“You all want that inflation should come down. Neither the Ministry of Finance nor the Reserve Bank has any magic wand to bring down inflation,” said K C Chakrabarty, the Deputy Governor of the RBI, at a banking conclave organized by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) in New Delhi.
Tracing the genesis of the current rise in inflation—headline inflation, as measured by the Wholesale Price Index (WPI) stood at over 9% in May—and its refusal to be tamed by even the hawkish monetary stance taken by the RBI, Chakrabarty, with his usual brutal frankness, further said: “…instead of saying that [the] RBI should bring down inflation, we must increase productivity and bring down the cost of services and that will only bring down inflation. Otherwise, it will not come down.”
Indeed, for quite sometime, the RBI has focused its policy initiatives on containing the inflation—raised interest rates nine times in the last 15 months—even if it meant sacrificing the growth in economy, and yet could not arrest the price rise. Against this backdrop, it is self-evident that the current raising of policy interest rates by 25 basis points by the RBI to bring its repo rate to 7.5%, which incidentally still continues to be way behind the rate of inflation, may not alter the course of price rise, particularly when the widening current account deficit is pointing towards an economy wherein demand for goods and services is outstripping the domestic supply.
All this cumulatively leads to the conclusion that the real remedy for the current rise in inflation lies beyond the monetary policy. Which is why the government has to step in and take corrective action that only it can take. As a first step in this direction, it might as well argue for reining in global commodity prices with G20 group. Secondly, it should work towards fiscal consolidation in such a way that the government expenditure does not create additional demand in the system. Thirdly, it should focus its action on setting right the supply-side bottlenecks.
Of the three, it is the issue of supply-side bottlenecks, which has the potential to feed inflation perpetually, that needs to be addressed on a priority basis by the government. As a long-term strategy, the government has to fix the brewing crisis in Indian agriculture. Around 60% of our agriculture land is dependent on rains. Of course, enterprising farmers from these tracts have created their own irrigation facilities by way of ground water exploitation. But according to a Planning Commission study, the level of ground water extraction is unsustainable in Punjab, Rajasthan and Haryana, while the position of exploitation in the states of Tamil Nadu, Gujarat and UP is fast approaching that stage. With the resulting decline in water levels, the report says that “nearly two-thirds of our farm land is either degraded or sick.” Intriguingly, these six states accounted for half of the food grain production in 2008-09. What will further aggravate the matter is: climate change, for it is the dry land farmers who would suffer most because of it.
But ironically, today, the focus of nation’s agricultural research and extension support, including price support mechanism, is predominantly on irrigated crops. That aside, of late, there has not been enough research—with the money coming in from Indian Council of Agricultural Research going towards salaries of scientists working in state agricultural universities, there remains no money for real research. The net result is: green revolution seems to have run its course, while dry land farming remains as mere subsistence farming.
While the need for quick action on the production front is thus mounting up, the governmental administration appears to be in a ‘gridlock’—gridlock of inaction—bogged down more by the ongoing agitations of Anna Hazare, Baba Ramdev, Civil Society, etc. and such other things that hardly matter for production and economic growth. Alas, who will make the government start working!
GRK Murty
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