Price we pay

The government has reacted to the sharp rise in prices of wheat, pulses and vegetables by measures for demand and supply management. Allowing the private sector to import wheat is welcome. Indeed, it should use the opportunity to decanalise the imports of all agricultural commodities. The way forward is the same as that followed for manufacturing. First, allow the private sector to import and then slowly bring down custom duties giving producers time to become competitive in a global environment. Consumers can expect to gain the same way as they have gained with respect to cars and electronic goods. Variety increased, goods became cheaper and quality has improved.

The transition to an open agricultural sector will, no doubt, have to be managed very cleverly. The short term pain to poor farmers as well as the political strength of farmer lobbies will pose huge challenges. Yet given how Indian manufacturing stood up to the world, there should be no doubt Indian agriculture will come out the winner if policies are right. Our comparative advantage in labour intensive crops like fruit, vegetables, horticulture, etc can increase both employment and incomes in rural India. The move towards cash crops and globalisation is not something that policy can prevent. The government can make the transition smoother, put in measures to absorb shocks and help farmers with infrastructure like better roads, power, cold storages and inputs. Or, it can pretend that Indian agriculture can remain insulated from the rest of the world forever, and not give it a conducive environment to make this transition.

The inflation rate in manufactured goods has also risen more than one percentage point since April 8217;06 8212; another issue to address. Annual inflation based on WPI-Manufacturing rose from 1.82 on April 8 to 2.93 on June 10, 8217;06. India is not the only country where inflation is rising. It is a global phenomenon. As a country that trades many commodities including oil, India cannot escape the ups and downs of the global inflation cycle. At a macroeconomic policy level, India8217;s fiscal policy is on its way to becoming increasingly expansionary and even discussing a contraction in government expenditure to pull down the inflation rate appears to be pointless at this juncture. This will leave the burden of tightening on monetary policy. The trade off between growth and inflation will pose a difficult choice for policy makers, especially in the next two to three years. Many hard decisions may need to be made.