Sunday, May 11, 2008

Inflation in India

A great deal of argument is going on the genesis of inflation in food and commodity prices in India.

One theory doing the round is that cheap dollar , available from the US Fed through cuts in interest rate, is perhaps being channelled into speculation on global commodities prices and the response of the Indian government should be to follow a tighter monetary policy by hiking interest rate and lifting the ban on export of rice and allowing the farmer to make gains out of a global shortage.

If interest rate is hiked in India the substantial rate-differential (between India & the US) will only bring more short-term foreign investment to the market thereby fuelling inflation further. Secondly it will have an adverse effect on the cost of the capital for the local entrepreneur and effect medium-term growth prospects.

Lifting the ban on export of rice will definitely help a section of wealthy farmers in India but will leave the country with a shortage of essential commodity like food which will again fuel inflationary trend.

Staple food (like rice & wheat and not shrimps ) is an essential commodity and should be distinguished from the other agricultural commodity like coffee, tea ,potato etc. The role of the government should be to ensure that staple food items are available first for domestic consumption and surplus, if any, should be exported. It is of course , essential that the government adjusts the minimum reserve price to the farmers keeping into account the global price of such food items.

The problem is actually on the supply & distribution side. We have to take medium-term measures to increase farm productivity of food though better seeds (genetic or otherwise), fertilisers & allocate more forest land for food production (Al Gore, Pachauri and climate change can take a hike during that period). In the short-term, the public distribution system should be streamlined on war-footing to prevent leakages and food wastage. If necessary, special courts should be set up to convict government officials found guilty of sabotaging the PDS.

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