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THE three challenges before the
economy are the rising prices of fuel, agricultural goods and the
large inflow of foreign capital. These factors are also
responsible for the general increase in prices. Most economists
consider this price rise as a problem that must be tackled
immediately. I welcome this increase, however. The current price
rise is not a problem. Rather, it is a symptom of good times!
The price of fuel is rising because the demand from developing
countries is increasing rapidly. Western countries have been mired
in a slowdown for the last three years. Their consumption of oil
has decreased. Yet the price is increasing because demand from the
developing countries has gone up. This increase is especially
beneficial for India. Increased incomes of the oil-exporting
countries of West Asia will lead to more demand for workers from
this country. Second, we are receiving a good share of their
incomes in the form of investment in our share markets. West Asian
investors were previously investing their money in London and New
York. Now they are investing in Mumbai. Third, the higher price of
oil strengthens the developing countries against the developed.
The developing countries as a group are exporters of oil, while
developed countries are importers. The higher price of oil leads
to the transfer of money from the developed to the developing
bloc. Finally the, increase in the price of fuel will lead to a
reduction in the use of fossil fuels. It will encourage the
development of alternative sources of energy such as wind and
solar power and help ensure the country’s energy security.
We should, therefore, welcome the increase in the price. The
government should, in fact, phase out the subsidy on diesel and
LPG and encourage reduced consumption of these fuels.
There has been a large inflow of foreign capital in our share
markets over the past year, though the trend is somewhat subdued
at the moment. Indian companies are using the money garnered from
the share markets to set up factories. This is leading to higher
demand for cement, steel, machinery and labour and to an all-round
increase in prices. This increase is welcome because it is caused
by a spurt in economic activity. Yet there is need to be alert. It
is possible that this inflow may reverse and destabilise our
economy. Actually this happened in 2008. The Sensex had crashed
from 21k to 8k because foreign investors had sold out. The
possibility of this happening again is high because economies of
the developed countries are running on the respirator of stimulus
packages.
The government should impose an ‘exit tax’ on foreign investors to
prevent recurrence of such an exit. Investors repatriating money
before three years should be required to pay a heavy tax. This
will reduce short-term volatile capital flows.
Another challenge is the increase in the price of agricultural
goods like onions and sugar. This increase is rather surprising.
The monsoons have been favourable. Stocks of wheat are in excess
of our requirements. This indicates that production of
agricultural goods has been plentiful. The increase in the price
of onions, edible oils and pulses appears to be the outcome of the
global shortage.
Across the world, agricultural land is being diverted for
residential colonies, highways, Special Economic Zones, factories
and airports. Yet more agricultural land is being diverted for the
production of bio-diesel corn in the United States, sugarcane in
Brazil and jatropa in India. This is resulting in less production
of food. Simultaneously the demand pattern of food items is
getting diversified. Previously the overwhelming part of the
populace consumed only grains and pulses. Now they have started
consuming fruit, vegetables and milk products. But the farmer has
continued to grow more wheat because he is assured of a reasonable
price under the Minimum Support Price programme. This has led to
surplus production of wheat and shortage of other items.
The policy of opening the domestic agricultural market to global
trade is fundamentally correct. It is unwise to sell onion in the
country for Rs 50 a kg if the global price is Rs 150. It is
equally unwise to force Indian consumers to buy apples at Rs 100 a
kg if they are available in the global markets at Rs 50. We should
encourage our farmers and consumers to respond to the global price
movements. By banning exports, our farmers are not benefiting from
the high global price of onions. We are again encouraging them to
continue with shoddy production of crops that are available cheap
in the global markets. The present policy is to ban exports when
global prices are high and to make imports when global prices are
low. The Indian farmer loses out in both cases. He cannot sell at
a high price in global markets due to the export ban. He cannot
avail of the high domestic prices when global prices are low. This
policy is wholly anti-farmer and must be discontinued. But this
must not apply to the few crops that ensure our food security such
as wheat, rice, ragi and bajra.
The present all-round increase in prices is a healthy phenomenon.
The high price of fuel strengthens the developing countries
vis-à-vis the developed world. Factories are being established
from capital inflows. The high price of agricultural produce is
benefiting the farmers and ensuring food security.
It must be accepted though, that the price rise affects a large
number of people. The objective of economic growth is welfare.
Growth that harms people is not desirable.
We may examine the impact of the price rise on the people by
dividing them into three categories. The present price rise is
beneficial for farmers because the price of their produce is
increasing. The price rise is harmful for the urban middle class
because they have to buy goods from the retail market. But this
should not bother us because the income of this segment has risen
much faster than the rest of the population. They can easily
absorb the price rise. It is the worker who is really affected
when he has to buy food from the market. The monthly salary of the
housemaid in Delhi has increased from Rs 300 to Rs 350. The prices
have increased much faster. This problem should not be tackled by
reducing the prices because we will deprive ourselves of the
various benefits accruing to us. The solution lies in increasing
the salary of the housemaid. She can buy onions at Rs 50 a kg if
her salary is increased to Rs 500 a month. The government must
give employment subsidy to industries, direct the use of manual
labour in government contracts, increase wages payable under the
Mahatma Gandhi NREGS to Rs 200 per day, provide tax relief to
labour-intensive industries, etc. These measures will lead to
increase in the demand for labour and higher wages. This will
neutralise the impact of the price rise on the poor.
The writer is former Professor of Economics, Indian Institute of
Management, Bangalore.
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