Less than a week before presenting his maiden budget, Union finance minister, Arun Jaitley, is making a frontal attack on what would surely be the single-most critical issue for him. Inflation in India has proved to be defiant and it was one of the most decisive factors in tilting the people’s verdict in the last election. BJP had promised to cure it. Now Jaitley is seeking to rope in the state governments in his fight against this menace. That’s a sensible new approach. He is meeting the state food ministers to discuss ways of de-clogging the food-supply channels as well as to augment availability.
The disaggregated inflation figures clearly show that inflation had been mainly in food articles. This is not new; we are seeing the same trends unabated since the middle of 2007-08. Even then, price spurts had been confined to a select few items. Until now, the approach towards inflation control had been to rely on monetary policy of the Reserve Bank of India almost in a copy-book style: raise interest rate, follow tight money policy and influence inflationary expectations to contain price rise. Pursuing this strategy, RBI had raised interest rates 13 times consecutively under its former governor, D Subbarao. Unfortunately, inflation did not come down; all we had achieved was industrial slowdown.
It is only now that there is recognition of the fact that the kind of inflation we had been seeing can be controlled with supply-side interventions. Take for instance potato prices. The latest wholesale price index shows that in May 2014 price of potato rose by 31.44 per cent on a year to year comparison; in each of the previous two months – April and March —prices rose by over 31 per cent. Prices of fruits went up by close to 20 per cent in May and those for egg, fish and meat by over 12 per cent. Onion prices had shown astronomical rise at some points. Obviously, if these were not amenable to hikes in interest rates, something else was needed. First, we have to augment production of these items; secondly, remove the numerous bottlenecks in their supply chain; and thirdly, curtailing their wastage through proper storage.
These fall within the ken of the state governments. Without involving the states, it would not be possible to address any of these. Why? Because, agriculture is a state subject and any programmes for farm sector development can be successful only if the states enthusiastically implement these on the ground. That’s admittedly a long-term goal. But at the shorter end of the action package, participation of the states is essential. Witness the situation: a state growing excess potatoes had imposed restrictions on its movement mistakenly thinking that such a step should ensure cheaper potato price locally. The end-result was a crash in potato prices locally. At the same time, neighbouring states were starved of potatoes and facing price spikes. Same with onions.
The tragedy is that the state governments have been empowered to divide India’s farm markets into small segments by legislation. The Agriculture Produce Marketing Committee (APMC) Act gives power to states to impose restrictions on farm goods movements across borders and its indiscriminate use has cut up the nation’s farm products’ market. The first step that Jaitley can take in his deliberations with state ministers would be to convince them to scrap the APMC Act. That will benefit all.