urad dal: Rs 50/kg (Rs 48)
Moong dal: Rs 40/kg (Rs 35)
Onion: Rs 9.80/kg (Rs 6)
Tomato: Rs 5/kg (Re 1)
Groundnut: Rs 37/kg (Rs 28)
Sunflower oil:Rs 58/kg(Rs 47) | | | Figures in brackets denote prices of the commodities in 2006 | | NOT ENOUGH TO EAT
We simply don't produce enough wheat, rice or pulses for our needs For the past 10 years, India's production of wheat, rice, pulses and oilseeds has been stagnant, this when per capita incomes are growing. The consumption of pulses has grown to over 15 million tonne but India produces barely around 12 million tonne. Imports are limited by options as few countries produce pulses. Imports of oilseeds are fraught with political risk as local farmers can be affected. Naturally inflation in oilseeds has grown by 21 per cent, in pulses by 25.4 per cent, wheat by 14.7 per cent and rice by 8 per cent. Worse, despite buffer stock norms being lower for three years, the Government has failed to step in with higher rates for procurement or even imports. Agriculture and Food Minister Sharad Pawar finds himself in a queer quandary. By allowing private companies to procure and ensure better returns for farmers as agriculture minister he created problems for himself as food minister when the government couldn't procure enough. As transnationals and local players procured, Government procurement fell by 37 per cent. Imports could have helped but again there were two problems. Traditionally, Indian prices are lower so imports are costlier. Also Pawar was reluctant to import. While Manmohan and Chidambaram beseeched him to import wheat as early as December 2005, the decision to import was taken three months later and the wheat arrived in June. All this led to rise in prices as did low acreage. December stocks of rice and wheat are a million tonne lower than last year's 18.76 million tonne. Now the Government is pinning its hopes on the rabi crop. |  CM SPEAK
"Inflation is a global phenomenon and there is little that the Government can do about it." AMARINDER SINGH CHIEF MINISTER, PUNJAB | 23%
shortfall in foodgrain stocks over the required buffer norms | | CHANDIGARH Chana dal: Rs 37/kg (Rs 28)
Moong: Rs 44/kg (Rs 36)
Rajmah: Rs 58/kg (Rs 38)
Onion: Rs 26/kg (Rs 10)
Tomato: Rs 24/kg (Rs 10)
Wheat: Rs 10/kg (Rs 6.90)
Atta: Rs 15.50/kg (Rs 12.50) | | Figures in brackets denote prices of the commodities in 2006 |  CM SPEAK
"The repeal of the Essential Commodities Act has only led to hoarding. We have asked the Centre to revive the Act which was scrapped by the NDA government."
Y.S. RAJASEKHARA REDDY
CHIEF MINISTER, ANDHRA PRADESH | | ADHOCISM RULES
Knee-jerk actions on banning exports or opening imports fuel the fire At the CWC meeting, faced with a barrage of reactions, Chidambaram asked if the members had any suggestions. An hour and a half later he walked out with two "solid suggestions". Initiate steps to crack down on hoarders and ban forward trading in primary foods. That is the mind-set of the political class. How do you initiate de-hoarding when the law allows (at least in some states) private companies to procure and warehouse their purchases? As for ban of forward trading, fact is it was introduced as a tool to enable farmers to discover better prices. Joseph Massey of Multi Commodities Exchange points out that "the ban on tur and urad haven't brought prices down". The answer is long-term import strategy that enable cheaper imports not placebo petro price cuts. But it is politics not economics that dictates what can be exported or in some cases what can be imported. What is worse is that when the Government does decide to import, it is a process that is too loud and takes too long driving prices further up. Take pulses. We don't produce enough. We need to increase acreage in pulse cultivation or invest in technology that would deliver higher yields. Chief of the prime minister's economic advisory council C. Rangarajan reveals that "there has been no breakthrough either in output efficiency after the Green Revolution". Neither is there any attempt to move farmers away from crops that add to water stress towards produce that we necessarily import. WASTED PRODUCE
Lack of distribution and processing chains leads to waste and inflation. The price rise in perishables like fruit and vegetables may be seasonal but again like in grains it has a structural issue. Thanks to the absence of distribution links and processing, 16 million tonne of vegetables and 40 million tonne of fruit are wasted which adds to losses and prices. Consumers flocking the newly set-up retail outfits may find prices surprisingly cheaper even as the entrepreneurs claim to pay better rates to farmers. The answer lies in the fact that the traditional distribution chain from field to fork is too long. It involves too many middlemen resulting in consumers paying as much as six times what the farmer gets paid for his produce. Retail chains world over invest in logistics, warehouses and delivering value to both consumers and to farmers. | | THE CENTRE'S REMEDY | | |
The steps freeing imports and banning exports have made little or no dent on prices
June '06: Import of pulses at zero duty, wheat at 5%, export of pulses banned July '06: Strict norms on forwards to check price volatility in wheat, sugar, pulses Reverse repo rate hiked for second time by 0.25% since January Aug '06: Import duty on palm oil cut by 10 percentage points Sept '06: Zero-duty import of wheat by private players Dec '06: Import of 50,000 MT pulses by NAFED Dec '06: New contract by NAFED for 30,000 MT two-third of which is yet to arrive Jan '07: Zero-duty import window for wheat extended till February-end Total ban on futures trading in tur, urad 10 percentage point import duty cuts on crude palm oil and crude and refined sunflower oil Import duty on maize reduced to zero for 2007 Repo rate hiked by 0.25% for the fifth time in 12 months Feb '07: Export of skimmed milk powder banned till September-end and wheat for 2007 50 lakh tonne of wheat imported by State Trading Corporation received Up to 4 lakh tonne of wheat to be released under the Open Market Sale Scheme Cash reserve ratio hiked for the third time in three months, this time by 0.50%
| | WHAT NEEDS TO BE DONE? Every crisis in India screams not for controls or bans but for more reforms. The problem with the policy machinery is that there is thought and debate just as long as the crisis lasts. The odds are that as prices even out, Government will return to the "business as usual" mode. Worse, adhocism would rule policy. Food security is not an issue that a nation of billion-plus people can take lightly. What is needed is a long-term view on needs and engineering of solutions that survive the test of price cycles. As BJP President Rajnath Singh said, "These are issues that were visible long enough for the Government to act." Fact is nobody acted. CALIBRATE CAUTION
Monetary steps should not result in a sudden slowdown or aggravation The temptation for politicians in a crisis is to over-reach. So it is for economists. India has taken its sweet time to achieve the 8-plus per cent growth. Just because the spike of an estimated 9.2 per cent GDP growth has triggered inflationary pressures there is a chance that policymakers could err on the side of a slowdown in their quest to control prices. We have been through it in 1996. It is essential, therefore, to calibrate the responses to keep the growth and entrepreneurial impulses alive. Sure as Govind Rao, director, National Institute for Public Finance and Policy, says there could be a case for further tightening of liquidity but the more immediate focus should be on addressing the supply side problems. Investments take time to translate into capacities, more so in the Indian context. The distance between investment intent and translation can be shortened by improving clearances, investing in infrastructure and expanding markets. It is estimated that investments of well over a trillion rupees are stuck at various levels owing to pending clearances. Similarly, lack of skilled manpower and rigidity in the labour laws is deterring companies from adding capacities. Thanks to the inverted tariff, it costs Indian companies Rs 100 to produce what Chinese make for Rs 70. The answer to reducing manufacturing inflation thus lies as much in tightening the money trail as it is in loosening the vice-like grip of red tape and political discretion that is holding up reforms. Simply put, if production goes up there will be competition which in turn will drive prices down. | | WHAT THE LEFT WANTS | | |
The CPI(M) suggests that the following steps would be sufficient to check price rise: 1. Ban futures trading in essential commodities as speculators are using the system to create artificial shortages resulting in price spikes. This has also been recommended by the Standing Committee on Food, Consumer Affairs and Public Distribution. 2. Reduce prices of petrol and diesel to reduce the impact of transportation costs on primary articles. This is now possible in view of the drop in international crude prices to $50 a barrel. 3. Revise the ad valorem duty structure on oil imports that leads to higher energy costs and adds to inflation. 4. Crack down on hoarding invoking the provisions of the Essential Commodities Act. 5. Reverse the dilution of the Essential Commodities Act and bring more items under it. 6. Strengthen government intervention in procurement and distribution of essential commodities.
| | GO AGGRO ON AGRO
Agriculture needs restructuring badly to meet the needs of a new economy Really speaking, it is not so much a grow more issue as it is a grow right issue. It has been over four decades since the Green Revolution which created new acreage in cultivation through expanded irrigation and higher yields through investment in new technology. Sadly, although India is considered to be the second largest producer of foodgrain, it is nowhere near international norms in yield per acre. Even though agriculture delivers nearly a fifth of the GDP, investment into the sector which should at least be 5 per cent of GDP has been less than 2 per cent. What this means is investment in irrigation to enable multiple crops, higher credit to farmers of whom only a third have access to bank funds and investment in technology for high yield seeds. Farmers also need advice which the death of extension services has denied them. The present crisis gives enough indications on what needs to be cultivated, what can be exported and what needs to be imported. For instance, it requires no genius to understand that we need to urgently increase acreage for pulses. It is also clear that given the level of water stress, cropping pattern has to shift from water-intensive crops to those that deliver higher returns per litre rather than per acre. It shouldn't be too tough for the government to focus on a new blueprint on agri production which functions on incentives based on national needs. What all this adds up to is a new vision statement for agriculture. This is, in fact, one of the unfulfilled promises of the UPA. | | WHAT THE BJP WANTS | | |
The BJP's formula to contain spiralling prices:: 1. Avoid distress purchases from the international market as are being made now at prices higher than those prevailing in the country. The Government lacked the economic vision to foresee the shortage in advance. 2. Strengthen the public distribution system. The allocations should be made public to check corruption and increase transparency. 3. Set up a monitoring system for studying food production and procurement, and facilitate supplies to states affected by scarcities. 4. Rationalise the tax structure for petro products so as to reduce their prices which will, in turn, reduce the burden of transportation costs. 5. The Government should accurately estimate the agri output and plan timely procurement of foodgrain and maintain its buffer stocks. 6. Stop forward trading in essential commodities and ban 'satta' in basic agricultural produces with immediate effect.
| | OPEN UP RETAIL
Investment in distribution, food processing will deliver value to farmers, consumers The most often quoted statistic in this Government is how two-third of the populace is dependent on one-fifth of the GDP. The problem is yet again being viewed from the wrong side. What needs to be recognised is that core agriculture is losing its viability. It is not that the consumer is getting goods cheap. Fact is the middle is too long and too many are living off it, denying both farmers and consumers affordability. Already, private players in the farm to fork business are showing farmers what to produce, giving them better prices, curbing wastage and weeding out the middlemen. This phenomenon needs to expand. As farmers get better value for their produce, they will be able to invest in quality inputs, learn from the market and use technology just as private industry has to improve their lot. The starting point would be to bury the shibboleth of keeping retail closed in the guise of protecting shopkeepers. Greater common good-of farmers and consumers-dictates that government unlocks the potential of its masses by opening up investments in this sector. In a sense, these issues have been debated and discussed by the committees set up by the UPA. The question is will the Singh Parivar put thoughts into action? World over, inflation in primary articles is a page in history books. This is a phantom that we need to get rid of. -with Malini Bhupta, Sudhir Gore and bureaus | THE BITE VIEW Board of India Today Economists gives its views on how to bite the bullet on runaway inflation | WHY PRICES ARE RISING? | |  |  |  | BIBEK DEBROY
SECRETARY-GENERAL, PHDCCI | • Industrial production
capacity exhausted
• Controls on imports
of agro products
• Real estate, capital,
skills in short supply
• Lack of agri reforms
• Expectations fuel
further inflation | | AJIT RANADE
CHIEF ECONOMIST, AVB GROUP | • Zero growth in food
production
• Money supply up on
rise in capital inflows
• Inflation is a global
problem
• Rising input costs
• Inflation in services
like education, health | | INDIRA RAJARAMAN
MEMBER, ICRIER BOARD | • Low foodgrain
productivity
• Overheating in some
industrial sectors
• Accumulated impact
of fuel prices
• The impact of VAT
• Global inflation in inputs such as steel, zinc | |  |  | | SIDDHARTH ROY
ECONOMIC ADVISER, TATA GROUP | • Excess demand
• Supply rigidities,
poor output, imports
• Income growth is
driving food demand
• Global inflation in
raw material cost
• High petro tax robs
low crude price benefits | | SHANKAR ACHARYA
MEMBER, ICRIER BOARD | • Accelerated growth
and demand pressure
• Medium-term weakness
in agri growth
• Mismanagement of
wheat stocks
• Global price rise due
to growth in China
• Expectations fuel rise | | |
Index |
Moderate overheating – the economy growing beyond its capacity – this is reflected in the prices of manufactured products growing by about 6 per cent over the last year – temporary, amenable to monetary policy.
