Why inflation will not come down with same policy.

the food inflation is something which is really threatening one for the current government; people of India can tolerate anything but the inflation; on top of it there exist the highly exaggerating media which describes the ailing condition on food prices on almost hourly basis. The government track record has been pretty shabby, in spite of all the repeated claims of PM and FM, it has remained on 7-9 percent corridor, the condition of food items has been typically worst, the inflation of the food items have been hovering around 17 to 20 percent mark for almost an year now.








The causes, as described by agriculture minister Sharad Pawar are typically from global warming to the increase in the minimum support price that government offer to the farmers, while on the financial side; Montek Singh Ahluwalia, deputy chairman of planning commission says, since per capita income of Indians have risen considerably, they should be ready to pay more.





Unfortunately all these reasons look more of an excuse than anything else, Let's first see how inflation works; nation adopt currency and decide that all the goods in the country would be measured against the currency, it is very important to make sure how much notes are printed, if you print loads of currency notes; more notes would be im market thus more notes would be required to buy a good, for example, if today government decides to flood the market with twice as much rupees notes as of now, price of the milk which would be at 20 rupees a liter would increase to 40 rupees a liter, but imagine the additional currency that has been released in the market has been distribute unevenly, (say 20% people get 80% of the excess notes pumped by governemnt) those 20% can afford to buy the milk easily but those who have fixed income have to pay more for the same milk, here starts the problem, since one has to consume milk, the person would start saving the money more and would spend less in leisure and thus the industries such as manufacturing and cinema halls will face the music and the recession spiral would start. Hence government has to be on it's toes to make sure prices remain stable, it is also termed as regressive form of taxes which affect poor the most.





Coming back to Indian context, why the inflation has remained so high? There are some fundamental errors that has been committed which has resulted in the today sky high prices, Let's take it one by one...

1. Useless public expenditure and rising fiscal deficit.

Former RBI Governor, Bimal Jalan in his book, Indian fiscal policy in 21st century has said "fiscal deficits are not unpopular however same can't be said about inflation" however; there exists a direct correlation in between the two, if fiscal deficit will increase; there would be less money in the government treasury than it should be, so where this difference of money goes? It goes in the market, look at the example above, once there is more currency in the market; value of it will decrease, what will happen next? the prices would increase. Congress led government allowed the fiscal deficit to increase in 2006-2008 period, FM keep on assuring that things are under control. However it was not! allowance of high fiscal deficit has resulted in this inflation. The governments, irrespective of whom so ever party in in centre; has failed to understand the importance of decreasing fiscal deficit; they like to spend more in popular schemes, which might help in gaining the short term success but in longer run; it is people who have to pay back with the higher prices. So when Mamta Banerjee says she cares about the poor by giving some relaxations to poor in cost of maintaining the fiscal deficit, she is actually giving them from one hand while taking even more from other! Something which displays complete lack of vision.



2. Increasing Minimum support prices of FCI for no reasons
There exists a committee that takes the call on all the minimum support price which FCI food corporation of India pays to the farmers, the stock of FCI is used by the government sponsered PDS schemes as well as a tool to maintain the the stable prices in the market; This unfortunately has been used as a political tool, governments for long has used MSP as a political instrument while displaying themselves as more farmer friendly, historically the prices of the MSP are artificially fixed very high than market prices, Congress government from 2004 onwards has increased the MSP from an 20 to 60% until 2008, if government is paying more to the farmers, from where the additional money that has been gifted to farmers would be recovered? It would be from market. More expensive you will purchase more expensive you have to buy, this flawed policy hurts government economics too badly, the food subsidy has to be increased, (since you have to keep the price which you sell to poor constant while the purchasing cost has increased), would further cause the fiscal deficit to increase, creating a spiral effect!

Sanjay Nirupam, congress MP from Mumbai participating in the price rise debate in Loksabha pointed out a very important point, since the government has increased the MSP for farmers, so one should expect the price rise, while he cleanly discarded the fact the poor farmers would be in the line of fire once the price would increase.



3. Hesitation on retail reforms

Imagine if there were only BSNL were in the telecom market; one have to stand in the long queue to get a Internet connection, service would have been pathetic, something Indians are very familiar since India has for 40 years adopted the socialistic and communistic model of economy. the 1991 NIP tried to address the causes resulted in India turning the most booming telecom markets of the world, but the same has not been done in the retail sector, still there exists the monopoly of 1960s by those contractors who buy cheap from typical thok bazars and sell dear in the local market, stocking and black marketing are another blemishes of this system, why can't this sector be reformed and ensure there exists enough competition so that people get the best deals? populist leaders cite the poor dukandaar who would loose everything to big corporate houses once such reforms are adopted, however the same concerns were also raised when India opted for free market economy in 1991, what happened next; everyone knows, Mayawati government decided to close "Reliance fresh", citing the same old reason, potentially loosing an window of opportunity.



One has to acknowledge that there exist a trade off between the growth and inflation, however a wise fiscal policies and keeping the medium and long term vision, can ensure that high growth rate can be achieved by keeping inflation checked, finally problem converges to one one single point; governments lack the vision and the will to carry out any functional and structural reforms to combat the inflation.