By Dr. Gyan Pathak
“An explosion of food and energy prices for those that are better off in inconvenience – for the poor people, tragedy,” says IMF Chief Kristalina Georgieva while sounding global warning that there would be “people on the street” unless steps are taken to protect the most vulnerable. To prevent such a situation in India, Modi government will have to make a tightrope walk between fiscal and monetary policies.
Inflation in India has been largely driven by the rising food prices which directly affect the poor and the vulnerable. Since the lockdown in 2020 India has been distributing free food grains to support 80 crore people out of 140 crore population. If the scheme is not extended beyond September 30, 2022, such a huge population will have no option but to suffer the most, because food prices have become unaffordable for majority of them.
However, such a fiscal policy, though it is absolutely necessary to save the poor of the country, would go against the monetary policy that targets to keep the inflation under control. Fiscal policy is decided by the Government of India, while the monetary policy is decided by the Reserve Bank of India (RBI). For Union Government, liberal fiscal policy is an option, but for the RBI there would be no option left but to increase the interest rate in the present circumstances of inflationary pressure.
Such a condition would on the one hand increase the demand and push up the prices again on the other, and then there further tightening of the fiscal and monetary policies would be required. It would be a vicious circle and Modi government needs to rescue the economy and the people by restoring the right conditions for growth, of which price stability is a critical condition. Higher interest rate would increase the cost of investment and input which would further push the prices up.
The data available on the Department of Consumer Affairs portal shows that the all India daily average retail prices of rice were higher by 9.03 per cent, wheat by 14.39 per cent, and wheat flour by 17.87 per cent compared to a year ago. The all-India daily average wholesale prices of rice were higher by 10.16 per cent, wheat by 15.43 per cent, and wheat flour by 20.65 per cent.
Rice is a staple food in the entire country, and the Ministry of Agriculture has just estimated the kharif rice output at 104.99 million tonnes which is lower than 111.6 MT (6 per cent less) compared to the production in the last kharif season. The Ministry has therefore admitted that the domestic prices of rice are showing “increasing trend” and it may “continue to increase” at least for a year until the next kharif season.
The dip in kharif production is significant, since rice is being distributed under the National Food Security Act. It would pose new difficulties in procuring sufficient quantity or rice for Public Distribution System of the country. It should be noted that India has recently banned rice-export to keep the domestic prices in check, but failed. Domestic prices of rice continue to rise.
The Ministry has said that the changes have been done keeping in mind the need to support the ethanol-blending programme that saves costly oil imports and to help the animal husbandry and poultry sector by reducing the cost of animal feed that has a bearing on the price of milk, meat, and eggs. However, export of broken rice has increased by more than 43 times in the past four years from just 0.51 LMT in 2019 to 21.31 LMT during April-August 2022. It has impacted the domestic prices of broken rice from Rs16/kg to Rs22/kg in the open market. It adversely increased the input cost for poultry and animal husbandry by 60-65 per cent which in turn increased the price of meat, egg, and milk, contributing thereby in the food inflation.
Modi government has very narrow options in this regard. One the one hand it needs not to divert grains to industries for ethanol production when very large population above 60 per cent needing free food grains because they cannot afford to purchase them at market price, and on the other it needs to divert it for ethanol production to keep oil prices in control and saving precious dollars.
Modi government seems to have no clue as how to tackle the ticklish situation. They are simply following the policy of wait and watch for now, though inflation is hovering near 7 per cent which is an eight-year high, and much higher at tolerable limit of RBI range of 4-6 per cent. Reducing it to 4 per cent is found to be difficult by the RBI through its monetary policy, since it fears aggressive rate hikes could hurt economic growth.
Since growth and inflation have to be balanced, both the fiscal and monetary policy would need very careful consideration. However, responsible officials in both the Union Government and the RBI agree on the need to bring down inflation below 6 per cent which they find comfortable. Despite accommodative stance with growth bias, RBI could not prevent retail inflation to rise to 7.79 per cent, highest in eight years, in May, which was driven by steep hike in food prices. Inflation remained high thereafter and even in August it was above 7 per cent again due to higher food prices. It has tremendous pressure on RBI to raise interest rate, and within a week on September 30, we would know about the RBI action since report on Monetary Policy Committee is due on that date.
Modi government has tweaked is fiscal policy in recent months which has included reducing taxes on gasoline and diesel and imposing curbs on export of rice, sugar etc, which also failed to bring the inflation below 7 per cent. With economic growth of 13.5 per cent in fist quarter of 2022-23, Modi government has resorted to propaganda of good governance to sooth people’s strained sentiments, but it is only political. The fact is, it is below the RBI’s forecast of 16.2 per cent for the period threatening the overall growth projection of 7.5 per cent for the full year, and now the latest international estimates forecast it to be only 7 per cent due to elevated inflation and tighter monetary conditions.
India is certainly undergoing a severe “cost of living crisis” and the poor vulnerable people are being shaken by the “food-shock”. Modi government must find out ways and means to overcome the crisis rather adopting a policy of wait and watch, which would induce further shocks after shock. (IPA Service)
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