Wednesday, August 20, 2014

So many theories but what is the solution?

The Food and Agriculture Organisation says that its Food Price Index increased by 9.6% from 1990 to 2013 but the Wholesale Price Index for food in India increased by an eye watering 51.4% during the same period. While FAO index for foodgrains increased by 12.5%, India's WPI increased by 47.2% from 1990 to 2013. The FAO diary index increased by 22.0% while the WPI in India increased by 43.9%. Only the prices of edible oils increased by exactly the same amount of 15.9%. Apparently the reason is that the government controls prices by increasing import tariffs when there is surplus production in India, thereby stopping the import of cheaper alternatives, and bans exports during shortages, to keep prices down by stopping further reduction in supplies due to exports. This reduces volatility in prices but a closed market results in high average prices over the long term. These maybe indirect causes but the government raises prices of food directly by paying a Minimum Support Price for foodgrains, which is higher than the market price. Since the majority of people are still dependent on income from farming they form the largest ' vote bank ', which no politician can ignore. By promising a 50% profit on farm produce our Prime Minister virtually locks in food inflation forever. This higher price is guaranteed only for grains, which can be stored, so that naturally encourages farmers to switch land to grain production leaving less for producing vegetables whose prices are rising daily. The MNREGA scheme which pays the rural poor for 100 days a year, for doing nothing, caused rural wage inflation by putting a floor under wages for labor. RBI Governor, Raghuram Rajan thinks that MNREGA added only 10% to inflation and the rest came from MSPs. The massive government spending on these schemes caused the fiscal deficit to balloon and that combined with inflation caused the rupee to tank. The weak rupee in turn caused the price of diesel to rise by 19%, fertilisers by 9.7% and electricity by 12.7%, increasing cost of production. Depending on who you ask between 20 and 40 million women have dropped out of the job markets while some 14 million men have moved to construction because of the boom in real estate prices. This has naturally caused a sharp rise in labor costs which is reflected in rising food prices. The massive increase in construction has reduced land for agriculture, thus reducing the ability to raise production to take advantage of high prices. The present government is aware of the dangers of inflation and a falling rupee but it has to stay in power to improve matters. To stay in power it needs to win elections in states which means it cannot stop freebies altogether. Bring down demand by reducing births. Reduce births by linking all subsidies to not having children. Simple but tough.

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