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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