Opinion With Russia-Ukraine conflict, comes inflation challenge

India is not impervious to this tendency. Most of the major banks in the country, including the State Bank of India, offer interest rates between 3 to 4 per cent to depositors. With CPI inflation at 6 per cent and WPI inflation at 13 per cent, Indian depositors are fast losing the real value of their money because of this hidden “inflation tax”.

Both the finance ministry and the RBI are betting on revving up growth, at least for the time being. This is fine as long as they can tame inflation within reasonable limits. Even the upper limit of RBI’s tolerance band has an in-built bias against depositors and is in favour of entrepreneurs, accelerating inequalities in the system. If we want to do justice to the masses on whose deposits the entire banking system hinges, one must ensure positive real rates of interest. To do this, one must ensure lower rates of inflation, preferably below 3 per cent per year.

How can one do that in a country like India? Given that food has a weight of more than 45 per cent in CPI in India, understanding the dynamics of food inflation is critical. India imports roughly 60 per cent of its consumption of edible oils, and global prices of edible oils have gone up by more than 50 per cent over the last year. Edible oil inflation in India was touching 35 per cent a few months back. This has come down to 18 per cent after the reduction on import duties.

The Union Minister of Commerce has also recently claimed that they have brought down the inflation in pulses by imposing stock limits on traders and by lowering import duties and importing more pulses. The Centre has also imposed stocking limits on domestic oil/oilseed traders. One wonders why it does not impose a stock limit on wheat and rice with the Food Corporation of India. After all, the FCI is the biggest hoarder of staples. As on January 1, it is saddled with stocks that are almost four times the buffer stock norms. By unloading the excess grain in the open market, FCI could help in bringing down food inflation substantially as rice and wheat have a high weightage in CPI. The problem, however, is that the economic cost of rice and wheat to the FCI is way above their market prices. The unloading of excess stocks will, therefore, have to be done at prices much lower than their economic cost — the FCI will incur huge losses that are hidden in the “food subsidy”. In the name of the poor, India runs one of the largest but perhaps the most inefficient and corrupt public distribution system (PDS) in the world. The system is crying for reforms, but no political party has the will power to take it head on for fear of being branded as anti-poor.

Every political party promises freebies before elections. In the current round of state elections too, political parties are competing to promise loan waivers and free power to farmers, unemployment allowances to the youth and income support to women. Some have even promised laptops, smart phones and electric scooters. This amounts to misusing taxpayers’ money to get into power. Unless the Election Commission comes down heavily on such promises or a public interest litigation is filed in the Supreme Court to stop this competitive populism, Indian policymaking cannot be growth-oriented.

In this context, it may also be noted that India’s food subsidy policy covering 67 per cent of the population and distributing rice and wheat at more than 90 per cent subsidy under the National Food Security Act of 2013 was the UPA’s last-ditch attempt to win the 2014 parliamentary election. It lost the polls, but the policy has remained stuck. The Narendra Modi government has so far not summoned the will to either raise the issue price under PDS or reduce its coverage to only those below the poverty line — defined as per the Rangarajan Committee or by the NITI Aayog recently under its multi-dimensional poverty index.

It is important to reform the grain-management-cum-food-subsidy system to release precious resources for growth of agriculture. This should be combined with taking giant strides to raise productivity and producing more nutritious food while protecting the environment. The paradox of Indian policy making can be judged by looking at the Union budget for the 2022-23. It provides more than Rs 2 lakh crore for food subsidy while agri-research and development gets a paltry Rs 8,500 crore — even though it’s well-known agri-R&D gives a much higher return in terms of promoting growth with competitiveness, and reduces poverty by making food cheaper and controlling food inflation.

This column first appeared in the print edition on February 28, 2022 under the title ‘So that the war doesn’t hit us’. Gulati is Infosys Chair professor for Agriculture at ICRIER