Inflation: Old rules apply no more

Is the Indian economy entering what the computer experts call the 'third generation' stage? There was a time when things were reasonably predictable: a good harvest was generally followed by a fall in prices and a drought led equally predictably to shortages and inflation. There was also, if one looked closely enough, some sort of correlation between food grain production and industrial output, and for very good reasons. A good deal of industrial activity in India, not to speak of industrial demand, is linked with inputs of farm origin; so a drought or a poor crop led generally to poor performance on the industrial front and vice versa. No more. Finance Minister Ramaswamy Venkataraman said on return from Washington last month that the inflation rate had dipped below the two-digit level, the scourge of all governments worldwide, and was nearer 9 per cent a year on a point-to-point basis. There are many ways of measuring inflation - the size of the hole in one's pocket is one - and the point-to-point basis which calculates the increase in the wholesale price index in, say, October 1981 over October 1980, is a standard one. In October 1981 the wholesale price index was indeed 9 per cent over that a year ago, but that is not the whole story. A consumer does not buy all his requirements in one week, or even one month. He spreads his income over a year so that a more accurate and reliable indicator of change in the price level is an average for the year compared with the average in the previous year. Comparing the year ending June 1981 with the corresponding previous year (ending June 1980) the inflation rate works out at 14 per cent, down only 1 per cent from last year's 15 per cent and still in the two-digit range.Anomaly: The surprising part is that inflation should continue at such a high level for two years running even after a record harvest of 136 million tonnes last year. The general rule is that when foodgrain production is up, prices go down, or, if production is not all that up, go up only slightly. This has been the trend for the last 15 years or so, if not more, but things are obviously changing. 1976-77 was a bad year with food grain production down by 8.4 per cent so that when the Janata Government took over in April 1977, food grain prices went up by 12 percent. The following year (1977-78) was a reasonably good year with an increase of 14 per cent in food grain output which helped halve the inflation rate to 4.5 per cent. On the other hand, 1978-79 was not such a good year but grain output did go up by 4 per cent and the inflation rate came down further to 2 per cent a year.The year 1979-80, a disastrous one by all standards, was a very poor year with a steep fall in grain output by as much as 17 per cent, so that the production level was back to the 1976-77 level and the overall inflation rate up to 18.5 per cent. And what happened in 1980-81? The record harvest of 136 million tonnes did nothing to slake the inflationary thirst and the overall inflation rate came only slightly down from 18.5 per cent to 16.8 per cent a year, and food grain price inflation rate from 15 to 13.8 percent a year. In fact, for the first 9 months of 1981 the inflation rate of what are known as primary products like cereals, pulses, and oil seeds has been hovering around 14 to 15 per cent without a break. It is only because the inflation rate of industrial goods has been falling that the overall rate seems to be declining. For the bulk of the population, which spends more than two-thirds of its income on foodstuffs, mostly cereals, there has been no relief whatsoever. And none is in sight either.Contrary Behaviour: It is also doubtful whether Venkataraman and his colleagues will be able to do anything about it, for the economy seems to be behaving with a contrariness that seems to be beyond control. Charan Singh's budget of 1979 was designed to transfer vast resources from urban to rural producers through the simple device of pushing up prices of foodgrains and other rural products. During the few months that the kisan leader was in power, he must have been a helpless witness to precisely the opposite: the inflation rate of industrial products was consistently higher than that of primary products and the transfer of resources, if any, was from the village to the city.When, on the other hand, Venkataraman tried to curb foodgrain and vegetable oil prices by importing the commodities from the US and other countries, their prices should have tumbled down. Actually, it is the inflation rate of industrial products that has been coming down - it was less than 1 per cent a year in September against as much as 16 per cent in April -while that of primary products has been steady around 14 to 15 per cent. There is perhaps a perverse streak in the functioning of a rapidly changing economy - and not only in India - which makes nonsense of the best laid plans of mice and men. Margaret Thatcher in Britain and Ronald Reagan in the United States have also discovered that a highly complex national economy, particularly one that is changing course, as are most economies in the world today, is not easily manageable and often acts up in a contrary manner.What can a finance minister do in such circumstances? The first thing he could do is to read the writing on the wall and give up the pretence of 'managing' the economic monster as if he were a small puppy. The Indian economy is far too complex to be 'managed' by a few harried officials in New Delhi. It is in fact two economies, not one-a highly developed and advanced industrial sector and a not so highly developed but rapidly changing rural sector, which work alongside each other but are increasingly independent of each other, or at any rate not as closely as meshed as they used to be a decade or so ago. This is the reason why the old rules don't apply any more with the same degree of exactitude and price changes in one sector do not transmit themselves automatically to the other sector, as they did in the '60s. Moreover, it is the industrial sector (along with what is known as the services sector such as banking and transportation) which is now the dominant sector and which, as the Americans put it calls the shots. The industrial sector is also one which responds to the impulses of growth more quickly than the farm sector which tends to be lackadaisical in its ways and has apparently reached the end of its technological capability for the time being.New Breed: On the other hand, the industrial sector is advancing on a broad front, both in terms of technology as well as innovative management and pushing ahead with a ferocity that a government official in Udyog Bhavan recently described as breathtaking. Contrary to popular impression, it is not the Government that is handing out industrial licences but the industrialists who are forcing the Government's hand. In Udyog Bhavan and elsewhere, it is the officials who are signing on the dotted line and have ceased to be part of the decision-making machinery. This machinery now functions from five-star hotels and politicians' bungalows where the new breed of industrialists and businessmen are on first name terms with the politicians, most of whom are second-generation urban men with few- roots in the village.Inflation is not merely a question of imbalance between supply and demand, though it works through the supply-demand nexus. It is basically a barometer of changes in the social process which is what all economic activity primarily is. During the sterile '70s the country was stopped in its tracks because of the inability or reluctance of the political leaders to let industry push ahead for fear that it might upset the social balance. The Government has now apparently realised that you cannot really hold back a dynamic constituent of the economy and yet stimulate growth. This explains the recent liberalisation in licensing procedures, the virtual scrapping of the Monopolies and Restrictive Trade Practices Commission (MRTPC) liberalisation of imports in order to free the industrial sector from the slow-moving but politically ambitious rural producers, and the application for a massive loan from the IMF. It would be wrong to think that the Government is doing all this as part of a calculated strategy. Actually the Government is doing what it is compelled to do under the unrelenting pressures of a section of society thrusting forward.Balanced economic growth-the shibboleth of tired old academicians who often find themselves on planning committees and commissions - is a myth. An economy pushes itself forward first in one direction, then in another, upsetting in the process economic and social forces, the upset itself being a part of the process of growth. The stimulus for growth does not come from the planners - from targets of investment and production streaming out of whirling computers - who can, however, if they are sharp enough to notice the changes, go along with the process of growth and try and minimise the distortions through wise administrative and other measures. These distortions ultimately surface as inflationary pressures, as one social sector tries to score over another by appropriating more than its due share of the pie. Since, however, there is no such thing as a due share, tension ensues. This is precisely what is happening in Europe, for there the society as a whole is not clear about its direction as it manoeuvres itself into the next post-industrial stage. In India, we have not yet reached this stage. which makes the Government's task that much simpler. A single-digit inflation rate is not much to crow about unless it is accompanied by a double-digit growth rate. That would indeed be something.PRICES : THOSE WERE THE DAYSHello, nostalgia! In 1939, just before Adolf Hitler struck in Poland, one could go to the market with a rupee and come home with 1 kg of rice (12 paise), 1 kg of wheat (7 p), 1 kg of dal (8p), 1 kg of sugar (29 p) and half a kg of ghee-all for just one rupee. Gold was Rs 36 a tola (Rs 32 for 10 gram) and silver bars could be picked up for 50 paise a tola (Rs 44 a kg).By 1947, things had changed, but a rupee could still buy 1 kg of rice (67 p), 1 kg of wheat (26 p) and a small packet of tea. Gold was Rs 103 per 10 gm and silver around Rs 200 a kg. A bag of cement could be had for Rs 3 and good quality ghee for Rs 150 a maund (about Rs 4 a kg).Twenty years later, a rupee was not a rupee any more and all that it could buy was a kilogram of potatoes, 1 kg of onions and perhaps a pinch of salt to go with them. Gold had nearly doubled in price to Rs 185 (per 10 gm) and silver to Rs 472 a kg. Ghee was Rs 15 a kg (the price of half a tola of gold 30 years earlier) and sugar around Rs 3 a kg. Even vanaspati, which rarely saw the inside of a respectable household before the war, was sold for Rs 5.75 a kg, more than the price of ghee 20 years before.At this rate, how will price labels look like 20 years from now? Ghee is already close to Rs 50 a kg (more than the price of silver in 1939), rice around Rs 4 and wheat Rs 2.50 a kg. Gold may soon touch Rs 2000 per 10 gram and silver Rs 3000 a kg.If we assume prices to go up at the same rate as they have done since 1970, the cow will jump over the moon by the year 2000 AD. Wheat will be around Rs 10 a kg (which should warm the cockles of Charan Singh's heart), vanaspati about Rs 70 a kg and a cake of soap of Rs 12, gold, for those with a yen for it, will be sold by the gram, at Rs 8,600 a gram, and silver, also by the gram, at Rs 54 a gram.Will it really matter though? Prices cannot rise unless incomes also go up, but what causes heart burning is that not everyone gets the same portion of the cake as before and those who are better organised often get away with what appears like murder. Forty years ago, a factory worker was lucky to take home more than Rs 15-20 a month.In Pune last week, Bajaj Auto announced that the wage of its lowest paid worker would be Rs 1,175 per month, roughly 60 times the 1939 wage. Come to think of it, gold prices have gone up by almost exactly the same amount since 1940. There is rough justice in this world after all. Perhaps a little too rough on some, but can it really be otherwise? Published By: AtMigration Published On: Oct 26, 2013 10:41 IST--- ENDS ---

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Inflation: Old rules apply no more

Is the Indian economy entering what the computer experts call the 'third generation' stage?

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