‘Inflation and growth’

The editorial “Inflation and growth” (Business Line, March 25) rightly points to the
trade-off between growth and inflation. “Rising inflation and falling growth” smacks of a
mild stagflation that was lurking around in its sinister form during the 1970s. The
current situation in the country is not all that frightening. But there is hardly any room
for complacency as inflation is touching 6 per cent. That points to the worrisome
prospect of its closing the gap towards double-digit inflation. Steadily rising food prices
seen during the last few weeks, unless stemmed, pose a real danger to the stability of
the economy as they might upset the growth applecart.
The cereal price index has gone up by 6.28 per cent. 
The vulnerable poor will have to fork out more on food items out of their  meagre and
shrinking income in the absence of alternative income avenues.
The government’s pre-Budget Economic Survey (2007-08) proudly declared: “WPI 
recorded an inflation of 3.9 per cent on January 19, 2008, down sharply from the 6.3
per cent inflation rate a year ago.”
The triumphant tone sounds hollow as the WPI at 5.92 per cent has surged  with a
vengeance during the week ended March 8, 2008, in less than a month.
The primary articles group (foodgrains, etc) index marked a lower rise at  3.8 per cent
than 10.2 per cent a year ago. These commodities contributed 22 per cent to overall
inflation as against 35.4 per cent last year. Primary articles were the major drivers of
inflation in 2006-07. These drivers are back in the seat.
The rise is reminiscent of the rampant food prices that prevailed last year  also.
Prices of pulses such as  moong, arhar, gram, masur, urad and grains such as rice and
wheat did go up last year.
The government’s response by holding futures trading in a few commodities as 
responsible for the rise in the prices and banning futures trading in these, seems
retrograde in view of the subsequent evidence to the contrary. This time around, food
inflation is likely to be more acute, exacerbated as it is by the overall global tight food
situation and persistently rising demand for food (besides fuel) from emerging
economies.
The editorial has rightly pointed out that under the circumstances,  policymakers must
address two distinct issues — fiscal and investment policies have to boost farm
production and, in turn, food supplies, and, given the high global prices, increasing
imports would only stoke inflation.
Indian policymakers need not be complacent in the belief that the country  has close
to $300 billion to finance import of foodgrains. The point is if food inflation is an
international phenomenon, the grain-exporting countries will first cater to the needs of
their populations, and export the surplus.
Frankly, there is not much exportable surplus of grains in the world. 
An indication of this can be seen in  The Economist commodity-price index (London)
that reached a new peak on March 4, driven by investment fund buying that added to
strong demand from consumers in the emerging economies. Yet there is no alternative
to a long-term agricultural strategy that focusses on public investment, sound rural
infrastructure, a fair return to farmers by way of fair prices, crop insurance and
protection against volatile agricultural prices.
The time has come for revoking the ban on futures trading in a few cereals  and pulses
that was imposed last year, if only to ensure fair prices to farmers.
Farmers will then continue to invest in agriculture and help boost its share  in GDP.
The falling share of agriculture in GDP is not a sign of its being an advanced or mature
capitalistic economy a la the US or Japan but a danger signal that points to stagnant
agriculture and falling productivity that call for stringent measures.
Nausheen Shaikh Amrita