Economics for Everyone – Inflation: Impact on the Nation

The graph of inflation and that of the blood pressure of the United Progressive Alliance ministers have become highly positively correlated, what with national election not very far away.

Mar 10, 2014 11:03 IST India Infoline News Service

The issue


The graph of inflation and that of the blood pressure of the United Progressive Alliance ministers have

become highly positively correlated, what with national election not very far away.


Not surprisingly, we are witness to a flurry of frantic actions and threat of even more frantic fanatic actions to show to the whole world (electorates) that the fight against inflation is very much on.

And, whenever that fails, one can always fall back on the tried and tested formula of blaming the global

phenomenon having engendered the local problem.


Not that this attribution is baseless. There is indeed no gainsaying the fact that inflation has indeed taken a global hue with food and oil prices running amok all over the world. And, the rise in food and oil

prices is more a reflection of runaway commodity prices.

Inflation rate grew by a faster 7.60 per cent in May from 7.14 per cent in the previous month, on higher

prices of food items, including jaggery and fish.

The RBI Governor recently admitted that inflation in India's food prices is much higher than the country's 'tolerance limit' necessitating a comprehensive review of the situation." We anticipated some inflationary pressures but it turned out to be more intense and we have to examine all aspects of the situation, both global and domestic,


Rising prices have forced India's United Progressive Alliance government to take urgent measures -- like banning export of non-basmati rice, pulses, edible oil and cement -- to rein in runaway inflation. High inflation rate has taken a political colour in the country with the opposition Bharatiya Janata Party and Left allies accusing thegovernment of its failure to address the aam aadmi's woes.

According to India Inc, however, the highest point in inflation is yet to hit India. A new survey says that nearly two-thirds of the executives in India expect prices to flare up in the next six months. The report -- Economic and Hiring Outlook, First Quarter 2008: A McKinsey Global Survey -- states that as many as 64 per cent of Indian executives expect the rate of inflation to rise in the next six month, while only 20 per cent expect a decline in the rate of price rise.


Among the products primarily responsible for the current inflation are food products of different kinds,

including cereals, intermediates like metals and the universal intermediate, oil.


Some of the reasons for the spurt in prices of various commodities:


  • Impact of high oil prices: High crude oil prices affect agricultural costs directly because of the significance of energy as an input in the cultivation process as well as in the transportation of food.  
  • Increase use of bio-fuels: Many Western countries have promoted bio-fuels as an alternative to petroleum. This has led to significant shifts in acreage as well as use of certain food grains. For example, Brazil uses sugarcane to make bio-fuel and the European Union uses imported vegetable oils to make bio-fuel. This has reduced the available land for producing food the world over. As global food andcommodity prices rise, the impact is felt by India too.
  • Neglect of agriculture: The prolonged agrarian crisis in many parts of the developing world; excessive use of groundwater and inadequate attention to preserving or regenerating land and soil quality; lack of attention to relevant agricultural research and extension; overuse of chemical inputs that have long-run implications for both safety and productivity have cumulatively led to inflation.

    Reversing these processes will take time and substantial public investment. Until then, global supply conditions will remain problematic.
  • A change in market structure: This allows for greater international speculation in commodities. It is often assumed that rising food prices automatically benefit farmers, but this is far from the case, especially as the global food trade has become more concentrated and vertically integrated.

Individual households claim to have opted for major cuts in their daily budget. "If the government doesn't do anything to address your woes, we are left with no option but to choose a lower standard of living," they say in unison.

Some of the largest increases in food prices have been in Mumbai. Here food is brought over long istances by truckers who are now paying much more for fuel as the government has passed part of the increase in world oil prices on to the consumers.

Wholesale price index has accelerated to 6 per cent from 4 per cent in January. Consumer price indexes have risen nearly 7 per cent in urban areas over the past year and almost 9 per cent in rural areas,
where more than two-thirds of the population lives and where higher food prices are having the worst effect.

According to small and medium level traders, they have been doubly hit. Rising prices are eating into the olume of import of products; an increase in sales price tags is barring the entry of more consumers. "As a result, they can import less and can sell even lesser amount of products," With prices of essentials going through the roof, it has been extremely difficult for them to accumulate capital. As a result, they can procure fewer amounts of goods and can sell even fewer products. Inflation is directly gnawing at their very existence."

What is alarming is that small and medium businessmen are not backed by enough ca

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