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INDIA: Blames West For High Food, Energy Prices

Paranjoy Guha Thakurta

NEW DELHI, Apr 29 2008 (IPS) - While moving firmly to curb inflationary trends, India’s coalition government, which faces a general election next year, continues to blame a poorly managed international financial system for spiralling food and energy prices at home.

On Tuesday the Reserve Bank of India (RBI) moved to increase the cash reserve ratio (CRR) – or the proportion of bank funds that has to be compulsorily kept with India’s central bank – by 0.25 percent to 8.25 percent to rein in inflationary expectations.

Hours before the apex monetary authority increased the CRR for the second time in less than a fortnight to suck out liquidity from the financial system, Prime Minister Manmohan Singh complained bitterly that the international community was not heeding India’s advice to calm down the world’s turbulent financial and commodities markets.

"India’s voice must be heard…Be it the management of the world food economy, be it the management of the energy economy, be it the management of the financial system or indeed be it the management of global security," Singh, a former World Bank economist, told a meeting of the Confederation of Indian Industry, representing India’s business elite.

Singh pointed out that although the international demand for crude oil had gone up by just one percent over the last two years, crude prices have shot up by over 90 percent in US dollar terms and 40 percent in Euro terms. "I am deeply dismayed that the global response to this third energy crisis has fallen short of our expectations and compares poorly with the response to the first and the second oil crises," the Indian Prime Minister said. Singh was of the view that the international community had been slow to come to grips with the now visible structural weaknesses in the functioning of the international financial system. "The management of the financial sector in the developed economies, especially the U.S., has been less than satisfactory," he remarked, adding that international financial institutions have also not played an active role in tackling the consequences of the problem. Whereas India has not witnessed food riots, high prices of cereals, edible oil, milk and dairy products, vegetables and fruits in recent months have made the ruling elite in the world’s largest democracy and second most-populous nation-state rather apprehensive of a voter backlash.

The official wholesale price index has exceeded the seven per cent mark but retail prices have gone up much higher. According to official data, in India’s capital, New Delhi, edible oil prices have jumped by a huge 40 percent over a year, rice prices by 20 percent and prices of certain lentils by 18 percent. (Rice and lentils comprise the staple diet for many Indians.) Milk prices too are up by over 11 percent.

The government has initiated a slew of measures to curb inflationary expectations. Such measures include a lowering of customs duties on imported palm oil and subsidies on its sale, curbs on exports of particular categories of rice, a ban on exports of wheat and pulses, besides curbs in money supply by the RBI.

While the Indian economy as a whole has been growing rapidly at an average of 8.5 per cent over the last five years – for the first time since the country become politically independent 60 years ago – this growth has been mainly confined to manufacturing industry and the burgeoning services sector.

The farm sector has, however, grown by barely 2.5 percent over the last five years. The trend rate of growth is even lower if the past decade and a half is considered. Thus, per head availability of cereals (wheat and rice) at present is more or less at the level that prevailed in the 1970s.

"The government has allowed the condition of the public distribution system for food and other essential commodities to deteriorate and this is hurting the poor very badly," says S.P. Shukla, former finance secretary to the government of India.

In an interview with IPS, Shukla added that "inadequate public investments in rural areas, especially in irrigation facilities, have contributed to low farm productivity". The situation has worsened on account of poor storage facilities resulting in high levels of wastage.

Historians point out that there has never been an acute shortage of food in India, not even during the infamous Bengal famine of 1943 in which more than 1.5 million are estimated to have died of starvation. The problem has always pertained to access or entitlement to food at prices that are affordable.

Although agriculture provides a livelihood to around 60 percent of the country’s 1.1 billion people, this sector accounts for barely 18 percent of India’s current gross domestic product (GDP).

India has also mismanaged its cereal stocks that were at record levels six years ago. Amartya Sen, the Indian economics Nobel laureate , had pointed out at that time that if all the bags of wheat and rice with the government-owned Food Corporation of India were placed end to end, they would reach the moon and back!

Stocks came down drastically two years later because of exports and also on account of low domestic production. Consequently, India had to import wheat in 2006 and 2007. The problem compounded because the landed price of imported wheat was nearly twice as high as the ‘minimum support price’ the government pays its own farmers.

Indian cultivators are particularly vulnerable since 60 percent of the country’s total cropped area is not irrigated and dependent on the four-month long monsoon during which period 80 per cent of the year’s total precipitation takes place. The government is hopeful that this year’s monsoon will be normal and that wheat output will touch a new high.

"The RBI’s decision to suck out excess liquidity would mute inflationary expectations to a certain extent," says Abheek Barua, chief economist with HDFC Bank (formerly Housing Development and Finance Corporation). He told IPS in an interview that "the prices of commodities are being driven by speculation through leveraged positions based on borrowings". Such speculation would come down and lead to a moderating effect on the rate of inflation, Barua hoped.

Until late-2006, inflation in India was driven largely by high prices of petroleum products. (The country currently imports three-quarters of its consumption of crude oil.) Subsequently, however, inflation has been driven by high food prices.

This is bad news for ruling politicians because the poor in India votes in much larger numbers than the affluent. Roughly one out of four Indians lives on less than one US dollar a day and three out of four earn two dollars or less.

Finance Minister Palaniappan Chidambaram has stated on a number of occasions in recent weeks that the government is willing to sacrifice growth to curb inflation. Critics say he does not have much of a choice.