Opinion Mantras and myths
Food is a macro and not a supply-side inflation
That food inflation is supply-side is a mantra repeated without reference to either theory or facts. It was not so in India as there were always in government braver spirits to stick their necks out in Yojana Bhavan,North block or Mint Street. The supply-side mantra goes back to my planning days. But in those days we had our hands on the levers of the economy which we consciously gave up in the 90s,but when we face a problem we go back to those mantras without the power to act or intention to use what we have.
I did not design the reform of the 90s and remain an agnostic,for there were many ways of doing it. But that is not because I did not know the theory,and that is true today. Supply-side mantras in India go back to a time before that when imports were controlled and if specific commodities went out of a price band you used dual pricing,played the buffer stocks or used limited trade imports,an expression we owe to Vijay Kelkar who developed it for building the first case I know of trading in a bad year three to four lakh tonnes of oilseeds equivalents,not oil,or two to four million tonnes of grain and providing exchange reserves for that so that your strategic investment plans in energy or irrigation infrastructure did not go haywire with wage push inflation.
We gave all that up,correctly so,and the only difference one can have is on phasing and harmonising,but to use those mantras in an open economy,where exchange rates and trade are largely free and public intervention is strictly limited,is both confused and dysfunctional. Which are the specific agricultural commodities in which supply is a bottleneck and prices are rising? If it is general then you have a macro problem and it is not honest to beat the gods and the farmer with a supply-side stick.
The first fact the mantra chanters have to come to grips with is that if you look at the latest GDP forecast,the value added in agriculture,and that includes animal husbandry,
fishing and forestry,as a percentage of private final consumption expenditure,both in constant prices,is 24 per cent in H1 2009-10. It was 24 per cent in H1 2008-09. In plain terms,that means that agricultural supply as a share of demand in real terms is constant. It is not rice price that is rising but all agricultural prices. We know that milk and poultry supply is growing at 3-4 per cent a year in real terms and it is that the CSO tells us which leads to the near 1 per cent growth rate in agricultural GDP for the quarter. The same is true for fruits and vegetables and those prices are rising. These prices rise when the share of output to demand in real terms is constant. Ministers keep on,on kharif grains as the big villain,but both in the price and in the output indices their share is pretty low,in fact around a sixteenth. We do need to get real particularly when we have severely curtailed the PDS and use dual pricing only in sugar to feather a small political nest.
Of course the share of value added in agriculture to private final consumption expenditure in current prices is different from last year and that is the point. We are facing a macro and not a supply-side inflation. Much higher consumer demand is hitting agriculture as a whole. We are living as if there is no tomorrow. You have reached an abyss when prices chase incomes. This emerges from the highly unbalanced nature of our stimulus. Up to this year governments capital formation or investment in real terms is falling in a significant manner by more than 15 per cent every year. We are promised,as in the past,a big increase in investment this year,although there are no signs of it up till now. The slack on account of export and private contraction is in the industrial sector,but our stimulus is only on consumption. President Obama has put the details of his stimulus on the Internet. It is almost entirely on infrastructure. This is true of the Brazilians. So is the Chinese stimulus. The American and Chinese stimuli are much bigger than ours at above $700 billion,but no inflation. We have to understand that we cannot be the last of the big spenders.
If sitting in a village near a nature park I can see this so clearly,the economists working with government a tradition started by the late J.J. Anjaria in every ministry and economics think-tank can surely see it. Speak up and tell us what the real answers are. Nothing will go wrong with you. Remember the big chief is an economist.
The writer,a former Union minister,is chairman,Institute of Rural Management,Anand
express@expressindia.com
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