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Inflation Is Mehangai Not Just Price Rise

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The new government’s first priority should be to tackle inflation, says Ajit Ranade, Chief Economist, Aditya Birla Group. To do this, he believes it needs to address lacunae on the policy front — both fiscal and monetary. In an interview with BW’s Joe C. Mathew, he talks about the need to involve the private sector and curb corruption to address the problem of price rise. He also stresses the need to pay more attention to agricultural productivity.
Edited excerpts:

What should the new government do to tackle inflation?
First, the government needs to acknowledge that this is an India-specific problem. If you look at the rest of the world, in most of the developed countries, we have low inflation.

Even in other emerging markets like ours, the pressure on the inflation front is relatively low. The second step is to acknowledge that government policy has something to do with it.

What do you mean by policy? Can you explain?
In other countries, the (inflationary) problem is linked to the housing price bubble or the asset price bubble. Here, we are not talking about such bubbles; we are talking about real inflation in the prices of food and services consumed by people. We need short-, medium- and long-term policies to address this problem. In a growing economy, when the national income is soaring, when citizens’ consumption patterns are changing, there will obviously be an increase in demand for, let’s say, food. If there is more demand for products such as milk, pulses and eggs, then the long-term policy angle will be to ensure that the production  of these items catches up with demand. If our growth in productivity has consistently failed, you need policy measures to correct that.

Do you think our inflation indicators are capturing the right elements? Will addition of the services segment make a difference to inflation figures? 
Inflation, in India, is not a measurement problem. Irrespective of whether you include housing or services — which reflects the changing consumption pattern — to make inflation measurement more representative, the problem will remain. I would like to make a point here about inflation as it is understood in English, and its Hindi counterpart, mehangai. I think the Hindi word means unaffordability, whereas in English, the word tends to focus on the increase or decrease in prices in percentage terms, especially among analysts. Inflation is not a problem in the English sense of the word. Unaffordability is the problem. People have a fixed budget and when the budget gets squeezed, a lot of things become unaffordable. When people talk about increase in prices, they are talking about unaffordability.

So, it’s the reduction in purchasing power of the rupee that is hurting most?
Yes. It is not the percentage debate. It is the lowering of the purchasing power that is hurting. If you take the past 10 years’ record, the rupee has lost more than 60 per cent of its purchasing power. Our population will continue to grow and so will our national income. So, unless we have a single-minded focus on enhancing productivity of the economy, inflation will get worse.

Then, what is the solution to controlling inflation?
I feel inflation has to be tackled cooperatively. It is the cooperation between the fiscal and monetary authorities that will do the job. And, I believe the lion’s share of the burden is on the fiscal authorities (the finance ministry). For example, Indian industry has continuously faced pressure on administrated prices of railway freight, entry taxes, port charges, toll, coal linkages and even royalties — all these are administered prices and if you look at these, over the past seven to 10 years, there has been a huge push (in these areas). So, if your procurement prices are too high, then you can’t increase the public distribution system prices and the gap between the two adds to the food subsidy and that is directly contributing to the fiscal deficit.

Can you give an example?
When the Golden Quadrilateral project was implemented some 10 years ago, potatoes from West Bengal began reaching far off places. When there was no connectivity, potatoes had a captive market in Bengal. With better transportation and highway connectivity, all this changed. If you supplement that with better storage and cold chain facilities for various agro-based commodities, their supply chain bottlenecks can be reduced. In this, private investment can play a significant role. For instance, in organised retail, private sector investment in warehousing and cold chain facilities can enable the retailer to have a direct arrangement with farmers for their produce.

Can reducing corruption help fight inflation?
This is a hypothesis I would like to examine in detail. Three years ago, at Delhi’s Ramlila Maidan, an old man stood up and claimed that the root cause of inflation in India was corruption. I cannot deny that. Corruption definitely adds to the inflationary trend. Take, for instance, supply chain inefficiency. Let’s say the local mafia controls the procurement process. In such a scenario, price discovery will not be as accurate as it should be. So, it is a fact that cost increases when there is a corruption in the supply chain.

How do we increase productivity? Does the private sector play a role?
When we say productivity, we essentially mean investment. Productivity enhancement is all about investment and innovation. It is fundamentally done only by the private sector. The government can provide better infrastructure, better electricity, roads, etc., but ultimately, an increase in productivity happens because of private
sector engagement.

What should be the new government’s top priority?
Economic reforms largely bypassed agriculture. Therefore, there are a lot of low-hanging fruits in agriculture. Essentially, the aim should be to increase farm productivity to have a better alignment between resources and crops. For example, in Maharashtra, 60 per cent of water goes towards sugarcane production, which is cultivated on just 3 per cent of the land. So, we need some balance between crops and the resources they consume. We need to greatly enhance our rain-fed agriculture. We need a better integration of agri-processing with agriculture, and we need to allow private sector players to be directly linked with farmers.  There is great promise in the business of farmer cooperative companies.

Apart from infrastructure and agriculture, any other sectors that the government should focus on a priority basis as part of its inflation tackling efforts?
There are so many areas where you can link enhancement in infrastructure with increase in productivity, and therefore ease the pressure on prices.

What are the other areas that affect inflation?
Increase in support prices for various foodgrains, agricultural products, the raising of the minimum wage floor in the  national rural employment guarantee programme, food and fertiliser subsidies — all of these contribute to inflation. But I would not want to make them the central
villains of the piece. 

joe@businessworld.in 
twitter@joecmathew

(This story was published in BW | Businessworld Issue Dated 16-06-2014)
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