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Inflation can indeed be brought down

CA Anil Garg 
on 02 January 2014

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Ever rising food prices have been hurting everybody in India for last several years, taking sheen out of otherwise spectacular economic growth so much that darling of the world recently during President Obama’s visit a few years ago has become laughing stock of the world! This has forced government to retreat to socialism under the newly devised synonym “Inclusive Growth”. That it may take India back to pre-reform era seems to be nobody’s concern. RBI and Finance Ministry have squarely failed to control inflation, simply because they have stubbornly refused to look beyond the mechanical tool of monetary policy to control inflation which was never relevant in the first place.  Their competence is in question but competence has never been a quality of our governments anyway.

The root cause of ever rising prices of essential commodities is :-

1. Mismatch of Demand & Supply

2. Sharp increase in demand for goods, due to increase in disposal income of the people, thanks to spectacular GDP growth since 90s.

3. Failure of supplies to keep pace with increased demand.

4. Hoarding of goods to create artificial shortage and push up the prices.

Nothing can be done about the increase in demand. In fact, it is an advantage for India because increase in demand should encourage more investment in creating new capacities to increase supplies, which will bring higher levels of prosperity to India. But it is not happening much, and supplies are not increasing as much as demand.

Theoretically, investors and entrepreneurs, both domestic as well as foreign, should find this gap between demand and supply exciting, and they should jump at the opportunity by making investments aggressively. But it is not happening. The answer lies in the fact that India remains hostile to business which is reflected in our worsening ranking in the Ease of doing business index where we rank 134 out of 184 countries, and in the Global Competition Index where we rank 60 out of 148 countries. If businessman finds it difficult to do business in India and finds that he is unable to compete with other countries in the world, he will surely not be keen to expand his business even if he is not thinking of exiting it altogether. So, the solution lies in making India business friendly which will be reflected in India’s position on Ease of Doing Business Index. If that improves, most certainly India’s position will improve on Global Competition Index as well. Governments, whether Central or State, must take note of these global rankings and resolve to bring India to top 10 within time bound programme.

However, a short term solution to deal with mismatch in demand and supply could be permitting imports and exports of all goods without government intervention. This will be a major economic reform anyway. Traders should be allowed to export or import goods whenever they want. They will export when domestic prices are lower than export prices, meaning when there is an over-supply of goods in domestic market. Likewise, they will import when domestic prices are higher than international prices meaning a shortage of supplies in domestic market. This way, government can ensure relatively stable pricing pattern in the domestic market and also improve India’s reputation in international market which is currently very poor due to volatile and arbitrary import-export policies of the government.

Unfortunately, current generation of babus and netas are incapable of appreciating these solutions. They don’t appreciate business, global rankings etc. They never speak about these global ranking. Even Narendra Modi, regarded as the 25th avtar of Lord Vishnu by his supporters, has never spoken about these issues. In fact, these babus and netas consider business as necessary evil and deal with it as an evil. Unless they understand that business alone can bring prosperity to India and nothing else, they cannot benefit from it. India has been paying heavy price this misunderstanding through 6 decades of lost prosperity, and will continue to do so until a revolutionary leader emerges on the horizon. Not in sight yet, so please don’t cherish any hopes as yet.

Hoarding is an equally strong factor responsible for artificial shortage of goods in the market leading to aggressive price increase. The governments in India have always been happy to attempt to solve any problem by issuing orders and making new laws. Unfortunately, most problems cannot be solved this way but at least hoarding can be solved this way. It can be prevented by :-

1. Invoking essential commodities laws to mandate compulsory licensing for storage of goods subject to such aggressive price increase. This can be done by having a dynamic schedule to the law to be revised frequently to include items where hoarding is suspected, and to remove items where market mechanism has perfected itself to prevent risk of hoarding in foreseeable future. Once government knows who are the people authorized to hold stocks, it can further prescribe stock limits and keep reducing them to force liquidation of stocks, conduct raids and audits to check the records and even check the audit trail of movement of goods from manufacturers to the traders and from there to the market. If there is any tax evasion, that can be checked through such measures as well.

2. Getting RBI to prescribe dynamic margins for bank credits against stocks of such items which can be increased frequently to reduce bank finance for stocking of these items and eventually, deny bank finance altogether if prices refuse to come under control. This way, RBI can also avoid hurting general investment sentiment by needlessly increasing interest rates vitiating the investment climate and further discouraging easement of supply position, and eventually, achieving opposite of what RBI says it wants to achieve, reduce price rise.

Union Agriculture Minister has recently challenged Arvind Kejriwal to reduce the prices of onions now that he has won elections. That he simultaneously reduced the export price of onions by half and thus, facilitated more exports and thereby reduced domestic availability further, which could only push up domestic prices, is another matter. We Indians seldom practice what we preach. Still, Kejriwal should immediately invoke essential commodities and such other laws as available to him, to prevent hoarding. He could also demand through a resolution in Delhi Assembly, that RBI prescribes separate margin requirements for these items to be increased frequently in order to reduce and ultimately deny bank finance for stocking of these items, and to abstain from generally restrictive monetary policy which is hurting investment climate needlessly.

RBI could also be advised to consider money supply to GDP ratio of other countries with far lower inflation rates, like Singapore and Hong Kong where this ratio is in excess of 3 and yet the inflation rates are about 3% whereas this ratio is just about 0.75 in India and yet, we have hyper inflation. RBI must acknowledge that it has been pressing wrong buttons to control inflation and is the main culprit to hurt sentiments together with over-zealous Pranab Mukherjee when he couldn’t resist temptation to rob Vodafone through retrospective amendments to define legislative intention of 1961 which he must have learnt through some heavenly communication in 2012!


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