Helpless Government amidst Galloping Inflation
by Ashwani Mahajan on 10 Feb 2010 4 Comments

Some time back it was conceded by the government itself that the consumer price index for industrial workers and agricultural workers has increased by nearly 13 percent, as compared to last year. More disturbing is the fact that food prices have gone up by more than 30 percent. Food grains, pulses, vegetable oil and also vegetables, prices of all commodities have doubled, or even more as compared to last year.


Although the effect of inflation is being felt by all sections, the worst hit are the lower income earners or even lower middle section of society. Earlier a worker with 100-150 rupees of daily wages could afford good food, and could even save for rainy days. But today’s hyper inflation has made life miserable for low income earners, who constitute nearly 90 percent of the population; the doors to life are nearly closed for the unemployed.

Although inflation in India is not a new phenomenon, for the past 15 years inflation was largely under control. However, in the last one year inflation has crossed all limits and the life of the common man is badly threatened. Despite repeated assurances from the government, not only do inflationary trends continue unabated, contradictory statements from different organs of the government are making the things even worse.


In addition to hoarding and black marketing, theoretically there are two reasons for increasing inflation. One is increase in demand and other is insufficient supplies. Increase in demand comes from increase in incomes and increase in money supply. This type of inflation is called demand pull inflation. Insufficient supplies or increase in costs lead to cost push inflation. If these reasons are taken care of, inflation can be brought under control. Recently the government has been talking tough against hoarders, but this alone cannot bring the price line down.


Big Budgets and Fiscal Deficit


For some years now, the government has been increasing the size of its budget; this trend has intensified in the last few years. The size of the Union budget, which was Rs. 7,12,732 crores in 2007-08, increased to Rs. 9,00,953 crores in 2008-09.


The current year budget size has been put at a huge Rs. 10,20,838 crores. Likewise, the fiscal deficit has been showing an increasing trend from Rs. 1,27,000 crores in 2007-08 to Rs. 3,27,000 crores in 2008-09, further galloping to more than Rs. 3,97,0000 crores in budget 2009-10.


This is happening because on the one hand government expenditure has been increasing exponentially, while tax and other receipts are not showing a matching increase. The government’s inability to fill the ever rising fiscal deficit by way of additional market borrowing means the additional government expenditure has been funded mainly by issuance of additional currency. It is clear from the fact that in 2008-09 almost one lakh crore rupees of additional currency was issued by the Reserve Bank of India, and till December Rs. 18,2009 in the current fiscal year; so far Rs. 72,171 crores of additional currency has already been issued by RBI.

Consequently, the country’s money supply is growing at a very fast pace. As a result, between 2001 and 2009, money supply has increased three fold. Although production also increased in the past, the growth of money supply has been much higher than growth in production. The obvious result is fast rising inflation. For various reasons, any significant prudence in government expenditure is not in sight; hence, in the near future we cannot expect any relief from inflation.


Inadequate Agricultural Production

While the people’s purchasing power is increasing, agricultural production, especially production of food products, is almost stagnant or increasing at a very slow rate. Per capita availability of pulses and edible oils, instead of increasing, has been declining continuously.


In 1990-91, the per capita availability of food grains was 186 kilograms per person per annum; this declines to only 148.5 kilograms in 2007-08. Per capita availability of pulses declined from 15.2 kilograms to 13.36 kilograms during the same period.


During the year 2008-09, the situation deteriorated further and production of all food products including food grains, pulses, edible oils and even sugarcane has come down. Constantly declining production of food grains and other food items may easily be attributed to the neglect of agriculture by the government, which is clear from the fact that government’s expenditure on agriculture has constantly been falling. The Central Government’s expenditure on agriculture, which used to be 27 percent of total government expenditure, was reduced to just 5 percent in budget 2009-10. This is because the Centre’s attention is more towards non-agricultural activities and agriculture is being neglected.

The neglect of agriculture reflects in the non-remunerative prices for agricultural products. Declining government expenditure and non-remunerative prices both facilitate the government’s endeavour (as demonstrated by undue haste being shown in projects of Special Economic Zones etc.) to divert agricultural land for non-agricultural purposes. This tendency of shifting agricultural land for non-agricultural use shows in a satellite survey of India as referred to by the Parliamentary Committee on Special Economic Zones.

Existing farmer-run agriculture is being fast monopolised by companies by way of contract farming, further pushing up prices of agricultural products. These companies along with a host of other agri-business firms indulge in future trading, which also plays an important role in inflation in food products.

If the government is serious about controlling inflation, it must put an end to the neglect of agriculture; provide remunerative prices to farmers, ban future trading, especially in agricultural products, and implement real austerity measures to check its fiscal deficit, lest inflation reaches a point of no return.


The writer teaches Economics at Delhi University

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