Opinion The season to choose policy

When you grow in per capita terms at around 6.5 to 7 per cent every year,while demand for cereals grows slowly,the demand for vegetables,milk,meat and tree crops grows very substantially. This is happening in India somewhat suddenly and is leading to not only the resurgence of income possibilities for the agricultural sector but also wage-goods inflation becoming a constraint on macro policies.

Agricultural growth is 5.4 per cent,but comes after a low base. The PM’s Economic Advisory Council is right in saying that grain production is not rising,but that is also on account of nobody wanting more grain. This year the performance on rice,wheat and pulses is impressive. But the average growth of the last three years is less than 2 per cent,which means that a half per cent of GDP is weather-related and fuel inflation was around 15 per cent,although the former is showing a seasonal downturn. It would be imprudent to relax one’s guard.

Bad rains — deficient,but also untimely — and poor policy could also boomerang. The latter would include subsidising three-quarters of the grain market,which some policy-makers want. Economists have argued against this — both for macro policy constraints,but also,importantly,for fashioning a focused food security law,a very important initiative.

Corporate results in the year’s third quarter show the impact of rising costs. Manufacturing growth is half of the first half of the year. Interest rates are high at around 10 per cent. As the PM said,inflation is a threat to the growth rate if glossed over. The January figure was 8.23 per cent,largely led by food and fuel. Food is not an immediate concern but it is now spreading to a more general inflation,with manufacturing prices edging upwards on account of higher input costs.

High fuel prices can cause macro pressures,through food,fertiliser,fuel subsidies and direct government expenditures. Salary bills will be higher. These are matters of concern. Pre-budget noise about linking fertiliser prices to gas prices for subsidies,and about adding more tax sops to power projects,is by itself innocuous — but shows a definite trend to sidestep basic reform on energy- and nutrient-based prices. If the principles of such sovereign interest policies are not stated clearly and transparently,there is always the possibility of interest groups hijacking the implementation.

At this stage,forecasting is hazardous,given the fragile political economy of reform,the compulsions of coalition politics and the fact that state elections are coming. But the outlines of various alternatives are clear. It is almost certain that radical fiscal policy steps in terms of expenditure cutting and revenue increases are not on the agenda. It is hoped that at least the pre-stimulus tax cuts will be restored,as they are the world over. There are larger constraints here: for example,the RBI consistently maintained that monetary policy has limits given the fiscal overhang. Pressure on interest rates will continue,even while they will be seen as a major instrument of inflation control.

Trade and tariff policy will be seen as a source of managing the price rise,even though international agri-markets are highly imperfect — while there will probably be little concern devoted to price incentives for ensuring agricultural supply over the medium term. This combination of priorities would put paid to better supply. For example,export restrictions after price-rises in commodities like onions,rice,raw cotton and so on are common,and their impact is seen in harvest prices crashing. Government policies are reactive rather than taken with advance planning.

While the larger economic environment will be uncertain for domestic agricultural sector supply,reform of the management of subsidies will no doubt continue. Investments in marketing,processing and distribution infrastructure,including FDI,will also continue.

It is extremely unlikely that growth will fall below 8 per cent if the rains are average. It is also extremely unlikely that inflation will not be around 7 or 8 per cent in the next fiscal year. These outcomes will require progress,however slow,on some of the issues this column has been highlighting.

On the other hand,with a bad monsoon,higher international fuel prices,and greater political pressures,things could get temporarily worse,but the sun is always shining outside my cottage in Gandhinagar and so I do believe they will eventually get better.

The writer,a former Union minister,is chairman,Institute of Rural Management,Anand,express@expressindia.com