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30/01/2011 by navanavonmilita
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29 Jan, 2011, 04.23AM IST, V RAGHUNATHAN,ET Bureau
Corruption in India and China: A study in contrast
* Comments (5)
Read more on »xinhua news agency|national crime records bureau|huang songyou|chinese communist party|central commission for discipline inspection|candidate for mass adulation
As the Congress readies for its annual meeting next month, public interest is running high. An online survey by www.people.com, an influential news portal, showed that corruption is the issue netizens want the Congress gathering to address most. Other issues netizens want the session to tackle are the widening gap between rich and poor, the skyrocketing cost of housing, the health system, pensions and education. In another online poll, 70% of respondents urged officials to declare their assets and emphasised the role of the Internet in preventing corruption. This is the third consecutive year corruption has been the top issue on the eve of the Congress meeting….”
Are you impressed, if a little baffled perhaps, that Congress is focused on corruption after all? Well, sadly, the Congress above refers to the National People’s Congress of China and the press report of Xinhua News Agency , dating about a year ago, referred to a meeting in Beijing!
Well then, even if China is way ahead of us in financial, political, defence, space and manufacturing muscle, many of our problems are very similar. In fact, the only area where we have a little more than China is in the area of corruption. Yes, as Transparency International rankings, 2010 will tell us we (at 87) are a little more corrupt than China (78). But where we differ is in what we are doing about it and what China is doing about it.
In recent years, there has been unprecedented crackdown on corrupt government officials in China. Huang Songyou , the former vice president of the Supreme People’s Court, was awarded a life sentence in January last year for embezzlement and taking bribes amounting to slightly over half a million dollars in return for favourable court rulings.
Shortly thereafter, Yu Renlu, former vice chief of the civil aviation administration was dismissed and booted out of the Chinese Communist Party (CPC) for “serious violations of discipline and law”, according to CPC’s Central Commission for Discipline Inspection (CCDI) and the ministry of supervision.
In fact, this New Year, China has announced a renewed effort to fight increasing corruption in the country. According to reports, in 2010 alone, its war against corruption resulted in no less than some 5,000 higher-level Chinese government officials — mostly above the county head level — being punished for corruption. Further, according to CCDI, again in 2010 alone, some 1,44,000 cases of corruption were investigated , leading to penalties for more than 1,46,000 lower-ranking government officials! Most of these cases pertained to officials involved in corruption, bribery and acting against the public interest — much like our own.
In contrast, according to the data from our National Crime Records Bureau , in 2008, of the 8,554 cases that came up for investigation with state anti-corruption /vigilance department under Prevention of Corruption Act and related IPC sections, a measly 268 were punished by the respective departments and 65 sacked! Nothing underscores this parody more than the recent press report about an IAS couple in Bhopal — Arvind and Tinu Joshi — who is said to have amassed assets worth Rs 360 crore; and what is more, according to press reports, ‘… in 1998 he [Arvind Joshi] was asked to pay the state Rs 1 crore that he had allegedly made off Bhopal gas leak victims by overcharging for bed-sheets and curtains in hospital purchases’ ! If true, this would mean the government’s policy is, ‘if you are not caught thieving, you keep the booty; if you are caught, you will have to return it’ ! Talk of disincentives and incentives for corruption in China and India!
Unfortunately, our political parties do not seem to recognise the opportunity of a lifetime staring them in the face. Any government which now acts tough and comes down hard on the corruption will become a candidate for mass adulation . In short, the glory of a resurgent India is up for grabs. Sadly, there may be no takers.
Our system vilifies the Naxalites, Maos, Bodos and such for taking to arms in the face of little government benefits ever reaching them, rather than engage in discussions. Of course, these groups are wrong. And of course, engaging in discussions is the only civilised thing to do. But doing the civilised thing calls for reciprocal civility.
When the country talks, the political parties and the government should listen. If they don’t, we shouldn’t be surprised if we find increasing violence all around. The call to address corruption is nearing a crescendo. If we let this opportunity to take the corruption bull by the horns go, the country will be headed only one way, that is, downhill, on the way to a large banana republic. That is why the government should listen to this crescendo of public opinion sooner rather than leaving it too late.
Some very well-meaning personalities seem to suggest that as a people, we are obsessively preoccupied with corruption ; perhaps implying ‘after all China is no less corrupt’. These people are often so high and mighty that they may almost never have stared at corruption at the day-to-day level at close quarters. After all, if two obscure IAS officers have amassed Rs 360 crore till they have been ‘caught’, surely the situation is scary?
And lastly, the Chinese being corrupt or not can hardly be a source of consolation for what we are. Notwithstanding their corruption, they are able to lay an 1,142-km Golmud-Lhasa high-speed railway line at an average altitude of 10,000 ft, and frequently at nearly 17,000 ft, in four years flat. Can we match that? Sure, China has problems; but they are addressing them. One also frequently dismisses all of China’s successes to the account of their non-democratic regime, while chalking all our failures to democracy’s account. Not all democracies need to be corrupt. Nor can a9% growth be an answer to all our ills.
First, that growth is despite all our ills —so imagine the potential. Second, that 9% may not sustain for long if the country continues to be plundered. Yes, we are a rich country if non-descript babus can loot . 360 crore of the country. But even we can’t afford any more plunder.
Readers’ opinions (5)
JAL UK 30/01/2011 at 06:00 PM
At least in India it is possible to more openly discuss corruption in the media than in China.
Agree (2)Disagree (2)Recommend (2)
renu Bhopal 30/01/2011 at 04:16 PM
arvind and tinu joshi were caught but there are people far more corrupt who have got away. The IAS should be dismantled — most members of this service are arrogant, and corrupt and a liability to this country. crores are siphoned away as senior officers collude with lower functionaries .
Agree (2)Recommend (2)
shen us 30/01/2011 at 12:27 AM
In democratic countries, talk is cheap and blaming others is the way to do things. Does anybody admit one’s own participation in spreading culture of corruption in any society by giving or taking a five penny bribe? Does one say – this is what I will do to stop corruption in my society? How does that Gandhian practice take hold of for getting freedom from the captivity of corruption, any where?
V.B.Sastry Secunderabad 29/01/2011 at 08:39 PM
While almost everybody laments the widespread malaise of corruption, most people respect any person who has high income and wealth despite knowing fully well that the source of his high income and wealth is ill-gotten money. Very few people resort to whistle-blowing. Most people also cannot refrain from gaining in corrupt ways if opportunity is available or can be created in whatever field he functions, be it revenue, or expenditure or investment or education or healthcare or sports or money management or consultancy or audit etc. and in any capacity including the topmost and bottom-most in an organization. Moral values which militate against corrupt practices do not seem to have been deeply embedded in the psyche of most people in India and their peeving against corruption seems to be more founded in jealousy rather than conscience-driven revolt. Therefore even if a person is caught with proof of his corruption, sympathy and considerateness seem to weigh in heavily and the corrupt person is treated as a source of earning ill-gotten income by those engaged in proving his guilt and punishing him..
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G.Natarajan Chennai 29/01/2011 at 05:55 AM
If a person in public service is corrupt,tried in fast court and proved guilty, he should be imprisoned till death and the entire property in his name, wife and children should be confiscated.The worst is that the law makers are the real law breakers.
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29 Jan, 2011, 04.29AM IST,ET Bureau
Political ineptitude on CVC and black money
Read more on »pj thomas|cvc|central vigilance commissioner
This newspaper had earlier called on Mr Thomas to quit as the Central Vigilance Commissioner ( CVC )). Not because he is morally tainted but because the leader of the Opposition had not endorsed his choice for the constitutional post. The simple fact is that the Left, which had brought the charge of improper palmolein imports against the late K Karunakaran, into which case Mr Thomas was dragged, never stopped his rise in the ranks of the civil service in Kerala, and even promoted him to the rank of chief secretary. Nor did this case prevent Mr Thomas from being appointed as a secretary to the government of India. He enjoys a clean reputation among his colleagues.
So, the government had a legitimate case to recommend his name for the CVC’s post. But once the leader of the Opposition, one of the three members of the selection committee — the other two being the Prime Minister and the home minister — objected to his name, it should have been dropped. Having failed to observe this basic requirement , the political leadership, the law ministry and the law officers representing the case in the apex court have all messed up. While what the attorney general (AG) told the court was that the palmolein case was not on the files placed before the selection committee nor in its minutes, it was widely reported in the media as the government claiming ignorance of the palmolein charge. What the AG told the court was technically correct.
But it was politically untenable. But there was no one to control the political damage and set the record straight: yes, the leader of the Opposition had raised the palmolein case in the selection committee but the objection was overruled and the committee recorded her dissent without listing its specificity.
Similarly, it is ridiculous to see the government being defensive on respecting its international treaty obligations to protect the confidentiality of names obtained from foreign countries in relation to black money. Why doesn’t it undertake to follow the counsel of the court or of the leader of the Opposition on the subject? Ms Swaraj might be a feisty politician, but she is a responsible part of the system of parliamentary governance.
29 Jan, 2011, 04.09AM IST, Soma Banerjee,ET Bureau
Food inflation is no mystery
Read more on »food inflation|apmc
If you thought only onion made headlines and governments fall, here is some more food for thought. The retail prices of brinjal soared 110% and those of tomato by 125% between the first weeks of November 2010 and January 2011, while the rise in crude oil paled in comparison, climbing about 12% in the same period. While import-dependent economies are struggling to keep their fiscal math in shape with crude oil hovering close to $100 a barrel, vegetable traders have ensured most homemakers to drop their favourite baingan ka bharta off their menu too.
Except for this year, volatility in perishables such as fruit and vegetables does not hog the limelight as, say, oil. Interestingly, the factors leading to the price escalation of both oil and the brinjal-tomato combo are mysterious.
While Opec, accounting for 40% of the world’s oil production, claims that there is surplus capacity in the system, most farm economists say that the production of brinjal and tomatoes has not shown a significant drop to cause the sharp price rise. If at all, the increase in prices — 71.5% week-onweek in the case of brinjal for the week ended December 18, 2010, and 73% week-on-week for tomatoes in the week ended December 25, 2010 — was only driven by sentiment, a chain effect led by onion prices.
The skyrocketing prices of brinjal, tomato or even crude oil certainly had little to do with supply shortage. But here is where the story of crude oil and veggies takes a turn. The steep veggie prices led to record food inflation figures of over 18%, giving sleepless nights to Prime Minister Manmohan Singh and his men. Petrol prices that went up by . 2.54 a litre did little to fuel inflation.
In fact, the impact of the 5% hike in petrol prices on the wholesale price index was a negligible 0.05%. Moreover, those impacted by petrol prices are city dwellers, mostly owners of private vehicles. Public transport runs on diesel or compressed natural gas; and the same is the case with trains and trucks that move people and goods across the country.
But somehow, petrol has managed to pump up the political class. The outcry by those at protests rallies (read: Mamata Banerjee) or those on prime-time news are only misleading people. If the common man is the target constituency for the high-decibel vote-mongers, then how should petrol price hike make a difference to his life? The common man in remote Sundarbans (West Bengal) shells out . 200 for a litre of kerosene supposedly sold at Rs 11 a litre at the ration shops.
Price hike is a bad term, particularly when it comes to goods that impact household budgets. There was a huge public outcry as food inflation soared, and understandably so. Most economists and policymakers were caught unawares by the spike in inflation rates, particularly that of food items. Economists had projected inflation to be tamed to around 7% by December end. But that was not to be. The policy deficit in both the Indian horticulture and oil markets is evident.
If vegetable prices were soaring due to middlemen making a neat buck at the cost of both the farmer and the end consumer, retail prices of motor fuels had to experience such sharp spikes because the free pricing policy came far too late. And the case can only worsen further but for some radical timely policy interventions.
If the amendment of the Agricultural Produce Market Committees (APMC) Act and removal of horticulture goods from the APMC list should be brought in immediately to cut out the middleman, the removal of the administered pricing mechanism policy for motor fuels needs to kick in as soon as possible. It is estimated that, on one hand, prices of vegetables go up by as much as 10 times between the farm gate and the retail vendor, thanks to the controlled marketing regime.
On the other hand, the controlled pricing regime of diesel has now left a backlog of Rs 7 a litre if market prices were to kick in. Hike in diesel prices, unlike petrol prices, has a rippling effect and there is no way that the economy can absorb such a steep rise at one go. The solution would be to decontrol prices and allow oil companies to gradually increase prices, say by 50 paise a litre per month. This can be the only way to soften the blow of hard reality.
The sharp rise in vegetable prices has more to do with market sentiment than supply shortage. It’s a chain reaction triggered by high onion prices. The impact of the recent hike in petrol prices on the wholesale price index is highly exaggerated for political reasons The steep difference between the farm gate and the retail prices in vegetables is caused by the controlled marketing regime.
Volume 28 – Issue 03 :: Jan. 29-Feb. 11, 2011
INDIA’S NATIONAL MAGAZINE
from the publishers of THE HINDU
Policy paralysis and inflation
The persistence of inflation sends out the message that economic governance under a government populated with economists of repute has broken down.
ARUNANGSU ROY CHOWDHURY
AT BAITHAK KHANA Bazar, a wholesale and retail market in Kolkata. A file picture.
INFLATION, which had been officially declared as being on the wane, is back and raging. Focussed on food articles, it is eroding the real incomes of the poor and, therefore, the popular support that brought the United Progressive Alliance to power for a consecutive second term. Particularly damaging is the fact that high inflation has been the norm for a year now, with its incidence shifting across commodities, but most often falling on one or other set of food articles. The government seems to be helpless and just wishing that the problem would go away.
Addressing a Chief Ministers’ conference on food prices in early February 2010, Prime Minister Manmohan Singh declared: “The worst is over as far as food inflation is concerned. I am confident that we will soon be able to stabilise food prices.” Three months later, on more than one occasion, government spokespersons, including Chief Economic Adviser Kaushik Basu, declared that inflation had “peaked out” and was on a downward trend.
Such statements are not surprising since in the current dispensation government representatives at the highest level are expected to talk down prices and talk up markets. It is not what you say but the confidence with which you say it that matters.
But there is reason to believe that the government did actually think that inflation would follow some sort of a cycle and more likely moderate quickly than rise significantly. One or two predictions of an impending price decline are understandable. But, over the last year, almost every month or even week, one official spokesperson or the other (be it the Finance Minister, the Finance Secretary, the Deputy Chairman of the Planning Commission or the ubiquitous head of the Prime Minister’s Economic Advisory Council) has declared that inflation is bound to moderate, in a voice tinged with surprise that it has not done so earlier.
This expectation came from a particular reading of the situation. Whenever prices rose rapidly, they were attributed either to supply-side factors, such as a poor crop, or to unavoidable factors, such as the “base effect”. (The base effect is the impact the previous year’s level of prices has on the computed rate of inflation: if prices were low, the inflation rate or percentage increase in prices would turn out high even though the price level may not be too high.) Thus, when the Prime Minister spoke in February last year he looked forward to a good monsoon and a better crop. And, if prices had been unusually low a year earlier, even a return to “normalcy” would reflect a high rate of inflation that must be discounted. Occasionally, of course, there was talk of hoarding and speculation, but only on the part of unscrupulous traders who were exploiting temporary demand-supply imbalances.
Experience has shown that these “beliefs” were patently false. Despite the fact that the monsoon has been much better in recent seasons, the annual point-to-point inflation in the wholesale price index (WPI) for food articles stood at 18.32 per cent and 16.91 per cent during the weeks ending December 25, 2010, and January 1, 2011, respectively. The figures for the corresponding weeks of the previous year were 19.9 per cent and 19.6 per cent respectively. Not much has changed even though the commodities involved are slightly different.
Moreover, the month-on-month inflation rate as reflected even by the WPI for all commodities, which stood at a disconcertingly high level in the first half of 2008 and declined consistently between July 2008 and July 2009 and accelerated subsequently, has remained at high levels throughout 2010. The month-on-month rate of inflation stood at 9.7 per cent in November and 8.5 per cent in December. And if weekly WPI movements are an indication, this is likely to be true in January 2011 as well.
The consumer price indices for agricultural labourers and industrial workers, which reflect the movements in the basket of goods consumed by these sections (which includes housing that dampens the increase), also rose by 7.1 per cent and 8.3 per cent respectively in November relative to the corresponding month of the previous year.
This persistence of the inflationary trend is substantially because the government, while occasionally expressing concern over the high level of inflation, has done little to combat it given its belief that inflation will necessarily moderate when supply conditions improve or the base effect wears out. This has sent out the message that economic governance under a government populated with economists of repute has broken down. That impression has only been bolstered by the open spats between segments of the government over who is responsible for the persisting inflation.
To understand the factors that could be driving the price rise, we need to turn to a number of noteworthy features of the current inflation scenario. The first is that while it is not restricted to food, it has been driven substantially by food articles that are more prone to speculative influences. In the case of these commodities, even when demand-supply imbalances are minor or absent, speculation can push up prices.
The second is that within food articles, inflation has, at different points in time, affected different commodities, such as cereals, pulses, vegetables, eggs, meat and milk. Not all of these commodities are equally weather dependent and the prices of some are influenced by where administered prices are set. To attribute the trends in their prices solely to demand-supply imbalances or imported inflation is to avoid the conundrum.
Third, when inflation does occur in some food items, be they onions, vegetables or even cereals, the rate of inflation tends to be extremely high, pointing to the role of speculation in driving prices in the short run. Finally, even when such influences are not at work there seem to be factors operative that keep the “all commodities” inflation rate high.
Even though it is still early to say, the trend over the last one and a half years suggests that there are structural factors at work that have set a higher floor to the inflation rate. They may be neutralised in the future but could well return to play a role subsequently. The government has recognised this structural inflationary tendency in a peculiar, in fact patently absurd, way. It attributes the inflation to the demand-side effects of high growth. If people are richer because of an 8-9 per cent growth rate, they are bound to demand more. Since supply does not adjust, prices are bound to rise.
There are many assumptions here. That when the gross domestic product (GDP) grows, those who need to buy and consume more cereals, pulses and vegetables garner a reasonable share of the benefits of that growth. Or that when GDP grows, such growth cannot occur in large measure in the commodity producing sectors, resulting in a widening gap between the demand for and supply of certain goods. That even though the “high growth” era began in 2004, it is only now that it has generated demand-supply imbalances. And that if there is indeed a supply-demand imbalance the government is unable, for whatever reason, to redress it by resorting to imports. Making such assumptions is not just wishful thinking, but avoiding the conundrum.
It is not that there are no demand-supply imbalances. India’s growth has indeed been lopsided. As has been argued by perceptive analysts, India’s high GDP growth was recorded in a period when the agricultural sector and a range of petty producers were experiencing a crisis, an aspect of which was the non-viability of crop production and, therefore, an extremely slow growth of agricultural output and GDP. At some point that long-term crisis was likely to result in an unsustainable demand-supply imbalance.
But there are two other factors that are structurally embedded in the economic environment generated by the government’s neoliberal reform agenda adopted for two decades now. The first is a tendency where corporate consolidation in production and trade, decontrol that permits profiteering, a reduced role for public agencies and public sector firms and the withdrawal or curtailment of subsidies on a range of inputs have pushed up costs and prices (including administered prices) substantially. As some have argued, India is increasingly a high-input-price-and-high-output-price economy, with a rising floor for many prices.
The second is the role that speculation has to come to play, what with liberalised trade, the presence of large corporate players in the wholesale and retail trade, and the growing role of futures and derivatives trading in a host of commodities. Add the influence of these two factors to the underlying crisis in some commodity producing sectors and the long-term, structural inflation is more than partly explained.
The government, of course, does not consider these angles worth pursuing. The reason is partly ideological. It cannot bear anyone questioning the outcome of reform. It cannot bear the suggestion that corporate entry can lead to profiteering in a context of decontrol. It does not believe that speculation in futures markets can push up spot prices, and has banned some of these markets only because of public pressure. It cannot contemplate a larger role for the state and no role for corporate (domestic and foreign) players in both wholesale and retail trade. In the event, all that the Prime Minister’s emergency meetings on the inflation issue have thrown up is an inter-ministerial group mandated to monitor short-term firefighting measures and promote actions that the government has for many years now claimed to be promoting.
To top it all, precisely at a time when it can come in handy, the government is threatening to renege on the UPA’s promise to deliver universal access to a minimum quota of food through the public distribution system. Riding on the argument that not enough foodgrain is available, even though production has been good, stocks with the government are comfortable, and foreign exchange that can be used to import even more is being handed over to the rich to be transferred to accounts abroad, it has used the Prime Minister’s Economic Advisory Council to stall even a diluted proposal from the Sonia Gandhi-led National Advisory Council to expand the public distribution system.
No guesses are needed to identify where the push for this effort to kill the proposal comes from. And here, too, the ultimate source is the neoliberal ideology that wants to cut expenditure and reduce the fiscal deficit even as tax concessions are handed out to the well-to-do.
The government is not alone in all this. There is an influential body of opinion, including in the mainstream media, that the inflation problem is the result of poor supply management that cannot, at low cost, mobilise and reach supplies from wherever it is available to wherever it is needed. This creates unnecessary shortages that push up prices and encourage speculation that aggravates the price increase. The solution, therefore, is corporate retailing services, including those that large transnational retail firms offer.
According to reports ( The Hindu, January 19, 2011), using inflation as the excuse, the Union Cabinet is about to consider a controversial proposal to permit 51 per cent foreign equity in multi-brand retailing. This argument, too, borders on the absurd. It ignores the fact that though India has until quite recently had no such retail trade structure there have been long periods when prices and inflation have been kept in control. It also ignores evidence from other contexts where such retail chains are active that the margin between prices paid to producers and charged to consumers tends to be high, buoyant and downward sticky.
Neoliberal thinking not only leads to policy paralysis and absurd reasoning. It also results in policy responses that are contrary to what is needed. Thus, in the midst of the current inflationary mess, on the basis of the liberalised pricing mechanism, the oil companies have been allowed to hike the price of petrol a second time in quick succession. Given the role of public sector firms here, nobody would believe that a nod from the government was not obtained before the hike. If balance has to be maintained, a hike in the price of diesel must follow.
This government may go in for that as well. Doing this to the prices of what are universal intermediates in the midst of an inflation emergency might be seen by some as madness. If the belief that people can be called upon to sacrifice real incomes because reform cannot be held back or reversed is a sign of madness, then possibly it is.
in New Delhi
The UPA government is apparently unmoved by the widespread criticism that its policies have fuelled the price rise.
A protest in Hyderabad on January 10 by Telugu Desam Party activists against the price rise.
INFLATION and price rise get inextricably linked to the political process at several levels of society. Developments in the past two months, which saw unprecedented rates of inflation and price rise, have underlined this perennial reality in politics. Activities of the United Progressive Alliance (UPA) government at the ministerial level, in administrative matters as also in the political jousting in the ruling coalition – between its leader, the Congress, and the smaller partners – have all had inflation and price rise at the core. The manoeuvres of the principal Opposition party, the Bharatiya Janata Party (BJP), and the non-BJP Opposition led by the Left parties have also stressed the same theme.
Social activists not directly affiliated to political parties have also addressed the issue in several foras. One such forum came up with a statement signed by 150 social activists from across the country and led by the Magsaysay Award winner Aruna Roy on January 19, even as the Rashtrapati Bhavan was getting ready for a “course-correction reshuffle” in the UPA Ministry. The statement asserted that the Manmohan Singh government’s priorities were such that they increased the economic hardships of the poor and the underprivileged who had to bear the brunt of the double-digit inflation.
The statement made a particular reference to a decision announced by the Prime Minister himself (through a letter on December 31, 2010) to delink wages given under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) from the Minimum Wages Act (see story on page 115). It also pointed out that the “government of India had already undermined wages under the NREGA through a January 2009 notification, which imposed an unjust freeze at an arbitrary rate of Rs.100 per day on its wages” and that the present action literally sought to “remove the basis of constitutional and legal protection of the lowest end of workers in the wage hierarchy”. The statement added: “With a consistent near double-digit inflation rate, touching 9.7 per cent and even higher food price inflation, the frozen NREGA wage, over the last 24 months, has been significantly eroded in real terms.”
The publication of this statement was preceded by a two-day consultation on minimum wages organised by the Bandhua Mukti Morcha, a non-governmental organisation, in collaboration with the Planning Commission and the Nehru Memorial Museum and Library (NMML). This consultation, which had the participation of an array of people from different segments of society, including senior politicians, prominent social activists and key administrators – such as Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, Union Minister of State for Labour Harish Rawat, Communist Party of India (Marxist) leader Sitaram Yechury, CPI leader D. Raja, Justices Ajit Prakash Shah and J.S. Verma, activists Harsh Mander, Medha Patkar, Swami Agnivesh and Prashant Bhushan, and development economist Jean Dreze – was dominated by pointed criticism of the UPA government’s functioning on very many fronts, including its failure to control inflation and the price spiral.
While the central focus of the consultation revolved around the assertion that a rational policy of minimum wages should be in place to allow workers a life of dignity, it also addressed other questions relating to it directly or indirectly. These included the overall policy thrusts of the Manmohan Singh government as well as the political pulls and pressures it was facing vis-a-vis the price rise.
The statement of the 150 social activists pointed out that the “government’s refusal to pay even minimum wages on public works at a time when food prices keep shooting up lays bare the Prime Minister’s promise that ‘no citizen of our country must sleep hungry’”. It added that “it is shocking that a government battling trust deficit as scam after scam privileging powerful corporations become public, will let, comparatively minor, fiscal considerations override a constitutional and humanitarian mandate. A government violating the Minimum Wage Act was violating the Constitution and calling to question its own legitimacy.”
The consultation as well as the statement presented the views of a large cross-section of people and reflected the growing anger against the policy thrust of the Manmohan Singh government, particularly in relation to the lives of the common people.
References to a statement issued by the Prime Minister’s Office (PMO) on January 13 regarding inflation and price rise came up time and again during the consultation. The Prime Minister had a two-day-long consultation with senior Ministers on ways and means to check inflation before issuing the statement. The PMO had stated: “The current bout of inflation is driven by a rise in prices of vegetables and fruits which is more difficult to manage because these commodities are not held in public stocks. The rise in prices is partly due to late rains, which affected the onion crop. There is also an underlying increase in the prices of milk, eggs, meat and fish, which is the result of fast growth of the economy, leading to rising income levels, combined with the effect of several inclusiveness programme which put greater income in the hands of the relatively poor whose food consumption increases.”
The “several inclusiveness programme” mentioned here is perceived to be the NREGS, which offers a minimum 100 days’ employment to the rural population. Citing the NREGS as a cause for rising prices evoked widespread criticism. At the consultation, Jean Dreze, who is a member of the National Advisory Council (NAC) headed by UPA chairperson Sonia Gandhi, lampooned this line of argument and insisted that “increasing NREGS wages is essential to protect the worker against the debilitating inflation”.
Prime Minister Manmohan Singh with Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission. Ahluwalia, who pursues a line similar to that of the PMO, claims that the government has to function within legal parameters even in deciding measures to curb inflation.
Montek Singh Ahluwalia, who had pursued a line similar to the one propounded by the PMO at several fora and even described inflation as a sign of prosperity and food price rise as a one-time increase that had helped agriculture, did not specifically respond to this criticism. All that he would say was that the government needed to function within legal parameters on all issues, including curbing inflation and protecting minimum wages.
The January 13 statement gave a number of solutions for tackling inflation and price rise. These included “stringent action against hoarders and black marketeers” and steps to boost agricultural productivity. The latter proposal was explained as one that would involve taking up new schemes that would provide large budgetary support for the production of cereals, pulses, oilseeds, vegetables and fruits, milk and milk products, and poultry.
Commenting on this, Professor Sudhir Kumar Panwar of the Kisan Jagriti Manch, a collective of activists and academics that addresses the concerns of farmers and seeks to make them part of think tanks and policymaking bodies, told Frontline that increasing agricultural productivity and making special efforts in that direction is only a small part of the solution. He pointed out that India was the second largest producer of onions in the world, contributing 19 per cent of the global production, and yet the price of onions in the country had reached an all-time high in the past three months. “What we need is not measures such as these, which are primarily short-term and fail to address the core policy issues involved in the current situation. What we require is a comprehensive policy shift from the current market-driven policies that the UPA-II government is pursuing,” Panwar said.
However, he said, he and his organisation did not see any chance of such a policy shift happening. “At a time when the government needs to think on these lines, it is actually contemplating an absolutely counterproductive measure – of allowing 51 per cent foreign direct investment (FDI) in retail trade. What is interesting in this regard is that the BJP government in Gujarat as well as the BJP-Akali Dal alliance government in Punjab are in favour of such a move though the BJP-led National Democratic Alliance (NDA) at the national level is opposed to FDI in the retail sector.” Panwar noted that the motivations for such policy flip-flop among mainstream parties came from sources beyond national politics. Interestingly, many prominent State-level leaders of the NDA, including Bihar Chief Minister Nitish Kumar and Uttarakhand Chief Minister Ramesh Pokhriyal Nishank, had squarely blamed the Union government for the price rise, he observed.
The CPI(M) pointed out that the government’s steps on inflation had essentially rested on “false assurances” and that “the Ministers in the UPA government are giving differing and contradictory statements regarding price rise and how to tackle it”.
In a statement, the party highlighted the difference between the promises of Ministers and the actual measures as follows: “Since deregulation, petrol prices have been hiked seven times leading to a 20 per cent rise and this has prompted the oil companies to increase the price of petrol twice in a month. The hike amounts to a steep Rs.5.50 per litre. The government has not stopped speculation through forward trading in food items and essential commodities. The export-import measures for commodities such as onions have fuelled price rise and only helped the private trading companies to make huge profits. The price rise of food items has not benefited farmers. In many areas, farmers in distress continue to commit suicide. Neither do they get remunerative prices nor are they compensated adequately for crop losses. The Central government has not extended adequate assistance to meet the losses of farmers due to unseasonal rains.” The statement also pointed out that the government move to allow foreign companies in the multi-brand retail trade would mean loss of livelihood for lakhs of shopkeepers and traders.
CPI leader Atul Kumar Anjan, was of the view that the government statement about “stringent action against hoarders and black marketeers” is essentially meant for public consumption. “If the government was serious about this, much would have happened long ago. For over a year, the government has assured the people that it would reduce the prices of essential commodities. Not only has that promise remained unfulfilled, but the reality has been a galloping rise in prices. What this promise of stringent action actually aims at is realpolitik objectives. Elections are due in many States, including big ones such as West Bengal and Tamil Nadu, in the not-so-distant future and the aim is to address the electorate in these States,” he told Frontline.
The realpolitik aims vis-a-vis the price rise situation cited by Anjan had found a reflection in the coalition politics of the UPA in recent times. It set off a kind of tussle between the Congress and its junior associate, the Nationalist Congress Party (NCP) led by Union Agriculture Minister Sharad Pawar. It was Congress general secretary Rahul Gandhi who triggered the tussle when he blamed the compulsions of coalition politics for putting limitations on the Congress’ ability to control prices. This was perceived as a jibe directed at the NCP and Pawar, who wasted no time in retorting that “decisions regarding price rise are taken collectively”. He added that “the Prime Minister, his Economic Adviser, the Finance Minister, the Home Minister, myself and the Planning Commission’s Deputy Chairman take periodic reviews”.
This was followed by an announcement by the Trinamool Congress, the West Bengal-based constituent of the UPA, that it would launch mass protest rallies against the government’s measures that contributed to inflation and price rise. Interestingly, the so-called course-correction reshuffle in the Union Cabinet, which ultimately manifested itself as a dud exercise on January 19, was billed as something that would strengthen the measures against inflation and price rise. As it turned out, there was no concrete political or organisational element in the reshuffle that suggested a significant move in this direction.
According to Anjan, such opportunistic and confrontational politics within the ruling coalition blunts a real struggle against inflation and rising prices. The CPI leader agreed with Sudhir Panwar’s view that the real struggle against inflation and price rise has to be policy-oriented.
Anjan added that a broad framework of the required policy shift is available in the recent call given by nine non-Congress, non-BJP parties for a nationwide movement against inflation and price rise. The parties had exhorted the government to “take steps for ending forward-trading in food and essential commodities, universalising the public distribution system, taking firm measures against hoarding, paying remunerative prices to farmers and giving inputs at reasonable cost, ending deregulation of petroleum products and rolling back the budgetary hikes on petroleum products and not allowing foreign capital in retail trade”. The nine parties, which include the four Left parties and the Janata Dal (Secular), the Telugu Desam Party (TDP), the Rashtriya Lok Dal (RLD) and the All India Anna Dravida Munnetra Kazhagam (AIADMK), are planning an agitation that will stretch up to the Budget session of Parliament, which is scheduled to begin on February 21. It remains to be seen how far this campaign or the deliberations so far will impact government policy. If the track record of the past one and a half years is anything to go by, a drastic reversal of policy seems unlikely.
What people say: KERALA
PHOTOGRAPHS: S. GOPAKUMAR
Leela, thatch maker
“I make thatches out of coconut leaves for a living. I manage to make about 20 pieces a day for a daily wage of Rs.40. I live alone, in a small, leaking hut on half a cent of land my family gave me. The government claims I belong to the above poverty line (APL) category. I am not eligible for ration rice at subsidised price. For most part of the year I have no work. A kilo of rice in the open market costs nearly Rs.30. I skip breakfast and survive on black tea for most part of the day and the half a kilo of rice I buy from the retail shop every three days – and, maybe, some fish. I cannot afford to buy vegetables. I ask God, every day, why do you make me live like this?”
Vijayan, farm labourer
“True, prices are going up. But if people like me cut down on food, how will we do the hard labour in the fields? I have been a farm labourer all my life and there is much demand for my kind of work now. I am sure to get four to five days of work every week, on an average, at Rs.400 to Rs.450 a day. I live with my wife and aged mother. We have been able to manage so far despite the rising prices. But by the end of the week, we have very little savings left.”
Rejitha, nanny and domestic help
“I am really worried now. I live alone with two school-going children, a daughter aged 15 and a son aged 12. I earn about Rs.4,000 a month, looking after a child for a young working couple six days a week and doing domestic chores for different households on Sundays. I need Rs.1,200 every month for tuition and transport expenses for my children. I need to clear a housing loan of Rs.17,000. But my household expenses have gone up by Rs.1,400 in the past six months. I try to pay the grocer and the vegetable seller some amount every month. But debts are mounting. There is this constant fear about the future.”
“I have changed my shopping habits. I have stopped buying milk, except a quarter litre every day for my child. We have stopped eating meat. I go to the vegetable market at night on Saturdays, when they sell it cheap, before the holiday. I buy half of our requirement of rice, atta, and so on from the ration shop, and the other half, of better quality, from the open market. We buy fish only on special occasions. We buy onions very rarely. We always go for the cheapest cooking oil. It has been months since we ate out. I have to manage a household with Rs.4,000 a month.”
Chandran, wayside restaurant waiter
“The hotel where I work caters mostly to poor people, workers, labourers and the like. There is a definite change in the past few months: many regular customers who used to order rice and fish curry or meat for lunch are now asking if they can have rice alone, with some gravy perhaps. And we oblige.”
Rajan, city vegetable seller
“Where they used to buy one kilo they buy less nowadays. Or they go for cheaper alternatives. We have stopped stocking costly vegetables, onions, potatoes, and the like.”
“The weather has been playing truant, there is the invariable threat of floods and pestilence and the worry about a poor harvest. But when we do have a good yield, we are happy that the prices of vegetables are going up, until we go to the market to buy other essential commodities. We never get the price that middlemen reap from the market with our produce. Rice cultivation is not profitable now. So we are forced to buy rice too. A cup of tea costs Rs.5 at the village tea shop. Coconut oil, onions, you name it, we are forced to buy them all, at the price that the market decides. Labour is costly. My family lives on the vegetables and bananas that we grow in our field. Now I try to sell my harvest to middlemen who export vegetables to the Gulf and other countries. They are willing to pay any price and are eager to take any quantity. But then, when the yield is plenty too, prices fall. Life is hard.”
Sekharan Nadar, village tea shop owner
“I get nearly a hundred customers a day, all of them regulars, farmers and farm labourers from the locality. Many have started complaining that I am hiking prices much too frequently. But do you think I can help it? Prices of all commodities have gone up. The daily expense for running this shop is Rs.1,000 to Rs.1,200. At the end of the day, I get Rs.1,500 to Rs.2,000. I need to maintain that to look after my family’s needs. I try to avoid serving dishes with onions and potatoes and rely mostly on cheaper or locally available stuff. But customers are not happy. I can sense it. Some order much less than they used to. Some do not visit the shop at all. Others mutter curses under their breath.”
“They say salaries and wages are going up. But prices are rising at a much faster rate. What is the point in government hiking salaries if it cannot control prices? Big onions sell at Rs.80 a kilo; small onions at Rs.75; green gram and black gram sell at Rs.80 or Rs.90; a kilo of coconut oil costs Rs.100. The government offers rice at Rs.2 a kilo for BPL cardholders. But we are excluded from that category. Rice is nearly Rs.30 a kilo in the open market. So instead, we buy back ration rice from the BPL cardholders at Rs.10 a kg. Incomes are rising, but only for the rich. For the poor like us, such rise in prices is proving to be a disastrous burden. Either steal from the rich or encourage everybody in the family to commit suicide – that’s the only option before us.”
NO MORE BREAKFAST in the Government Upper Primary School in coastal Thiruvananthapuram, Kerala.
The headmaster, government school catering to poor children from coastal Thiruvananthapuram.
“The noon meal programme is certainly a big relief for the poor fisherfolk’s children in our school, especially because life is becoming a burden in the coastal areas. The system provides upma or steamed rice and chickpeas or green gram for breakfast; rice, sambar, and two side dishes for lunch; and milk and eggs at least two days a week for all 166 students in this school. At times there is a delay in the funds being released. Until recently the teachers used to manage the system by pooling their own resources. But with rising prices, and the funds being delayed for over two months, we are unable to find the necessary resources for everything. So we have stopped providing breakfast to the children for the past two months.”
Mary Stella, fish vendor
“I travel from the coast to bring fish to nearly 70 households in the city every day. Many of them curse me, saying that I am trying to fleece them. But does anyone realise how difficult life has become for people like us? I have asked my son to stop going to school so that his two elder sisters can complete their education.”
What people say: MAHARASHTRA
EVERY year thousands participate in the Mumbai Marathon’s six-kilometre “Dream Run”. This part of the annual event is usually a colourful spectacle with people supporting various causes running in fancy dress. Of the 22,000 Dream Run participants this year, one man stood out: he was wearing a garland of onions. The elderly gentleman said he planned to present the garland to the winner. A fitting prize for the present times.
Workers in the unorganised sector are the worst affected by the price rise. They say jobs are not difficult to get but the wages they are paid are not enough to survive on. Even in the organised sector, salaries are not enough to cover basic expenses. Sheila Kamble works in a nationalised bank. Her husband is a manager in a shipping company. Together they earn close to Rs.60,000 a month. They have to repay a housing loan and a car loan, pay school fees, pay medical bills of their parents and utility bills, and, of course, buy food. “Earlier I would not care about the amount of food I bought. After all, we have two growing children. But now with ordinary dal costing Rs.100 a kilo or cooking oil costing Rs.110 a litre, we plan our purchases each week,” she says.
PHOTOGRAPHS: ANUPAMA KATAKAM
Ravindra Deolekar, farmer:”This is a terrible situation.”
Sheila says it is absurd to say prices are rising because people are consuming more. “Prices are rising because they are not controlling them and have no proper policy,” she says.
Alka Jadav has been a cook for 30 years. She and her husband commute two hours every day from Vasai, a northwestern suburb, to Churchgate in South Mumbai because salaries this side of the city are better. “Until a few months ago, Rs.100 would get me two kilos of onions and a kilo of peas. Now I buy half a kilo of onions and some cheaper vegetables,” she says.
Alka and Shantaram Jadav. “Now I buy half the quantity of vegetables I used to earlier,” says Alka.
Trade unionist and social activist Vivek Monteiro says inflation is really hurting the unorganised sector. “People are eating just once a day and we find nutrition levels are dropping rapidly.” He says the naka workers (those who pick up work at commercial areas for a daily wage), who would normally earn about Rs.100 a day, still earn that amount but it is not enough to feed their families.
Naresh Ram lives in a slum near Worli and has four children below the age of six. He works as a loader and is the only working member in the family. “My wife cannot leave the children and go to work. I make around Rs.2,500-3,000 a month. Some days my wife would feed the children dry rotis and then wait for me to return with my earnings to make a proper meal for the children. It was not so difficult until a few months ago.”
It is not just urban India that is reeling under inflation. Ravindra Deolekar owns seven acres of agricultural land in Saswani village in Raigarh district. “If the monsoon is bad then our crops suffer and that hits our income,” he says. “This is a terrible situation because farmers also need to earn money. But if the prices are too high then the consumer gets hit.”
Montek Singh Ahluwalia has a point in an economy that is doing well, but that is hardly a realistic scenario, says Vijay Jawandhia, a cotton farmer and an activist with the Shetkari Sangatana in Wardha. “There is an increase in the money supply and therefore in prosperity. But it is not benefiting the larger population, 70 per cent of which is in the agriculture sector,” he says. The Sixth Pay Commission looked after the urban poor and the working class but paid no attention to farm labour, Jawandhia says. “How can farm workers survive in a so-called thriving economy when prices are increasing but their income is not?” he asks.
Anupama Katakam in Mumbai
What people say: DELHI
IN times of inflation, restaurants and eateries feel the bite of competition. Sample this: “We still serve pyaj [onions] with our meals while most other restaurants have switched to mooli [radish],” Govardhan, the manager of Gopi Restaurant in South Delhi, says. Salad is vital to Delhi cuisine, and onions form an important part of it along with carrots and cucumber in small measure.
But the spiralling prices of onions – between Rs.80 and Rs.110 a kilo in the last one month – have completely changed the food pattern in the small dhabas.
Govardhan’s trade secret? “You just have to use onions more judiciously in the curries. That’s it.”
Gopi Restaurant is in Yusuf Sarai, which is probably the only lower middle class place to shop in South Delhi. Because of its proximity to the All India Institute of Medical Sciences, its numerous dhabas get a lot of business from people visiting the hospital. They stay in cheap hotels for the period of their treatment, which is usually more than a month.
With the prices of food served in the dhabas going up in the past year, another business is thriving here: provision stores have started renting out utensils to these people to cook their own food in the hotels they stay in.
Jagmoti Baruah from Assam, 60, a kidney patient, has been in Delhi for a month with his wife. “The last time I came here was in 2007. We got a meal for less than Rs.20 then. Now it costs Rs.60. Hiring cooking utensils and making our own food works out much cheaper than eating out,” he says.
A few hundred metres from the Yusuf Sarai market is the Green Park market. Here vendors sell exotic vegetables such as broccoli, lettuce, bell peppers, black mushrooms and olives. The fruit sellers here sell imported fruits.
Ram from Bihar, in his mid-40s, is the biggest vegetable vendor here. He sells the best onions even during these times of inflation. He sells them for Rs.120 a kilo. “There has not been much difference in onion sales despite the high prices,” he says.
He sources the vegetables from Azadpur, the biggest wholesale vegetable mandi in North India, at a price higher than what he paid earlier. “We have to cut down on profits because even though my shop is in Green Park, we cannot sell the vegetables for the prices we demand. You have to stabilise the prices according to Delhi,” he says.
In Green Park’s restaurants, salads do come with onions. The only thing is that they are not as prominent as they were before.
Around 20 kilometres from South Delhi, the crowded streets of Paharganj are home to the largest number of pavement-dwellers. Mohammed Rasheed, who has been living here for the last 30 years, says “Even if we get bread and pulses every day, that is more than enough, sir. Even a plate of dal does not come for less than Rs.30 in the cheapest dhaba here. We are labourers and don’t earn more than Rs.50 a day. We don’t need salads.”
“We have no idea what the government is doing. For us, the only concern is to get any food and to see that the police do not drive us away from this pavement,” another homeless person adds.
The middle classes, too, are dropping their pretence of concern for growth in the times of inflation. But one memory is still alive: the defeat of the BJP in the 1998 Delhi Assembly elections, caused solely by spiralling onion prices. A fall from which the party has not recovered.
Ajoy Ashirwad Mahaprashasta
Of margins and the marginalised
The countrywide share of corporate retail in food distribution tripled in the past four years when retail food prices showed the greatest increase.
THE dramatic increase in food inflation over the past two years has been associated with several surprises. One major surprise has been how the top economic policymakers in the country have responded to it. The initial response was one of apparent disbelief, followed very quickly by the frequently repeated but thus far unsubstantiated conviction that prices would come down very soon.
Then this massive increase in the price of essential commodities was welcomed, even by those who should know better, as being a sign of greater material prosperity in the country and the success of “pro-poor” schemes of the government reflected in increased demand for food. Could it be that the economists who are running the country apparently believe that food demand does not increase much even in periods of significant aggregate income growth, and among a population that has some of the worst nutrition indicators in the world? Is that why they did not see any need to work towards increased supply of food and have been so surprised by even a slight increase in demand?
As it happens, the demand for food has in fact been growing much more slowly than could be anticipated by both income and population growth. Much of that has to do with the distribution of that growth, which has disproportionately denied benefits to the poor who would naturally consume more food. But even so, the fact is that it is really the conditions of supply – reflecting the continuing policy neglect of agriculture as well as the nature of distribution and the pressures on the market from speculative activity – that have driven food prices up. This recognition may be why the official arguments have changed somewhat recently. Most recently, the officially stated position put the blame on inadequate distribution chains, focussing on their inefficiency, rather than on any speculative pressures that can also affect supply. This has become the most popular interpretation of the ongoing food crisis by those in the corridors of power and by their stenographers in the financial press. This has consequently led to the demand that modern corporate retail chains (ideally with foreign direct investment) be brought in to manage food distribution.
As a result, there are now those who argue that the only solution to the problem of high food prices is to bring in FDI in retail. It is argued that this will reduce wastage in storage and costs of transport of food items, cut out intermediaries in distribution and provide food more effectively to consumers at lower prices.
The prices started rising sharply only in October and this was the period after which supply actually increased quite sharply. Here, at a wholesale vegetable market in Chandigarh.
Of course, this argument is rather foolish at several levels. First of all, if the traditional supply chains are so faulty and deficient, why did they not create such massive food price spikes earlier? Why was food inflation relatively low in the period until 2006, despite equally rapid GDP (gross domestic product) growth and the same system of distribution that is now being faulted?
Secondly, if the problem is inadequate infrastructure, including cold storage facilities and networks that facilitate faster distribution from farm to market, what stopped the government from intervening more proactively to ensure better cold storage and other facilities through incentives and promotion of more farmers’ cooperatives? To announce such measures only now, as a weak response to a period of raging food inflation, is futile because such measures operate only with a significant time lag. This is all the more so because such proposals are mentioned explicitly in the Farmers’ Commission Report, which has been lying with the government for five years now. The idea that cold storage and other facilities can only be developed by large corporates once they get involved directly in retail food distribution is ridiculous at best.
Thirdly, this entire argument ignores the critical role that the public distribution system (PDS) can play in moderating food price spikes and dampening inflationary expectations and tendencies to hoard. Instead of accepting the government’s failure to use this system effectively so far, the tendency is to throw up one’s hands and declare that only the large private sector can save us, even though international evidence indicates that corporate monopoly in food trade typically increases distribution margins instead of reducing them.
Evidence on margins
Unfortunately, though, we are forced to take such arguments seriously because they are being repeated ad nauseum by the media and pushed into government policies by corporate lobbies. So, let us consider what recent evidence on distribution margins indicates.
In fact, there is significant reason to believe that the margins between wholesale and retail prices of many important food items have increased in the recent period (see MacroScan, Business Line, February 23, 2010). The point is that this has happened in a period of increased corporate involvement in food distribution and food retail. The share of corporate retail in food distribution in the country as a whole is estimated to have tripled in the past four years, and has grown even faster in the major metros and other large cities. This was also the period when retail food prices showed the greatest increase.
The other point that emerges from a comparison of retail margins across major towns and cities is that such margins are the lowest in States (such as Tamil Nadu and Kerala) where there is an extensive, well-developed and reasonably efficient PDS that provides a range of food items on a near-universal basis to the population. In regions where the PDS is weak or non-existent (such as Uttar Pradesh and Bihar), the margins tend to be high and growing fast, even though corporate food retailing in these regions is expanding.
So to look at corporate retail as the solution to the food price increase is more than irresponsible. There is no question that the current system of food procurement from farmers is inadequate, faulty and often anti-farmer. There is much that needs to be reformed in the way market yards are organised and in the options available to farmers to get their produce to the market. There is a range of necessary and possible interventions for this, most of which have been stated many times to the government by various commissions of its own.
Yet, thus far the United Progressive Alliance (UPA) government has done little about any of these, even in terms of working with State governments to improve the situation, and instead seems to think that simply allowing more corporate (and FDI) activity in retail will allow it to wash its hands of the matter.
In this context, consider how retail margins have behaved in the very recent past in just one location, the city of Delhi. Charts 1, 2 and 3 describe the price behaviour of three significant but relatively less perishable food items: rice, sugar and tur dal.
It is evident that the retail prices have generally tracked the wholesale prices in terms of direction of movement, but still there are some noteworthy variations. On average, retail margins have increased for all these commodities, and quite sharply for tur dal. This may be the result of a number of features, and obviously requires more investigation. But even so it is worth noting that Delhi is a city that has witnessed a significant increase in corporate food retail. And the role of inflationary expectations in being able to influence retail price behaviour is obviously much greater for larger players.
The food prices that have been most talked about, of course, are those of onions. Onion prices are widely perceived to have great political significance, especially in North India. Because onions, like other vegetables, are highly perishable, supply conditions play a major role in deciding their price. Charts 4 and 5 describe the wholesale and retail prices of onions and tomatoes and their total market arrivals in the city of Delhi.
The evidence is somewhat surprising. For much of the period of falling market arrivals over the past year, onion prices were rather stable and the retail margin actually shrank. Prices started rising sharply only in October – and this is the period after which supply actually increased quite sharply! In November and December, market arrivals increased but prices continued to shoot up. Surely, inflationary expectations and hoarding must have played their roles, along with the speculative pressure, and this was not sufficiently counteracted by government intervention through the public food distribution network.
The case of tomato prices is similarly interesting. It is evident that neither wholesale nor retail prices had much relation to market arrivals even for this extremely perishable commodity. But what the period of higher prices has been associated with is a significant increase in retail margins in October and November.
Dealing systematically with the problem of high food prices in a largely hungry population should normally be a priority issue for any government. There are certainly crucial medium-term policies that must be implemented to reverse the longer-run neglect of agriculture.
The issue of rapidly rising cultivation costs, which are making farming unviable once again, needs to be addressed in a holistic way. The concerns of storage, distribution and post-harvest technology also need to be dealt with. But in the short run, the problem cannot be avoided by talking of astrologers and the inability of mere humans to predict the future. Instead, creating a viable and effective PDS that counteracts tendencies to price spikes in essential commodities is an immediate requirement.
What people say: UTTAR PRADESH
THE poor and the marginalised are the worst affected by the rise in prices of essential food items. Zubaida, a migrant from Bihar, is a domestic help in an apartment complex in Ghaziabad.
“The life of a domestic worker is better than doing beldaari work (breaking stones, lifting building materials, and so on). As a beldaar, I would probably get up to Rs.150 a day, but as a domestic help in five homes, I earn Rs.4,000 a month,” she says.
Her husband, a rickshaw-puller, pays Rs.40 a day as rent for the rickshaw. They have a dream: to buy a rickshaw and pay off the moneylender. They stay in a hut. “We use tarpaulin and plastic sheets as roof. The other day it blew away at 3 a.m. It was bitterly cold and, along with my four children, we passed the night in much misery,” she says.
They do not have a BPL card. “I have paid Rs.1,000 to get a ration card. I am told that it can be made for free, but I don’t have a proof of residence. What do you think we eat? Earlier we used to buy a little milk every day. Now the children have tea. We’d like to eat eggs in this terrible cold but it is only in three or four days that I am able to buy two eggs for my four children. If I buy potatoes from the weekly market, then it is somewhat cheap, but most of the time I buy it from the provision store as I do not have the money to buy them in bulk from the market.”
Domestic workers are part of the mammoth unorganised workforce whose salaries are certainly not adjusted to the vagaries of inflation.
Zabaida and others like her have cut down on all vegetables and even lentils. Fruits had disappeared completely from her diet long ago. The humble onion and garlic too have followed suit in the last six months.
T.K. Rajalakshmi in Ghaziabad
What people say: HARYANA
IN Kheri Kalan village of Faridabad district in Haryana, much of the agricultural land has been acquired by real estate developers. Hoardings on the Main Kheri Road that leads to the village in Sector 89 announces the first “affordable mall” in the National Capital Region and “luxurious homes [that] can still be owned only if you hurry”. The proposed mall promises “shopping nirvana, entertainment bonanza, food fantasia, office ambience, etc”. Behind the hoardings are the mustard fields in full bloom, the remnants of a sprawling agricultural landscape.
SHIV KUMAR PUSHPAKAR
This agricultural worker’s family in Haryana subsists on a frugal meal with potato curry minus onions or garlic.
Vijender, a former farmer, says: “We sold our land to the builders. The rates paid by the Haryana Urban Development Authority were very low, so we sold five acres [two hectares] of our agricultural land for Rs.3 crore an acre.” Now his family supplies building materials. “The price rise affects us, but not to the extent it does the construction worker or the agricultural worker who is hardly paid the minimum wage,” he says.
Nearly 30 per cent of the people of Kheri Kalan are Dalits, and almost all of them are agricultural workers. With real estate developers and private educational institutions acquiring fertile agricultural land, the opportunities for work have shrunk. With falling incomes, nutrition levels too have plummeted. Tuberculosis and pneumonia are common in the families of agricultural workers. Roopmati, 30, frail and weak, had not cooked for the day. Her husband, an agricultural worker, was away looking for work. If he returned with money, there would be dinner, or else the family would go hungry.
Earlier, she said, when there was work in the fields, the payment used to be in part cash and part kind. “Now the fields have gone; we have to buy everything from the market, and with no work there is no money,” said Omvir, her brother-in-law. The family subsists on potatoes and bathua (a kind of leafy vegetable). “Rather than buy one egg for Rs.5, which can feed one or two persons, I’d rather go for a kilo of potatoes so that the entire family can eat the curry prepared with red chilli,” said Roopmati.
Work is rare as builders prefer labourers from Bihar, Chhattisgarh and Madhya Pradesh who work for as low as Rs.100 a day. People like Omvir get work in the village for 10 to 15 days a month. There is no work under the NREGS in Kheri Kalan. The children of the village go to school because they get a meal there. The only meal Roopmati’s son Kuldeep, 12, eats is in school. His two younger siblings do not have that advantage.
“In 1990, we used to get wheat, rice, sugar, pulses, kerosene, tea leaves, matchboxes and even notebooks and pencils from the ration shop. Now we get only wheat which is of bad quality. That too once in two months. They should give at least 40 kg to a family of five to seven members. The cost of grinding wheat has gone up from 50 paise to one and a half rupees a kilo. I go to the Bathauda village crossing every morning where there are several like me waiting for work. If I am lucky, I get work, or else I return home,” said Omvir.
Prem Singh, also an agricultural worker, said the Haryana government had promised in 2008 to give hundred square yards of land to BPL families. That was under the Mahatma Gandhi Gramin Basti Yojana, which had not taken off in the village. Apart from plots of land, the government had promised basic infrastructure, drinking water and electricity. In fact, as per a memo issued in February 2010 by the Principal Secretary’s office to the Town and Country Planning Department, private colonisers were directed to provide a certain per cent of the plots acquired for the economically weaker sections.
This definitely has not happened in Kheri Kalan village where multi-storeyed apartment complexes have come up. Even so, more than plots, the poor were in desperate need of alternative employment and a robust public distribution system.
Bhagwan Singh, a Dalit and a nambardar (a government employee who is supposed to assist officials in their village visits), said the entire basis of the BPL surveys was faulty. He narrated an incident in which surveyors declined to give BPL status to a family because they saw a “Lux” soap in the house.
In another house, when they were offered cold water in summer months, they decided the family owned a fridge and therefore could not be given BPL status.
Owing to the rising cost of food items, he said several families in his village had not bought quilts or warm clothes for children. “We know of families who have picked up clothes from the cremation ground, meant to be burnt along with the dead bodies, in order to protect themselves from the cold,” he said.
Representatives of farmers and government employees blame the government for protecting hoarders. “The onion crop that is now available was harvested in the rabi season last year.
We can understand if the present kharif crop has been affected because of the rains. It was surprising that when the traders protested, the government stopped the raids. It shows on which side the government is really on,” said Yaadram Singh, a representative of the Sarva Karamchaari Sangh.
Rajeev Bhati, a farmer who is heading a protest against land acquisition in Palwal district, said it was funny that while sugarcane was sold at Rs.2 a kg, sugar was priced at Rs.40 a kg. “The farmer doesn’t get anything. Today, one of the reasons that agricultural workers are not getting work is also because the small and medium farmers have taken to doing that work themselves,” he said.
“The situation of the marginal farmer is such that he sells good quality wheat and keeps the bad quality for his consumption. The wheat we sell at Rs.1,100 a quintal is the same that we buy for consumption at Rs.2,200 a quintal from the market,” said Bhati.
T.K. Rajalakshmi in Faridabad
What people say: TAMIL NADU
MALLESWARI, 65, a Dalit farm worker of Aththangi Kaavanur village in Tiruvallur district, does not know who heads the government’s or the Reserve Bank of India’s attempts to rein in inflation. But her predicament is akin to what the disciples of Jesus are said to have felt about feeding the multitude with five loaves and two fish. “I have my husband, four sons, one daughter, three daughters-in-law and five grandchildren living with me. Never before have I seen such a steep hike in the prices of vegetables and pulses. A single onion costs Rs.5 and a single tomato costs Rs.3. It has become impossible for me to ensure that all the members of the family get their share of side dishes,” she says.
B. JOTHI RAMALINGAM
AT ATHANGIKAAVANUR VILLAGE, Tiruvallur district. The rise in the prices of essential commodities is affecting the poor in particular.
Her family gets 20 kg of rice at Re.1 a kilo through the public distribution system, but that does not last a week. “We buy rice from private traders at Rs.22 a kg.”
The people in the Dalit colony have their cup of woes. E. Laila, who stays with her son, daughter-in-law and three grandchildren, says that she and other farm workers of the colony get job only for 30 days in a year as landowners prefer migrants to work in their fields. “We are engaged by very few farmers, that too only for paddy transplantation. More than 12 farmhands have to share Rs.1,000 provided for one acre.”
Implementation of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has not provided any worthwhile remedy to the problems of the jobless farmhands in this village where 420 job cards have been issued for 320 families. “When the scheme was announced five years ago, it raised our hopes of getting work at least for 100 days in a year. But the records show that only two persons have completed 100 days’ work. Only 20 persons were able to work for 80 days to 99 days,” one farm worker points out.
All this has left them at the mercy of usurious private moneylenders. “Though government agencies offer financial assistance through self-help groups, the rising prices of essential articles have made our day-to-day life more difficult,” R. Vasantha, another agricultural worker, says. She gets funds under the State government-sponsored livelihood development programme, Vaazhnthu Kattuvom Thittam. But not all the eligible poor have been enumerated under the BPL category and not all needy elders are given old age pension.
Narayanan, 61, an agricultural worker of Kaniyamoor village near Chinnaselam in Villupuram district, has three sons who are daily wage earners. According to a study done by the Tamil Nadu Vivasaya Thozhilalar Sangam, his nine-member family needs 70 kg of rice in addition to their PDS quota every month. He buys the extra rice from private outlets at 22 times the cost of PDS rice.
B. JOTHI RAMALINGAM
The cost of farm inputs and the hiring charges of machines have steadily increased. In the picture, using a paddy harvester in Kancheepuram.
“As we cannot afford the rice and pulses available in the open market, we have reduced the consumption of these. Soaring health costs have already pushed us into debt. Though we are prepared to work in the fields, we do not get enough work and are not paid the minimum wages fixed by the State government in this rain-fed area,” Narayanan told Sangam activists.
Small and medium farmers too are reeling under the impact of price rise. A.G. Kannan of Tiruvallur district says, “Even as the cost of farm inputs and the hiring charges of machines steadily increase, the price of agricultural produce has been dwindling. I have raised ‘Bapatla’, a fine variety of paddy, this time. Last year we sold it at Rs.1,150 a 76-kg bag. This year we struggled to push it for Rs.750 to Rs.850. This is because the market is decided by rice mill owners and intermediaries,” he says.
M. Manavalan, a medium farmer, says the rent for harvesting machines has gone up to Rs.2,100 from Rs.1,600 an hour. “The farmer has to bear the expenditure on weighing, packing and transporting the stock to the rice mills. The cost of seeds has also gone up manifold,” he adds.
Pooh-poohing the theory circulated by some rich farmers that the rise in the prices of vegetables is mainly because of the non-availability of farmhands, the national vice-president of the All India Agricultural Workers’ Union, S. Thirunavukkarasu, says, “Several lakhs of agricultural workers have become migrant labourers.”
“Farm workers need work for at least 200 days in a year and fair wages. Before the implementation of the Green Revolution, labourers had work for 180-200 days in a year. In the post-Green Revolution era, this dwindled to 100-110 days. In the present globalised scenario, farm workers are unable to get job even for 70 days, thanks to a combination of factors such as the use of modern equipment in the labour-intensive sector, the taking over of farm lands for industrial and real estate purposes, and the introduction of corporate and contract farming,” he says.
Referring to the much publicised nine-point plan of the State government to tame prices, Thirunavukkarasu says this should not become a knee-jerk reaction. He has called for sincere steps such as the strengthening of the MGNREGS; enacting comprehensive legislation to support farm workers, ensuring food security for them; and the banning of futures trading in essential commodities.
Such measures are important for the State, which has over 86.37 lakh farm workers and 51.16 lakh cultivators, he feels.
S. Dorairaj in Chennai
The class bias in government policy is clear in the decision to release a small amount of foodgrain in the open market to tackle inflation.
The government has, through another of its “slot machine” committees, to borrow Joan Robinson’s term (where the government puts in the coin and gets the report it wants), even rejected a proposal of the National Advisory Council to provide food security to the people. Here, at the wholesale market at Yeshwantpur in Bangalore.
MOST people would agree that there is a strong element of speculation underlying the current inflation and that forward trading contributes to it. Yet the government, though it has banned forward trading in certain commodities under public pressure, is curiously reluctant to see this point. The reason lies in its commitment to neoliberal reforms.
Neoliberal policies include the removal of ban on forward trading. This is justified by the argument that speculation, which forward trading encourages, is beneficial: it has a price-stabilising effect rather than a price-destabilising effect. The argument runs as follows: consider a year when there is an output shortfall. This would put pressure on prices. Now, since there is no particular reason to expect another output shortfall next year, everybody will believe that the price next year will be back to “normal”. They would therefore expect the current year’s “abnormal” prices, caused by the output shortfall, to fall next year. This expectation of price fall will induce people to reduce their holding of stocks of this commodity below what they would otherwise have done; and this will moderate the price rise in the current year itself.
Hence, it is argued, speculation has the effect of moderating price fluctuations, that is, reducing their amplitude. It also follows from this reasoning that when there are no output shortfalls there is no question of speculation itself conjuring up any deliberate scarcity out of thin air and pushing up prices. And if speculation can do no harm but can only do good then barriers to speculation, such as the ban on forward trading, should be removed. All markets, including forward markets, should be left to function freely.
The obvious fallacy of this argument lies in the assumption that the current price rise does not affect the price that is expected to prevail next year, that is, that the notion of the “normal” remains unaffected by the current price rise. This is wrong. If, for instance, because of the current price rise there are salary increases in some segments of the economy, then the money demand next year will be higher, so that even with no output shortfall, the “normal” price next year will be higher. If speculators’ expectation of the next year’s price is, for whatever reasons, affected by the current year’s price rise itself, then speculation in the current year may well raise current prices higher than they would otherwise have risen. And the same is true if speculators take into consideration not the “ground reality” alone sans speculation, but the actions of other speculators too. In such a case the argument about speculation being price-stabilising breaks down.
There is, however, an additional and even more powerful argument that shows why speculation is not just capable of aggravating inflation but necessarily does so. In the entire discussion above we think of speculators as being “price-takers”. They are assumed to behave on the basis of expecting a certain price to prevail, no matter how this expectation is formed; there is no question here of their deliberately rigging prices. But such rigging is a fact of life; and once we take it into account, the entire neoliberal argument about speculation collapses.
Such deliberate rigging of prices is ignored in the neoliberal argument because speculators are supposed to look only at the gains from speculation, and rigging the market, while it may benefit one single speculator at the expense of another, is unlikely to benefit speculators as a body. But since speculators are not just some “outsiders” but typically tend to be associated with the business of trading in the commodities in which they speculate, the effect of speculation on total profits, both from speculation and from trade, needs to be looked at; and when we do so, then rigging the market through speculation clearly becomes profitable not only for individual speculators but for the entire body of them.
The reason is simple. There is a whole range of commodities, the so-called essential commodities, in whose case demand is not very responsive to prices; it does not fall much as prices rise. In such cases of “inelastic demand” a price rise in the market increases the revenue and profits of all sellers. But, of course, if an individual seller tried to raise the price and others did not follow, then the individual seller would lose his or her market to others and end up making losses; but if all acted in concert to raise the price, then each would gain from it. The individual seller, therefore, is constrained in the matter of deliberately raising the current price.
The forward market
This is where the forward market comes to the individual seller’s help. If a seller deliberately rigs up the forward price, by contracting to buy at a higher price in the next period than would have otherwise prevailed, then this fact increases the expected price for the next period for all sellers, which, in turn, raises the current price and yields a gain to all of them.
An example will make things clear. If the current period’s price and also “normal” price in the next period is Rs.100, and a seller with a market of 100 units makes a forward contract to buy 10 units in the next period at a price of Rs.110. Others too make similar contracts and the forward price rises. With it the expected sale price for the next period rises, too, say by 8 per cent. This, in turn, pushes up the current sale price by, say, 5 per cent, which, let us assume, causes a drop in sales by 2 per cent. But even so, the seller obtains additional profits of Rs.290 in the current period against a promised additional payment of Rs.100 in the next period.
Other sellers, too, would be making similar gains. It follows that in any market with inelastic demand forward trading has an inherently inflationary bias. Sellers will push up the forward price in order to raise their current sale price, but they will not naturally try to lower the forward price for their wares. The bias is therefore only in an upward direction.
This has been so well established from past Indian experience that the current official faith in the virtues of futures markets is extremely odd. Obviously, however, the reason for this apparent faith is not blind adherence to a particular (mistaken) theory but the pressure to promote the interests of trader-speculators.
The other official excuse against a ban on forward markets is the argument that forward markets benefit peasant producers. This is baseless. The forward contracts are typically not with the peasants; so there is no question of their either being insulated against risk or getting a part of the higher price that speculation in the futures market brings about in the current period.
But forward trading is only one of the ways in which a neoliberal regime contributes to the inflationary process in essential commodities. The other crucial ways are: the strangulation of the peasant (and more generally petty producers’) economy, which adversely affects the production of a whole range of essential agricultural commodities; and the strangulation of the public distribution system in essential commodities both for ideological reasons and also for reasons of “sound finance” (which enjoins severe restrictions on food and other subsidies to keep down the fiscal deficit).
Peasant economy in crisis
There is no gainsaying that the peasant economy in India (and indeed all over the Third World) is in a severe crisis. The rise in costs of a variety of inputs, including credit, because of the withdrawal of government support that was provided earlier has made agriculture unprofitable. With earlier technological advances having reached a plateau, with woefully inadequate public investment in agriculture, with the substantial scaling down of public extension services in the agricultural sector, with the drop in profitability, and with agricultural land being diverted towards “infrastructure” and real estate projects for the rich, per capita foodgrain output has come down in the last two decades. It is scarcely surprising that per capita foodgrain availability has shown a declining trend, especially since the late 1990s. By 2008, it had declined to a level that was lower than at any time since the early 1950s, lower even than during the mid-1960s which had witnessed the Bihar famine.
The decline in per capita foodgrain availability in the era of globalisation, owing to the pursuit of neoliberal policies which reverse the earlier dirigiste strategy of supporting peasant production, is a phenomenon visible all over the Third World. Food riots have broken out in several countries, and Tunisia has even seen a popular uprising, caused inter alia by soaring food prices, that has overthrown the government. India is no exception in this regard. Of course, inflation in the foodgrains sector, which was raging earlier, has moderated; but the current rise in the prices of animal and dairy products is also a reflection of the food crisis, since any jolt to the food economy has the effect of reducing fodder availability and hence constraining the supply of animal products. So the crisis in peasant agriculture lies at the root of the current inflation.
In fact, what really needs to be explained is not why inflation in food products is occurring now, but why it had not occurred earlier, prior to 2008, if per capita foodgrain availability had been declining for such a long time. The answer lies in the fact that the squeeze on the peasant economy and the general deflation of public expenditure in the rural sector affect both the supply and the demand sides. Just as these factors restrict output, they also restrict the purchasing power in the hands of the rural population, and hence curb demand. Putting it differently, if inflation is one way of enforcing a reduced per capita availability, restrictions on the purchasing power in rural areas through government expenditure deflation is another alternative way. Reduced per capita availability or absorption sometimes occurs through the restraint on purchasing power at the prevailing price, and sometimes, as now, through inflation, that is, a rise in price relative to purchasing power.
In the period before 2008, the squeeze on purchasing power, effected through government expenditure deflation among other things, was the primary instrument of enforcing reduced per capita availability, both in India and elsewhere. After 2008, it is the rise in food prices that has taken on this role. Here speculation has also made its contribution, but it has been superimposed upon basic demand-supply imbalances.
The most important factor for the emergence of excess demand globally has been the diversion of grains for the production of biofuels (more than a quarter of the grain output in the U.S. is now so diverted). Within India, it is claimed, the main reason for the emergence of excess demand is the recent injection of purchasing power into the hands of the people through a revival of government expenditure in rural areas.
Even if we accept this argument for a moment, it only shows how fruitless this injection has been, since what it has added by way of money incomes in the hands of the people has been snatched away from them through inflation. In short, the problem of the crisis of the peasant economy, whether it manifests itself through reduced demand relative to supply or reduced supply relative to demand, remains the fundamental issue to be addressed.
The bizarre aspect of the current situation is that in the midst of the massive food price inflation, the government continues to sit on top of a mountain of foodgrain stocks, amounting to almost 60 million tonnes. True, at this moment the location of acute inflation is in sectors other than foodgrains; but foodgrains had seen sharp inflation until recently and foodgrain prices in the open market have not come down much from the dizzy heights to which they had climbed. And, anyway, the provision of cheap food to people, including to those counted as above poverty line (APL), cannot but provide relief in the midst of the current inflation.
Yet the government has not only turned down the Supreme Court’s suggestion to distribute food to the hungry; it has, via another of its “slot machine” committees, to borrow Joan Robinson’s term, (where the government puts in the coin and gets the report it wants), even rejected a proposal of the National Advisory Council to provide food security to the people. This proposal of the NAC had itself been criticised for its meagreness, since it sought to provide food security not to the entire population, but only to 75 per cent of it; but even this is unacceptable to the government.
The sting of this committee’s report is in its tail: it suggests linking the price at which the below-poverty-line (BPL) population is to be provided foodgrains to the rate of inflation, which means that henceforth even the BPL population will be provided no protection against inflation. This amounts to defeating the very purpose of the public distribution system, a decimation of the PDS.
The reason adduced is to keep the food subsidy bill under control, the necessity for which arises because the corporate rich, whose share in the gross domestic product has risen rapidly, cannot be taxed (on the contrary they have to be provided tax concessions and other handouts), while financial interests have to be appeased by sticking to “sound finance”, that is, restricting the fiscal deficit to 3 per cent. So, with corporate and financial interests dominating the state, the axe has to fall on the increasingly hungry and inflation-battered working people.
Nothing underscores the class bias and the mulishness of government policy as clearly as the recent decision to release a small amount of foodgrain stocks, not through the PDS but in the open market, as an anti-inflationary measure. This is exactly what the Indira Gandhi government, which at least had the excuse of inexperience in such matters at the time, had done in 1972 to counter an emerging inflationary upsurge. Grateful speculators bought up what was released in the open market and inflation continued to rage, with the government watching helplessly since it had run out of its stocks.
Manmohan Singh was in the government at the time as Economic Adviser and he, if nobody else, should have remembered that episode. But exactly the same mistake has been repeated by the government he leads now. And the reason once again is the obsession to contain the fiscal deficit that financial interests enjoin upon the government: releasing more foodgrains through the PDS for combating inflation would supposedly have raised the food subsidy “burden”.
No government, under such thraldom to corporate and financial interests, can protect the people from the squeeze of inflation. The end to inflation may come, but only when the same squeeze that it imposes on the people gets to be administered in some other, alternative, ways.
What people say: ANDHRA PRADESH
“THE common man is gasping for breath as the prices of essential commodities are spiralling out of control. Do you call it a sign of prosperity?” said Mandala Bulli Babu, a 47-year-old farmer in Kundavari Kandrika village near Vijayawada, when asked about Montek Singh Ahluwalia’s statement on inflation and prosperity. “Farmers are eking out a living on loans taken at high interest rates. The failure to control prices has jacked up input costs of agriculture, while farm labourers are demanding higher wages,” he says. Babu says the present inflation is not demand-driven but is the result of “failure of government policy on the agricultural front to raise output”.
B. Raghunath, a farmer from Laseru near Visakhapatnam, says his earnings are barely enough to feed his seven-member family.
V. Kanaka Durga, 30, a salesperson in a mobile phone shop in Vijayawada, says, “All my colleagues discuss only one topic: the rise in prices. My salary remains more or less the same, while the prices have gone up manifold. There is no truth in the government’s claim that people are becoming richer. That people are purchasing vegetables at higher prices does not mean their income levels have gone up. Earlier, I used to buy a kilo of tomato for my family of six members, but now I am purchasing only one-fourth.”
It has been a winter of discontent this time. “Right from garlic, brinjal and other vegetables to milk and spices, prices have gone up four or five times. We can feel the pinch since we are managing two households in different places,” says Anita Rao of Visakhapatnam, a painter, whose husband, a naval officer, is posted in Tamil Nadu. She lives with her son here. “Our monthly expenses have increased three times in the past two years. The Sixth Pay Commission has given a false sense of comfort. The income hikes are not at all on a par with the rising prices,” she says.
S. Devi, a farmer of K. Kotapadu near Pendurthi, sells vegetables from her farm at the MVP Rythu Bazaar in Visakhapatnam. “We invested Rs.50,000 on raising tomato last season. But the crop was ruined by heavy rain and we are barely able to make ends meet. Even the cost of fertilizers has gone up from Rs.30 last year to Rs.75 now,” she says.
Mandala Bulli Babu, a farmer in Kundavari Kandrika village near Vijayawada, blames the price rise on the failure of government policy.
It is a daily struggle for farmers in the tribal belt of Araku and the interior villages as they fight to keep the wolf from the door. B. Raghunath of Laseru village, 125 km from Visakhapatnam, says his earnings are barely enough to feed his seven-member family. “In a good season, I earn between Rs.5,000 and Rs.6,000 by selling vegetables and farm produce. But in a lean season my income falls to Rs.1,000. Even the cost of transporting vegetables from Araku has increased from Rs.2,500 to Rs.4,000. My daughter had to discontinue her studies and work as a volunteer at a local school to earn some extra money,” he says.
Although upper middle class families manage to bear the cost surge, they refute the contention that inflation is a sign of prosperity. “For a developing economy like India, 4-5 per cent increase in prices is normal. But a more than 18 per cent rise is certainly not a sign of prosperity. Today, the government is focussing more on core inflation and neglecting hairline inflation, which affects millions of households in the country,” says Prof. K. Sreerama Murty, Chairman, Board of Studies of Economics, Andhra University.
Prof. R. Sudarsana Rao, Head of the Department of Economics at the university, says, “I bought one kg of onions for Rs.40 on Pongal day, the highest I ever paid in my life for onions. The rise in petrol prices has come as the proverbial last straw. It is time decision-makers analysed the rise in prices from the common man’s perspective.”
K.K. Alemayehu, an Ethiopian doing research in Andhra University, has written to the Government of India to increase the stipend. “When we came here in 2008, our stipend of $250 a month was decent enough. But with such steep increase in prices, it is insufficient,” he says.
Anita Rao: “We can feel the pinch.”
Venkata Reddy, a street vendor running a fast-food centre in Hyderabad, does not know who Montek Singh Ahluwalia is, nor does he know that Prime Minister Manmohan Singh attributes the price rise to increasing consumption. All that this struggling migrant from Kurnool district knows is that during every visit to the wholesale market to get rice, chicken, noodles, oil and, most importantly, vegetables like onions and tomatoes, the prices would have risen. “Every week, it is a pain to see prices spiralling. In the past few months, while all other vendors have increased the prices of food items, I have not. I cannot afford to lose customers. That is why I revise the price once in nine months or a year,” he says.
G.V.R. Subba Rao in Vijayawada;Nivedita Ganguly in Visakhapatnam; and Suresh Krishnamoorthy in Hyderabad
What people say: KARNATAKA
Most people do not know whom to blame for the price rise. Some put the responsibility on the Central government, while others blame the State government. There is also a general anger against middlemen and the trading class who are believed to be hoarding and artificially inflating prices. The general sentiment is that the rich have become richer while the poor and the middle classes are the real sufferers.
Laxman Kengar, 43, a salesman of landscape materials, says: “Everyone – the government, the rich people – is forgetting the poor. What does Montek Singh Ahluwalia mean when he says inflation is a sign of prosperity? Only the income of the rich has increased. There is imbalance in society.” With the Rs.20,000 he earns a month, Kengar has to support his wife and child.
G.P. SAMPATH KUMAR
Anita R.: “Whatever we earn, we spend.”
“My savings have come down by 60 per cent over the past year. Earlier, vegetables worth Rs.100 would last for 15 days, now even if we spend Rs.1,000 a month on vegetables it is not enough. The income remains stagnant but what about the expenses?” says an angry Kengar.
Amjad Subhan, 55, a banana vendor, says: “Regular customers who bought a dozen bananas earlier can afford only half a dozen now. Earlier, I used to earn between Rs.50 and Rs.100 a day, but now to buy the same things I need Rs.300 to Rs.400. The customer comes in the form of an angel sent by God for me, but when he hears the price of the bananas he loses his temper, has an argument with me and walks away.”
Anita R., a resident of R.T. Nagar in Bangalore, works as a secretary in a small information technology firm in the city. Her attitude to the Prime Minister’s and Ahluwalia’s statement is one of serious scepticism. “Whatever we earn, we spend. This tyranny of price rise is killing the middle class,” she says. Anita earns less than Rs.20,000 a month and has to support her younger brother and mother.
With the Rs.13,000 he earns a month, V. Ratan Singh, 34, has to feed four mouths – himself, his wife and their two children. He is a cab driver ferrying clients in the IT sector.
G.P. SAMPATH KUMAR
Ratan Singh: “What do I save?”
“It is good that the IT industry is based in Bangalore because it provides jobs for people like me, but only the salary of the techies is going up while our incomes remain the same. No one gives me a tip, and even if they do it will be no more than Rs.50 a day. What will that give us – one dosa is Rs.25 and a tea costs Rs.10. Of my income 75-80 per cent is spent on rent and food. What am I supposed to save?” he asks. He is also angry at migrant unskilled labourers in Bangalore as he feels this deprives Kannadigas of the jobs that they should have. This is a dangerous outcome of inflation.
Sushil Kumar, an agriculturist growing paddy on his two acres on the outskirts of Bangalore, blames it on middlemen for hoarding essential food stuffs. “Even agricultural cooperatives are not of great use to us,” he says.
Vikhar Ahmed Sayeed in Bangalore
What people say: ORISSA
IN Orissa, be it in the capital, Bhubaneswar, or in the interior regions, lakhs of poor and middle-class people are reeling under the rise in prices. “Buying essential commodities has become a challenging task for us. We spend most of our income to buy rice, kerosene and vegetables at market prices,” says Minati Nayak, a middle-aged woman living in a slum cluster in the heart of Bhubaneswar.
Minati works as a maid in several households and her husband pulls a trolley-rickshaw. Unable to manage things smoothly, she has sent her physically challenged minor son to work in a shop on the outskirts of the city. Though Minati and her husband have been living in the slum since 1999, they have not been issued a BPL card so far. They, however, have voter ID cards.
Kishore Samal, a farmer in Ranapur village in Jajpur district, has a similar story to tell. “Buying onions has become a thing of the past. How can a farmer like me buy essential items at such high prices when I don’t get the right price for the paddy I produce in my fields?” he asks. “With the prices rising by the day, sugar, potato and pulses are getting out of our reach,” says Samal whose paddy crop was badly damaged by the unseasonal rains in the first fortnight of December.
Jatadhari Rout, a marginal farmer in Karamanga village in Jagatsinghpur district, says he is not aware of the measures the governments at the Centre and in the State are taking to help the poor cope with the price rise. “These days I rarely go to the weekly haat in our area to buy essential items,” says Rout. “The bus fares have also increased manifold in recent months, making it difficult for us to travel long distances. The government should take some serious measures to check the prices.”
“How can poor people like us live when the government has not been able to do anything to control the prices of onion, sugar, rice and pulses? I doubt whether the government is doing anything to help us cope with the situation,” says Shankar Sahu, a daily wage labourer from Bahadalpur village, 16 km from Bhubaneswar.
Sahu comes to work in the city every day on his bicycle as he says he cannot afford to travel in a bus. “Almost every essential item costs high,” says Sahu, explaining his difficulties. The lack of a BPL card has added to his family’s burden.
Prafulla Das in Bhubaneswar
What people say: WEST BENGAL
Annapurna Das, 55, of Baman Ghata village in South 24 Paraganas district does not mince her words when she speaks about the price rise. “I have three little grandchildren, and it is after four months that I could buy a small quantity of fish for them. Nothing is left for us, the poor. Things are getting increasingly expensive, but my sons’ wages remain the same,” she says.
She has four sons who work sometimes as unskilled industrial labourers and at other times as farm hands. With ten mouths to feed, Annapurna recently had to sell some of the jewellery and utensils to keep things going. “We are now compelled to eat less and try to ensure that at least the children get a full meal. But it is getting harder by the day,” she says. The argument that inflation is a sign of prosperity and that rising prices are an indication of increasing consumption puzzles her.
ARUNANGSU ROY CHOWDHURY
Annapurna Das of Baman Ghata village in South 24 Paraganas: “Things are getting increasingly expensive, but my sons’ wages remain the same.”
In the same village live 22-year-old Nirmal Sardar and his wife. A graduate, Nirmal works as a mason, earning Rs.3,000-3,500 a month. He sends half this money to his parents and three younger siblings living in Sandeshkhali. His father, once a farmer, is too old to work and it is on Nirmal’s income that all five have to survive. The Centre’s arguments, he feels, might hold true for the salaried class, but not for the wage earners.
Samarjeet Dubey, 28, and S.K. Pervez, 40, are self-employed; they supply chemicals to some units in the Leather Complex at Bantala, 20 km from Kolkata. “Till about a year ago we could make some investments, but now we have no savings,” says Dubey. Pervez, who has three teenaged children, says it is a struggle just to live with dignity, let alone comfort. “My monthly income is Rs.9,000 and my expenditure is Rs.12,000. There is the children’s education to think of, and school fees have increased. So we have to curtail our food and other expenses.”
Both Dubey and Pervez have had to cut down on all recreational expenditure. “We cannot spend anymore during festivals, nor dine out with the family. We cannot even take the children out for a vacation,” says Pervez. With the recent hike in petrol prices, he has been thinking of selling his two-wheeler. As for the Centre’s argument that inflation is a sign of prosperity, Dubey says, “That holds true for one section of the people who are getting richer.”
ARUNANGSU ROY CHOWDHURY
Nirmal Sardar, a graduate of Baman Ghata village, works as a mason to support his family.
In the busy Dalhousie area of Central Kolkata, Praveen Mehta, 28, sits all day long on the pavement, selling peanuts. He travels every day to his corner of the footpath from his house in Bandel, in Hooghly district, around 43 km from Kolkata. He is unmarried and has no dependants. “A year ago, I had a daily net profit of about Rs.50. But now it has come down to an average of Rs.10. People have begun to think twice before buying even peanuts,” he said.
The escalating prices of essential commodities have also narrowed down his daily diet. “Practically everything is now unaffordable for me, so I simply make do with lentil and some vegetables,” he says.
Suhrid Sankar Chattopadhyay in Kolkata
Danger of inflation
Government inaction on food-price inflation amounts to an implicit declaration that it is inevitable and has little to do with policy.
At a vegetable market in Secunderabad, a file picture. Soaring prices have kept most buyers away.
WELL before Budget 2010-11 was presented, inflation had emerged as the principal economic problem in the country. With food-price inflation running at close to 20 per cent, even the United Progressive Alliance (UPA) government at the Centre had been forced to recognise it as a problem that deserved as much attention as the objective of achieving a 9 or 10 per cent rate of growth, if not more.
In fact, the increase in the prices of rice, atta and sugar in cities, averaged across the major regions, had been so rapid as to be alarming, especially over the past two years, with rice prices increasing by nearly half in the northern cities and more than half in the southern cities. Atta prices have, on average, increased by around one-fifth from their level of two years ago. The most shocking increase has been in sugar prices, which have more than doubled across the country. Prices of other food items, ranging from pulses and dal to milk and vegetables, have also shown dramatic increase, especially in the past year.
Yet, there is little of substance that the government appears to be doing to rein in prices, with the Budget contributing to aggravating rather than redressing the problem. The proposed reduction in subsidies on fertilizers and the increase in duties on petroleum and petroleum products would increase the cost of production (including the cost of irrigation) and the cost of transportation, pushing up farm-gate, wholesale and retail prices further. The across-the-board increases in indirect taxes will only make things worse. This is surprising, since questions of food security and the right to food have become such urgent political and social issues in India today. Rapid aggregate income growth over the past two decades has not addressed the basic issue of ensuring the food security of the population. Instead, nutrition indicators have stagnated and per capita calorie consumption has actually declined, suggesting that the problem of hunger may have got worse rather than better. So, despite apparent material progress in the past decade, India is one of the worst countries in the world in terms of hunger among the population. The number of hungry people in India is reported by the United Nations to have increased between the early 1990s and the mid-2000s.
These very depressing indicators were calculated even before the recent rise in food prices, which is likely to have made matters worse. Indeed, the rise in food prices in the past two years has been the highest since the mid-1970s, when such inflation sparked widespread social unrest and political instability. Between 2005 and 2007, the year-on-year increase in food prices fluctuated between 3 and 5.6 per cent. It rose to 7.9 per cent in 2008, 12.9 per cent in 2009 and 19.4 per cent as of January 2010.
What is especially remarkable is that food prices have risen even when the general price index (for wholesale prices) was either flat, as in 2009 when the overall inflation rate was only around 2 per cent, or much lower at around 8.5 per cent as of January 2010. If, despite this, the government has chosen to underplay this problem, it must be because of its neoliberal preoccupations diverting its attention from the pursuit of its declared objective of “inclusive” growth.
To the extent that it recognises inflation, the Centre has chosen to identify price trends over the past few months as being the collateral fallout of policies and developments in the domestic and world economy. Among the reasons being cited are increases in the minimum support price for farm produce, increases in international prices, increases in demand “due to the increase in purchasing power” resulting from higher growth, excess liquidity in the system, “inefficiencies” in the marketing of farm produce, and the high cost of intermediation. While action to deal with some of these has been promised in the past and that promise reiterated more recently, many of the factors seen as driving inflation are either out of the Centre’s control or otherwise positive economic outcomes that cannot be countered.
Not surprisingly, when under attack for not doing much to curb inflation and in fact adopting policies that would aggravate it, the government has argued that inflation is restricted to a few commodities and can be dealt with through appropriate management of supplies. New taxes in the Budget, it argues, would have marginal or negligible implications for prices. It almost seems that the government expects the problem to somehow go away. But this is unlikely for three reasons, among others. First, as the Reserve Bank of India’s recent policy review statement notes, “the global rates of increase in the prices of sugar, cereals and edible oils are now appreciably higher than domestic rates”, so the opportunity to use imports to contain domestic food prices is limited. Second, even where imports can be resorted to, managing distribution to reach supplies where they are needed is not easy given the limited spread of the public distribution system (PDS). Third, global oil prices are still rising, at a time when the government is committed to linking domestic prices to international prices. It is the resulting erosion of its ability to ensure low inflation while pushing for reasonable growth that the government’s anti-inflation propaganda seeks to conceal.
Thus, the government’s views and inaction amount to an implicit declaration that food price inflation of some intensity is inevitable and that such inflation has little to do with policy. The evidence suggests that the real situation is very different, with food-price increases being the result of major failures of state policy. Domestic food production has been affected adversely by neoliberal economic policies that have opened up trade and exposed farmers to volatile international prices even as internal support systems have been dismantled and input prices have been rising continuously. Inadequate agricultural research, poor extension services, overuse of groundwater, and incentives for unsuitable cropping patterns have caused degeneration of soil quality and reduced the productivity of land and other inputs. Women farmers, who constitute a large (and growing) proportion of those tilling the land, have been deprived of many of the rights of cultivators, ranging from land titles to access to institutional credit, knowledge and inputs, and this too has affected the productivity and viability of cultivation.
But in addition to production, factors such as poor distribution, growing concentration in the market and inadequate public involvement have been crucial in allowing food prices to rise in this appalling manner. Successive governments at the Centre have reduced the scope of the PDS. Even now, in the face of the massive increase in prices, the Central government has delayed the allocation of foodgrains to States for their Above Poverty Line population. This has prevented the public distribution system from becoming a viable alternative for consumers and one that thwarts speculation and hoarding.
In addition, the decision to allow corporates (both domestic and foreign) to enter the market for grain and other food items has led to some increase in concentration of distribution. This has not been studied adequately, but it has many adverse implications, one of them being that farmers benefit less during periods of high prices because the gains are garnered by middlemen.
Thus, it has been found that the gap between farm-gate and wholesale prices is widening. A similar story is evident in terms of the gap between wholesale and retail prices. In the case of rice, the gap between average wholesale and retail prices has widened considerably – even doubled – across the four major zones of the country. As for wheat, the pattern is more uneven, but the retail margins are very large indeed, as expressed by the difference between the wholesale price of wheat and the retail price of atta (which is the most basic first stage of processing).
Underlying this tendency are forces that allow marketing margins – at both wholesale and retail levels – to increase. This means the direct producers, the farmers, do not get the benefit of the rising prices, which consumers in both rural and urban areas are forced to pay. The factors behind these increasing retail margins need to be studied in greater detail. The role of expectations, especially in the context of a poor monsoon that was bound to (and did) affect the kharif harvest adversely, should not be underplayed. But that refers only to the most recent period of rising prices, whereas this process has been marked for at least two years now.
In addition to this, there is initial evidence of a process of concentration of crop distribution, as more and more corporate entities, both national and international, get involved in this activity.
International experience suggests that their involvement in food distribution initially tends to bring down marketing margins and then leads to their increase as concentration grows. This may have been the case in certain Indian markets, but this is an area that merits further examination.
Many people have argued, convincingly, that increased and more stable food production is the key to food security. This is certainly true, and it calls for concerted public action for agriculture, on the basis of many recommendations that have been made by the Farmers’ Commission and others. But another very important element cannot be ignored: food distribution. Here, too, the recent trends make it evident that an efficiently functioning and widespread public system for distributing essential food items is important to prevent retail margins from rising.
So, one surprising element in the Budget is the reduction in the nominal outlay for Food and Public Distribution from Rs.56,721 crore in 2009-10 to Rs.56,133 crore in 2010-11. This amounts to a significant cut in real expenditure. The UPA government has pledged to bring a Food Security Act, but that needs to be universal in coverage (rather than confined to the Below Poverty Line population) and provide enough volumes to meet minimum requirements.
A universal system of public food distribution provides economies of scale; it reduces the transaction costs and administrative hassles involved in ascertaining the target group and making sure it reaches them; it allows for better public provision because even the better-off groups with more political voice have a stake in making sure it works well; it generates greater stability in government plans for ensuring food production and procurement.
But even before such a law is passed, it is clear that emergency measures are required to strengthen public food distribution, in addition to medium-term policies to improve domestic food supply. A properly funded, efficiently functioning and accountable system of public delivery of food items through a network of fair-price shops and cooperatives is the best and most cost-effective way of limiting increases in food prices and ensuring that every citizen has access to enough food. This, and therefore inflation control, is not a priority for this Budget.
The fuel price hike has serious implications for the soaring price levels, and the July 5 bandh conveys the people’s anger.
PHOTO: S.S. KUMAR
AT A MARKET in Chennai. The government’s failure to control the prolonged inflationary crisis seemed to signal that it could not care less about inflation and its effects on the poor majority that is experiencing a decline in real incomes.
THE July 5 bandh against the recent hike in the administered prices of petroleum products did shut much of the country down. This may or may not shake the United Progressive Alliance (UPA) II out of its indifference to political and parliamentary disagreement on the correctness of its manifestly elitist economic strategy which favours industry, finance and the well-to-do over the common person. But it does seem to mark a turning point in the six-year-long innings of the UPA in government. The claim that the UPA and its economist-Prime Minster has managed to build a consensus around the market-friendly, pro-business, neoliberal strategy it pursues has been challenged not just by the political opposition to it but also by the mass support that opposition has received, as reflected in the success of the bandh.
The fact that there is no such consensus but only an artificial one constructed by a governmental propaganda machinery and an elitist media is corroborated by many developments. For example, the myth that there is no opposition to inflation partly because its effects are no more so damaging (presumably because Indians on average are richer now and can “afford” it) and partly because some inflation is recognised as the unavoidable outcome of adjustments needed to promote growth, has been exposed for what it is: a myth. Political circumstances may have delayed strong public expression of anger, but such anger was clearly there and is now visible on the streets. It has clearly not been diluted by the periodic claims of apologists labelled as economists (non-resident, imported or locally cloned) that if we wait a few months inflation would just go away.
Second, the opposition is now strong enough to dismiss the malicious propaganda used to delegitimise dissent against a callous set of policies that penalise the poor for no reason other than the desire to reward the insatiable appetites of India’s rich. This propaganda of delegitimisation has many elements. That such dissent is merely the opportunistic coming together of the Left and the Right for political gain and not because of conviction about the correctness of their demands. That responding tosuch demands would drive the exchequer bankrupt. That the opposition to such policies, through a bandh for example, results in losses totalling thousands of crores of rupees, as “established” by spurious estimates purveyed by organisations, such as the Confederation of Indian Industry (CII), that represent the interests that benefit from market-driven pricing.
Finally, the lack of consensus was reflected in the official advertising campaign against the bandh launched by the Ministry of Petroleum and Natural Gas. Recognising that the opposition to the petroleum price hike was receiving public support, the Ministry decided to drop any pretence of a consensus and chose instead to manufacture one. Poorly designed advertisements occupying substantial newspaper space (at a cost, of course) asserted that the price hike was a “small price” to be paid today to “reap big benefits tomorrow”. Besides being opaque on what those benefits were and how they were to be derived from a price hike, the advertisements gratuitously declared that the bandh was “not a solution”. It was another matter that none was arguing that the bandh was a solution to anything other than governmental intransigence. In any case, it was unclear which problem the Ministry had in mind. In the event, the advertisements served no purpose other than that of paying off some newspapers that were using their editorial columns to justify the price hike and attack all opposition to it.
The opposition to the petrol price hike was as strong as it was because the hike came in the midst of a prolonged inflationary crisis that the government had failed to control. Coming when it did it also seemed to signal that the government could not care less about the inflation and its effects on the country’s poor majority that earns money-incomes that are not indexed to inflation and is therefore experiencing a decline in real (inflation-adjusted) incomes from their already abysmally low levels.
Consider, for example, the aggregate rate of inflation as reflected by the Wholesale Price Index (WPI). The WPI figures for May reflected three worrying trends. First, for the fifth month in a row, the aggregate annual rate of inflation as reflected in the month-on-month increase in the WPI had been near or well above double-digit levels. The figures for May put inflation at 10.2 per cent over the year. Second, this inflationary surge was particularly sharp in the case of some essential commodities, as a result of which the prices of food articles as a group had risen by 16.5 per cent and of foodgrains by close to 10 per cent. Though food inflation had declined to 12.9 per cent during the weekended June 19, the figure was still high and reflected more a base effect rather than a slowing of the extent of price increase. Finally, there were clear signs that what was largely an inflation in food prices was being generalised withthe increase in the prices of fuel by 13 per cent and of manufactured goods by 6-7 per cent.
As has always been the case, the inflation has been much greater at the retail level than at the wholesale level. The retail prices collated by the Ministry of Consumer Affairs, Food and Public Distribution indicate that the average across centres all over the country at the beginning of July had increased over the previous two years’ by 19 per cent forrice and wheat, 58 per cent for toor dal, 71 per cent for urad dal, 113.5 per cent for moong dal, 73 per cent for sugar and 32 per cent each for potatoes and onion. By any count this is an astounding rate of inflation, and a similar situation prevails in the case of vegetables, which are an important component in the food consumption basket of the common person.
The government’s periodic response has been that while inflation is a matter for concern, the trend is likely to reverse itself. In his inaugural address at a conference of Chief Ministers on the prices of essential commodities held in February this year, Prime Minister Manmohan Singh said the worst was over on the food inflation front and expressed confidence that the Centre would soon be able to stabilise food prices. But it could not in practice because it did little and ignored important structural influences on the pace of price increase in the current conjuncture. One is the long-term neglect of agriculture, which has affected the level and pattern of agricultural production to such an extent that supply-side constraints are leading to inflation every time growth picks up. The sudden and sharp hike in the support prices for pulses announced recently is an acknowledgement of this problem by the government. However, given the likely lag in output responses, the immediate fallout of that price increase could be an aggravation of inflationary trends.
A second structural influence is the effect the government’s policy of reducing subsidies, raising administered prices and dismantling price controls has on the costs of production. Finally, inflation is high and persistent despite expectations of a normal or good monsoon because the decision to give private trade a greater role in the markets for essentials and permit futures trading in some essential commodities has provided the basis for a new bout of speculation, which the government seems unable or unwilling to control.
PHOTO: NAND KUMAR/PTI
A PROTEST BY traders in Lucknow during the Bharat bandh on July 5 against the fuel price hike.
While there is some consensus on the role of speculation in driving inflation, official statements ignore the importance of liberalised marketing arrangements and liberalised futures trading in ensuring that speculative expectations of a rise in prices are realised. Moreover, with its emphasis on subsidy reduction and targeting of food distributed through the public distribution system (PDS), the Centre has paid little attention to enhancing the spread and penetration of the PDS, making it a less potent instrument to combat speculation.
In fact, many States have complained that they have not been allocated adequate supplies to cater to rising demand, undermining the role of the PDS as a safeguard against inflation in open market prices.
As opposed to focusing on these matters, the UPA government has sought to divert attention and induce a sense of complacency about future price trends. Besides periodically declaring that inflation would subside in due course, the government has chosen to identify the inflation that has been with us for the past few months as being the collateral fallout of policies and developments elsewhere in the domestic and world economy. For example, at the Chief Ministers’ conference, among the reasons reportedly cited for the price rise were increases in the minimum support price for farm produce instituted to help the farming community, increases in international prices, increases in demand “due to the increase in purchasing power” resulting from higher growth, excess liquidity in the system, “inefficiencies” in marketing of farm produce, and the high cost of intermediation. Many of the factors are either out of the Centre’s control or otherwise positive economic outcomes that cannot be countered. This amounted to an implicit declaration that food-price inflation of some intensity is inevitable.
Moreover, in yet another indication of its callousness, the Centre sought to transfer the blame for inflation to the States. At the Chief Ministers’ conference, the Prime Minister, who had earlier argued that the States were not doing enough to deal with speculation, attributed the wide gap between farm-gate and retail prices partly to the proliferation of State and local taxes, cesses and levies. Claiming that taxes on food items added an additional cost burden of as much as 10-15 per cent at the retail level, he implicitly suggested that the States should forgo revenues to neutralise some of the price increase.
Besides this, he made a case for enhancing competition at the retail level by opening up the retail trade, though the evidence elsewhere is that this merely increases concentration at the retail level and widens rather than reduces trade margins. Not surprisingly, the Prime Minister’s remarks, which were hailed by senior executives of many domestic retail majors, were seen as a signal of the government’s intent to allow a larger role for foreign companies in India’s retail industry.
The gap widens
This was being done when evidence, even in India, suggested that allowing corporates (both domestic and foreign) to enter the market for grain and other food items had led to some increase in concentration of distribution. This contributed to the widening of the gap between farm-gate and wholesale prices and the gap between wholesale and retail prices. As a result, farmers have benefited less from periods of high prices even as consumers suffered, because the benefits are garnered by middlemen. Whether it is agricultural, energy or industrial price inflation, a few corporate and trading interests seem to be the principal beneficiaries.
It is in this context that the recent decision to hike the prices of petroleum products and the opposition it has generated need to be assessed. The immediate- and near-term impact of the oil price decision would be an aggravation of inflationary trends that currently burden the common person. Petroleum products are consumed in some measure by all. Given the fact that these products are universal intermediates, entering into the costs of production of a number of goods and services, the cascading effects of the price hike on the costs and prices of a range of commodities is likely to be significant. With prices of essentials already on the rise, the move threatens to make inflation the country’s principal economic problem. It follows, therefore, that this is the worst time for hikes in and decontrol of prices of petroleum products.
The government claims that this was unavoidable because of the “losses” being suffered by the oil marketing companies (OMCs). When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute. This leads to what are termed “under-recoveries”, which would affect the accounts of the oil marketing companies (Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP) that obtain their supplies of petrol and diesel from the refineries at prices that equal their import price inclusive of customs duty. According to estimates, if retail prices had not been raised under-recoveries by the oil marketing companies would have exceeded Rs.70,000 crore in the current fiscal year. Since this is unsustainable, it is argued, the hike in prices and a shift out of a controlled pricing regime is unavoidable.
The government’s argument is by no means water-tight. While under-recoveries are a reality, they do not turn oil refining and marketing firms into loss-making enterprises because those firms deliver a range of products and services, the prices of all of which are not controlled. If, for example, even if we consider the profit after taxes of the most important oil companies over the past 10 years, they have remained positive in all years and quite substantially so in some. Under-recoveries are notional losses that only lower book profits relative to some benchmark. Thus, there was little danger of the industry going bankrupt even if prices had been kept at their earlier levels.
PHOTO: ARUNANGSU ROY CHOWDHURY
ON JUNE 26, following the transport strike called by the CITU, in Kolkata labourers carry loads of vegetables to the wholesale market.
There is, of course, the question of fairness. Since there are many players involved in the industry there is no reason why under-recoveries should affect only the books of the oil marketing companies. The returns on net worth earned by the oil marketing companies are far more volatile and vulnerable than those garnered by the upstream oil companies (ONGC, OIL and GAIL). The burden should be shared by the latter, which receive prices that more than compensate for costs; by the Central government, which garners revenues in the form of customs duties and excise duties (besides dividends from the oil majors); and by the State governments, which benefit from sales taxes. This requires, for example, the oil refineries to offer discounts when selling products to the OMCs and for the government to reduce the taxes it levies on oil products in order to absorb part of the under-recovery.
The controversial question of how the burden should be shared was analysed by a committee appointed to examine the issue. Headed by C. Rangarajan, it spent much of its energies on the different stages through which imported and domestic crude is converted into petroleum products supplied to the consumer, and the cost escalation that arises as the raw material passes through these stages. The numbers suggested that there was an adequate buffer to shield domestic consumers from the effects of increases in international prices, so long as segments that can afford to take a cut in petroleum-related revenues because they have alternative sources of resource mobilisation are willing to accept such a reduction.
Thus, if at all there is an argument for price deregulation it can only be that it is for some reason wrong to expect the oil companies and the government to bear the burden of the irrational fluctuations in the global prices of oil. That argument, too, is difficult to justify.
When the industry was wholly in the public sector, the prices of oil products were treated as one set of instruments in the tax-cum-subsidy regime of the government. Any losses suffered by the industry or any shortfall in funds required for investment as a result of price regulation were to be met from resources mobilised through progressive taxes rather than from regressive price increases. The government should have adopted a similar approach in the current situation and focussed on rules that can and have been devised.
It needs to be noted here that oil prices have not been held constant in recent history. Rather the average annual increase in prices over the past two decades indicates that the increase has been much higher in the case of retail prices of petrol, for example, than in the wholesale price index for all commodities. The common person has, indeed, borne some of the burden of volatile oil prices.
The question remains as to why the government is adopting policies that transfer most of the burden on to the aam aadmi and aggravate inflation. An ideological commitment to neoliberal policies and the misplaced belief in their ability to put India on the “world stage” may be playing a role. But, more importantly, the government’s moves or lack of them seem intended to favour corporate interests of various kinds. Hopefully, the Opposition would be able to drive home the point that the people are not willing to accept this kind of cynical extraction of surpluses for profit.
Volume 27 – Issue 15 :: Jul. 17-30, 2010
INDIA’S NATIONAL MAGAZINE
from the publishers of THE HINDU
The most efficient way of addressing the problem of food inflation is to expand and deepen the public distribution system.
The NSSO surveyof 1986-87 on the utilisation of the PDS showed that the southern States of Kerala, Andhra Pradesh and Tamil Nadu ranked the highest in terms of per capita offtake. Here, a file picture of a model ration shop in Madurai, Tamil Nadu.
THE persistent nature of the food inflation over the last year has brought the acuteness of food insecurity in India into political focus. Data until June 2010 show that while annual point-to-point food inflation rates show signs of moderation, the price index of food articles has continued to increase. The recent increase in fuel prices has added a new dimension to the problem of inflation. The Reserve Bank of India (RBI), in a statement dated July 2, 2010, said: “The recent increase in fuel prices will have an immediate impact of around one percentage point on WPI [Wholesale Price Index] inflation, with second round effects being felt in the months ahead.”
Inflation is essentially a tax on the incomes of poor people, who are essentially net buyers of food. In India, while landless labourers and urban consumers are almost fully dependent on market purchases of food, a substantial number of small and marginal peasants do not produce enough food for their household requirements. When food prices increase, these households spend a larger share of their incomes on food purchases. In many cases, households reduce food consumption itself or shift to cheaper, less balanced, diets. In other words, food insecurity has close linkages with nutrition security as well as the health status of the poor.
It should be obvious that the most efficient way of addressing the problem of food inflation in India today is to expand and deepen the public distribution system (PDS). However, revealing a mindset that defies the obvious, the United Progressive Alliance (UPA) II government is going ahead with a phased dismantling of the PDS itself. The government’s proposed Food Security Bill has been criticised severely by the Left parties and right-to-food activists. It is argued that the Bill, if passed in its present form, will restrict the overall supply of subsidised food in India, exclude large sections of the needy from the ambit of the PDS, and exacerbate insecurities around hunger and malnutrition.
A welfare instrument
A strong case for deepening and expanding the present PDS can be made by alluding to India’s experience with the earlier universal form of PDS. The PDS was established in the 1960s with the aim of (a) maintaining stability in the prices of essential commodities across regions; (b) ensuring food entitlements to all sections at reasonable and affordable prices; and (c) keeping a check on private trade, hoarding and black-marketing. The 1960s also marked the beginning of the Green Revolution. While it contributed significantly to the attainment of national food self-sufficiency, these gains were regionally biased in their spread. As a result, the achievement of local food security in the food-deficit regions and the growing urban regions came to depend significantly on external supplies from the food-surplus regions.
It was clear from historical experience that the market could not be a substitute for concerted state action in the procurement and distribution of foodgrains. A national food policy, thus, became critical for food security in the deficit regions. Beginning from the fourth Five-Year Plan period (1969-74), the government institutionalised the policy of procuring foodgrains from farmers on the basis of a procurement price and distributing them to various parts of the country. There were two objectives to this strategy: equitable regional distribution of foodgrains at reasonable prices and the provision of a fair price to farmers. The universal PDS was introduced in 1965 as the most important vehicle for the distribution of procured grains in the deficit regions.
In the period after 1965, the performance of the state as an intervening agent in the food economy was mixed. On the one hand, the Green Revolution had led to a massive regional concentration of foodgrain production. On the other hand, this had the potential to exacerbate the regional disparities in foodgrain consumption. However, studies have shown that the presence of a universal PDS acted as a check against this.
The only major source of information on the use of the PDS before the 1990s is for 1986-87, when the National Sample Survey Organisation (NSSO) conducted its 42nd round sample survey on the utilisation of the PDS. Two conclusions can be drawn from this survey. First, a substantial share of the total quantity of different food items purchased by India’s population was from the PDS. In other words, subsidised purchases from the PDS acted as an important supplement to other sources of purchase of food items. The share of purchase from the PDS in the total quantity purchased was higher in urban areas compared with rural areas. The fact that the PDS, with all its infirmities, played a role in keeping in check regional disparities in foodgrain consumption showed that it had the potential to be an instrument of welfare.
Secondly, what was also clear was that the PDS was not serving the vast majority of the country’s population even in 1986-87. The performance of the PDS, indicated by the extent of offtake of foodgrains, varied considerably across States. Southern States such as Kerala, Andhra Pradesh and Tamil Nadu ranked the highest in respect of per capita offtake, while the northern States such as Bihar, Madhya Pradesh, Orissa and Rajasthan ranked the lowest. The share of rural households that reported no purchase from the PDS in 1986-87 was about 98 per cent in Uttar Pradesh, Bihar and Orissa. At the same time, about 87 per cent of rural households in Kerala purchased foodgrains from the PDS.
Hence, the challenge in the 1990s was to expand considerably the reach of the PDS. However, official policy in the 1990s took the PDS to a completely different trajectory.After the neoliberal turn to economic policies after 1991, primacy was accorded to the logic of fiscal prudence, which entailed drastic reductions in subsidies, such as that on food. Thus, in 1997, the government decided to abolish the universal character of the PDS and convert it into a “targeted” scheme. Following the introduction of the Targeted PDS (TPDS), the population was classified into Above Poverty Line (APL) and Below Poverty Line (BPL) categories. Only those households classified as BPL were made eligible for subsidised purchase of commodities from ration shops. In the first phase, the APL households were eligible to purchase commodities from ration shops, but had to pay the full “economic cost” of the handling of commodities.
There are, of course, two immediate issues here. First, there are major problems associated with having a classification of households based on a survey in one year, and then following that classification for many years. The reason is that incomes of rural households, especially rural labour households, fluctuate considerably. A household may be non-poor in the year of survey, but may become poor in another year because of insecurities in the labour market.
Also, the poverty lines that are used are incomes at a near-destitution level. A household that earns an income just above the destitution-poverty line cannot be judged as not requiring social security assistance ( Weakening Welfare by Madhura Swaminathan, LeftWord Books, New Delhi, 2000).
Secondly, the fundamental critique of the concept of targeting has centred on the higher weight that neoliberal reforms give to errors of inclusion than to errors of exclusion. The increase in “efficiency” realised by excluding all the ineligible persons was given more emphasis compared with the inclusion of all the eligible persons. The errors of inclusion have only financial implications, but errors of exclusion have social costs, which have to be weighted higher.
The experience after 1997 showed that the fears of massive exclusion of the needy from the PDS were to be truly realised in practice. A widespread complaint from many parts of rural India after the introduction of the TPDS has been the existence of a major mismatch between households classified as BPL by the government and their actual standard of living. As noted in the report of the “High Level Committee on Long Term Grain Policy” (chaired by Abhijit Sen) submitted in 2002, “the narrow targeting of the PDS based on absolute income-poverty is likely to have excluded a large part of the nutritionally vulnerable population from the PDS”.
In 2004-05, the NSSO conducted another round of survey on the functioning of the PDS. The results from the 2004-05 survey are instructive in the discussion on errors of exclusion. Table 1 shows the distribution of households by types of ration cards possessed in select States; it shows that less than 30 per cent of the Indian rural population was classified as BPL in 2004-05, and thus eligible for the TPDS. The remaining 70 per cent of the rural population was ‘de facto APL’ and hence not covered under the TPDS. Further, in poorer States such as Bihar and Rajasthan, fewer than 20 per cent of households had BPL cards.
Let us now consider agricultural labourers, who form the most marginalised section of society. Only 48 per cent of agricultural labourers in rural India possessed either a BPL or an Antyodaya card in 2004-05 (Table 2). In Bihar, fewer than 30 per cent of agricultural labour households possessed either a BPL or an Antyodaya card.
Thus, while the TPDS was ostensibly aimed at reducing the errors of wrong inclusion, it invariably enhanced the errors of wrong exclusion with the attendant social costs.
Estimation vs Identification
Apart from the errors of wrong exclusion, the TPDS had yet another strange operational feature. As mentioned, under the TPDS, the population was divided into BPL and APL households with different allocations and prices. The problem here was how to classify the population into BPL and APL. There was no system to ensure that the estimation and identification of BPL households go hand-in-hand. Hence, a totally unscientific and arbitrary method was followed by the Central government, which further complicated the inherent contradictions of the TPDS.
The total quantity of commodities supplied by the Food Corporation of India (FCI) to each State was fixed by the Centre using a particular criterion. The Government of India used estimates from the quinquennial sample surveys of the NSSO to arrive at the proportion of poor households in each State. The quantity of commodities supplied to the States was fixed as per the allocations for this estimated proportion of poor households. The States, thus, had to design separate census surveys in order to identify these poor households. However, the census surveys conducted by the States, on many occasions, threw up a higher number of poor households than what the NSSO’s sample surveys showed.
Given that the total number of poor households was predetermined by the Centre, the costs of providing subsidised foodgrains to the rest of the poor households had to be met by the State governments. The crisis in State finances did not provide any room for States to incur such additional expenditures. The poor households that had not been counted in were classified as APL and kept outside the ambit of the TPDS. The TPDS was thus transformed into a Procrustean bed by neoliberal reforms.
The above discussion makes it clear that any efficient PDS has to be universal in character, as the inherent deficiencies in the methods of targeting result in enormous social costs. It is here that the proposed Food Security Bill of UPA-II fails to meet the mark. The framework in which the Bill is being discussed is rooted firmly in narrow targeting. The suggestions for a reversion to universal PDS are dismissed on the grounds of high fiscal costs. As fiscal rectitude is given as the primary reason for not having a universal PDS, it is important to look at how much a universalised PDS will actually cost.
Cost of Universal PDS
The M.S. Swaminathan Research Foundation (MSSRF), in its recent “Report on the State of Food Insecurity in Rural India”, attempts to analyse the economic feasibility of a universalised PDS. The calculations in this report are attributed to Madhura Swaminathan and are reproduced from the final report of the National Commission for Farmers (NCF). The MSSRF analysis has the following assumptions:
a) Universalisation implies coverage for at least 80 per cent of the population of India. The universal PDS would exclude (through self-selection) the richest 20 per cent of the population;
b) Universal PDS would provide the prevailing BPL allocations of 35 kg of wheat and rice at Rs.4.15 a kg and Rs.5.65 a kg respectively to 80 crore persons;
c) A provisioning of rice and wheat in the ratio of 2:1; and
d) The current economic cost borne by the FCI and an average family size of five are taken as given (NFHS-3 estimates the average size to be 4.8).
The Centre for Budget and Governance Accountability (CBGA), New Delhi, has also attempted a similar estimation. The assumptions in this analysis are:
a) Coverage of all the 23.96 crore households of the country with 35 kg of foodgrains at the Central Issue Price (CIP) of Rs.3 a kg.
b) The prevailing Minimum Support Price (MSP) and economic costs of wheat and rice are taken as given and the provisioning of rice and wheat is in the ratio of 2:1.
In a recent research project based at the Tata Institute of Social Sciences, Mumbai, we used these two methodologies and calculated the amount of financial resources required for universalising the PDS in 2010-11 (for a summary, see Awanish Kumar and Aditi Dixit, “Is a Universal PDS Financially Feasible in India?” at http://www.tiss.edu/announcements/attachments/res-brief-PDS.pdf). Table 3 shows the estimates as per the NCF approach, that is, assuming 80 per cent coverage and the CIP meant for BPL population applied to the entire population that is covered.
MEMBERS OF BPL families with the smart cards issued to them in Bangalore. The massive exclusion of the needy after the introduction of the TPDS was established in the NSSO survey of 2004-05. In Bihar and Rajasthan, fewer than 20 per cent of households had BPL cards.
With the current population estimated at 115 crore, 80 per cent coverage would imply 92 crore individuals. With an average family size of around 4.8, the total number of households to be covered would be 19.17 crore and the total amount of foodgrains required would be 805.1 lakh tonnes. The offtake of foodgrains under the TPDS in 2008-09 was only 348 lakh tonnes.
Thus, the provision of 35 kg of foodgrains to 80 per cent of households in India, at the currently applicable BPL Central issues prices for rice and wheat, will require an additional amount of only about Rs.42,237.9 crore (assuming MSP and economic costs remain constant). This additional amount would amount to only 0.64 per cent of India’s gross domestic product (GDP). The total food subsidy required would amount to just 1.48 per cent of the GDP.
If we calculate the total financial allocation required for universal PDS according to the CBGA approach, making some simple modifications, we get a slightly different picture. The added assumption here is that foodgrains are supplied at CIP for Antyodaya households, since we want to arrive at a reasonably practical range of calculations for various possible arrangements under a ‘truly’ universal PDS. In other words, through these two sets of calculations, we attempt to present the upper and lower limits of expenditure required for universalising PDS.
Table 4 attempts to calculate the total food subsidy required as per the second method. The additional food subsidy required here would amount to Rs.91,922 crore, which amounts to 1.39 per cent of India’s GDP. The total food subsidy required would amount to 2.23 per cent of the GDP.
Table 3 and Table 4, viewed together, present a ‘range’ for the possible financial commitment that the government would need to undertake to revert to a universal system of PDS. Table 4 shows a higher additional cost of Rs.91,922 crore since it assumes that all 24 crore households of the country would buy 35 kg of foodgrains.
Compare these required costs with the revenues forgone of the UPA-II government. The UPA-II government has forgone an amount of Rs.414,099 crore in terms of tax revenue and other exemptions for 2008-09 and Rs.502,299 crore for 2009-10, which amounts to almost 79 per cent of the aggregate tax collection in the fiscal year 2009-10 (R.E.) and nearly 8 per cent of India’s GDP.
Further, the effective tax rate of the corporate sector, at 22.78 per cent (in itself much below the statutory tax rate of 33.99 per cent), was significantly lower than that of the public sector companies. Even the said amount of revenue forgone is an underestimate since the concerned budget exercise operates only on a sample of 90 per cent companies.
In sum, given the large human and social costs associated with the TPDS owing to the errors of exclusion, the cost of a universal PDS is negligible. If the government could divert a part of the revenue foregone from corporate houses this fiscal year, a universal PDS can be established easily in the country.
Whether the neoliberal dogma that has afflicted the UPA-II government will allow it or not is to be seen.
R. Ramakumar is an Associate Professor at the Tata Institute of Social Sciences, Mumbai.
The Congress and the UPA are banking on the absence of opposition unity to ride out the resentment against the fuel price hike.
Prime Minister Manmohan Singh. “People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making,” he said after the fuel price hike.
“IT was not the usual indifference of this quintessential middle-class city that greeted us this time. In many places, young and old alike responded positively to our campaign and said the protest against the fuel price hike and price rise needs to be registered strongly with the government, for whatever it is worth.” This was a comment heard at a discussion by a group of Delhi-based activists of the Left parties on July 5, the day of the Bharat bandh. Clearly, the average Delhiite had set aside that day his/her general hostility to proactive political action. The bandh was organised severally but simultaneously by the Left parties and the National Democratic Alliance (NDA) led by the Bharatiya Janata Party (BJP), the principal opposition party in the Lok Sabha.
This popular support for the mass agitation resonated in other forums too. The Confederation of Indian Industry (CII), the country’s premier business association, stated that the agitation had a “significant impact on business and trade in some parts of the country”. It estimated a total loss of over Rs.3,000 crore to the economy on account of the bandh. It said that while the “CII has been a strong advocate of market-linked pricing and taxation of petroleum products and hopes to see the reforms in this direction completed in the course of the year”, it also “believes that targeted subsidies are necessary to ensure protection from price volatility for the needy and to ensure access”. The CII statement emphasised that “supply-side measures are required to deal with this problem in a more comprehensive manner”.
Clearly, the popular response to the agitation was such that even the business body could not ignore it as it had done many times in the past. Asked about the comments of the Left activists and the CII, Minister for Overseas Indian Affairs Vayalar Ravi, a senior Congress leader, admitted that the hike in fuel prices in the background of the overall inflationary tendencies had evoked a downbeat response from the people. “However, this by itself does not signify concrete negative political fallout for the government or the ruling coalition,” he added. “We are going through a period characterised by a lot of tokenisms, posturing and nuanced politics, and right across the political spectrum. It is a context where the trends are generally status quoist and even the subversive ones can at best be described as nascent and tentative.”
Vayalar Ravi went on to explain that “it is difficult to sustain the indirect understanding that was there between the Left and the BJP on the Bharat bandh, despite the great enthusiasm shown by senior BJP leader and former Deputy Prime Minister Lal Krishna Advani in relation to the development”. (Advani had, in his blog, written about an interaction between himself and Communist Party of India (CPI) leader Gurudas Dasgupta, wherein the Left party leader had apparently described his visit to the BJP office in Parliament as a kind of first foray into forbidden territory.)
He added: “The anti-communal, secular credentials of the Leftists are too dear to them and Prakash Karat, general secretary of the Communist Party of India (Marxist), has already emphasised it in an article in People’s Democracy, the party’s mouth-piece.”
The Congress leader also pointed out that regional outfits such as the Bahujan Samaj Party (BSP), the ruling party in Uttar Pradesh, and the Rashtriya Janata Dal (RJD) and the Lok Janshakti Party (LJP) in Bihar did not join hands with the BJP and the Left parties for the bandh though they had opposed the fuel price hike. “Clearly, these smaller parties are nuanced in their politics in order to retain multiple options,” he said.
Developments within these parties indicate that there is some merit in this assessment. Both RJD leader Lalu Prasad and LJP president Ram Vilas Paswan have softened considerably towards the UPA and its government despite periodic statements opposing the government’s polices. So much so, Paswan is even tipped to join the government in the next Cabinet reshuffle, expected around the end of July.
Another factor being referred to prominently in UPA circles in New Delhi relates to the timing of the fuel price hike. The overriding opinion within the UPA stresses the fact that the Central government has just begun the second year of its five-year term and argues that any unpopular decision can be taken at this point of time. “This is not bound to have an impact that will stay for the next three and a half years. In any case, the Congress and its partners need to face even State Assembly elections only during the last months of this year or early next year. We hope the government will be able to take measures to overcome the present popular resentment by then,” said a Congress Minister. Elections are due in Bihar, West Bengal, Tamil Nadu, Kerala, and Assam during the latter part of 2010 and early 2011.
A section in the Congress holds the view that the negative political and electoral fallout of inflation, fuel price hike and the rise in the prices of essential commodities will, in any case, be not as strong or decisive as is being visualised by many, including some Congress leaders. Advocates of this view emphasise that the political status and prospects of the party or the UPA government will remain largely unaffected. They point to the experience of the party and the UPA in the 2009 Lok Sabha elections. “The entire Opposition as well as some partners of the UPA had the conviction that inflation and price rise would cause electoral reverses to the Congress. But that is not what happened. An important reason for this is that large segments of the population are steadily acquiring the ability to absorb the effects of inflation,” said Law Minister M. Veerappa Moily.
Many others who hold the same view, including a couple of party spokespersons, said academic studies, too, corroborated this “no major impact” theory. According to one of these leaders, who did not wish to be named, a study conducted by Consumer Pyramids, a private centre for monitoring the Indian economy, during the run-up to the 2009 elections and covering the largest database on Indian households showed that over 80 per cent of Indian households had the ability to absorb inflation without hurting their consumption levels. The leader added that the significant rise in investments in recent years had created many new jobs all over the country and that there was a growing realisation that inflation was a small price to pay for this change.
Prime Minister Manmohan Singh’s comments in the wake of the fuel price hike also reflect such thinking. “People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making,” he said and added that the adjustment made in the prices of kerosene and cooking gas was necessary considering the very high subsidy that is implicit in their pricing structure. “These subsidies on petroleum have reached a level which is not connected to sound financial management of our economy. So, this decision has been taken to put some burden on the common people, but it is manageable.”
However, there are some sections in the government, including many leaders of the Nationalist Congress Party (NCP) and the Trinamool Congress, who are not ready to go along with this line of thinking. A senior NCP leader said there was a growing impression that the government was protecting and advancing the interests of corporate bigwigs alone and that the aam aadmi, on whose strength the UPA returned to power, had been left by the wayside. “This impression is steadily growing, especially in the small towns and villages across the country. All the statistics and analyses about 80 per cent Indian households having the capacity to absorb inflation do not pass muster before this impression among the people. This certainly does not bode well for the UPA and the Congress. We need to take urgent corrective measures,” the leader said.
According to the NCP leader, government agencies themselves have accepted that prices of potatoes and onions have risen by 50 per cent in 2009-10, while those of vegetables and fruit have increased by 15 to 20 per cent. “The increase in sugar prices has also caused great harm to the poor, especially in north India. Clearly, the overall impact is much more than what it was in 2008-09, and this is all the more reason not to hide behind clever statistics and analyses,” the NCP leader said.
According to a number of UPA leaders, the request from Sharad Pawar, Union Minister for Agriculture, Consumer Affairs, Food and Public Distribution and NCP president, to the Prime Minister a reduction in his job responsibilities could well be related to a perception that the country is about to witness a runaway spiralling of food prices. “Pawar seems keen to give up the Food portfolio, which he apparently surmises will soon become an unbearable political cross on his shoulders,” an NCP leader said.
Opinion is divided within the Congress and the UPA on the political impact of the price rise. What gives strength to advocates of the “minimal impact” hypothesis is the fact that a larger and long-standing opposition unity between the BJP and the Left parties is impossible despite joint actions on specific programmes.
Tractors for sale
AJOY ASHIRWAD MAHAPRASHASTA
in Bhatinda & JIND
Farmers and farm labourers are in distress even in Punjab and Haryana, ‘success stories’ of the Green Revolution.
TRACTORS of all makes, old and new, are lined up as far as the eye can see on the fields at Talwandi Sabo, an important tehsil in Bhatinda district of Punjab. On the highway cutting through the fields there are more of them, and drivers have a hard time trying to find parking space. In all, there are nearly 5,000 tractors. Stationed among the heavy farming vehicles are commission agents in different groups. To an outsider, it is the perfect image of the Green Revolution that brought glory to Punjab in the 1960s and 1970s. It could easily pass off as a farm fair or a promotional programme on mechanised farming by the government. But the reality is biting.
Every Wednesday, Talwandi Sabo hosts the largest second-hand tractor market in the State. Most of the sellers are small and marginal farmers who are in huge debt, thanks to the oppressive inflation and unsupportive government policies in agriculture. The tractor mandi, as it is locally called, is a case study of the dying farming culture of Punjab.
Gurvinder Singh, a small farmer who once owned four acres (one acre is 0.4 hectare) of land, bought a tractor two years ago. He could not afford the rising cost of diesel over the years and has now brought it for distress sale. “Successive governments in Punjab have done hardly anything to provide us adequate electricity. We have to use diesel for almost everything – tractors, submersible motors, and harvesting equipment. In the last two years, prices of all supplies have increased so much that I had to sell an acre of land. Now I cultivate only an acre and have given the other two acres on contract to a big farmer. I desperately wish that my tractor is sold today,” he says.
Intriguingly, Tejwinder Singh is at the mandi to sell his one-day-old tractor! He finds it hard to give his family two square meals a day with the two acres of land he owns. He bought the tractor on an agricultural loan. His logic is strange: “I have no money to marry off my daughter. I am in huge debt to private financiers. So I decided to buy a tractor on loan and then come to the mandi the next day to sell it and get some cash.”
While he has to pay the bank in instalments, he will get a lump sum at the mandi to marry off his daughter and even to survive for a few months. What, however, he does not realise is that he is falling into a spiral of debt. The new tractor cost him Rs.5 lakh plus 9 per cent interest. He plans to sell it off at Rs.3.5 lakh, the mandi rate. For Tejwinder, that is the only alternative.
The tractor mandi, which began in 1989, picked up business only in the mid-1990s, says Gurcharan Singh, the pradhan, or president, of the mandi. “In the last two years, the number of tractors coming here has increased. Earlier it was not more than 1,000; these days it is nothing fewer than 5,000 a day,” he says. The agents who help the farmers sell the tractors too are one-time farmers who left their unprofitable vocation.
Gurcharan says the number of buyers, too, has fallen. “There are some farmers who come here to sell their high-capacity tractors and buy smaller ones. This suggests that a small farmer’s capacity is decreasing. The only ones who can afford the rising cost of agriculture are big farmers with more than 50 acres of land because they saved a lot of money in the heyday of the Green Revolution. In addition, these farmers have other businesses that help them afford better lifestyles,” he says.
The big farmers, however, are a minuscule minority in Punjab, which has a poor record of land reforms. Sukhpal Singh, a senior economist at Punjab Agricultural University (PAU), Ludhiana, noted that out of 10 lakh farmer families in the State, only 9,000 had more than 50 acres of land. As many as 11,000 families owned between 25 and 50 acres, while the rest had less than 12.5 acres. The bulk of them owned less than four acres.
The situation is no different in the Malwa region, which comprises most of southern and central Punjab and is the heart of the Green Revolution. In Tamkot village, all farmers except one or two have less than five acres each of land. Of them, 80 per cent have abandoned farming.
Nirmal Singh and his wife, Sukhwinder Kaur, once owned 2.5 acres of land. But the rising input costs put the couple in deep debt, and all they have now is 0.6 acre.
Nirmal has already sold his tractor. Modan Singh, Nirmal’s neighbour, is left with 0.25 acre of the six acres he had. Both the families are in debt. Between them, they owe at least Rs.20,000 to the local grocers. To cut costs, both have stopped using spices in their food. To top it all, both have surreptitiously started going to the morning labour markets in nearby Mansa town in search of work. That is the worst that can happen to a farmer in Punjab. But even this does not help: work is not available for more than 10 days in a month.
The case of Haryana, another great beneficiary of the Green Revolution, is similar. Most of the small farmers are Ahirs or poor Jats. They have been suffering because of the rising production cost in agriculture. What differentiates Haryana, Punjab and western Uttar Pradesh from the rest of the country’s agrarian belts is their dependence on mechanised farming, thanks to the Green Revolution. Elsewhere in the country it is subsistence farming.
PROSPECTIVE BUYERS INSPECTING second-hand tractors displayed at the tractor mandi at Talwandi Sabo in Bhatinda district in Punjab. No fewer than 5,000 tractors are brought for sale to the mandi.
With economic liberalisation, the government gradually started withdrawing the benefits that it once gave these farmers. The same mechanised high-productivity farming, the use of pesticides and fertilizers, and modern irrigation rather than rain-fed agriculture now became a burden to them. The farmers were left high and dry as the markets opened up and the prices of crops did not rise as expected. Since April 1, the Union government has decontrolled the prices of all fertilizers except urea. At a grain market in Jind, Haryana, trader Suresh Kumar showed Frontline a price list. In 2007, a 50-kg packet of urea cost less than Rs.150; it now sells for Rs.265. The prices of DAP, or diammonium phosphate (which also comes in 50-kg packets), and zinc (10-kg packets) have gone up by almost 200 per cent in the last five years. Seed prices have increased by more than 120 per cent.
In order to cultivate one acre of land, a farmer needs at least 10 packets of different fertilizers, says Suresh Kumar. Diesel prices have gone up from Rs.22 to Rs.38 in the last two years. All this means that a farmer has to spend double the amount of what he had to spend three years ago for an acre of land.
Mostly, paddy, wheat and cotton are cultivated in these areas. Last year, cotton prices plummeted to an all-time low. “Small farmers also lease out land from big farmers. Five years ago, the lease was Rs.5,000 to Rs.6,000 an acre, but these days the rates have shot up to Rs.40,000,” Suresh Kumar says. Last year’s drought brought more misery to the farmers.
Rajvinder Singh Rana, State secretary of the Communist Party of India (Marxist-Leninist Liberation), makes specific observations about the change the price rise has caused in Haryana and Punjab. Once farmers had a good number of domesticated animals, but now many are being sold off. In the past few years farmers have begun to sell all their milk. In short, the food basket of Punjab is diminishing.
He also points to the vicious cycle of debt that the farmers are in. The lack of adequate institutional financing drives many small farmers to grain commission agents who lend money to them at more than 25 per cent interest, he says. “There is also a reverse pattern in leasing out land,” he says. “Earlier big farmers used to rent out their land at very high rates. But these days, lack of capital and huge debts are forcing small farmers to rent out whatever little land they have to big farmers at half or less than half the market price. The rich farmers are thus getting richer and the poor are getting poorer.”
According to Rana, the growing inequalities have also led to a higher crime rate than earlier in the States. In Punjab, many people are getting addicted to cheap narcotic drugs because of distress, he says.
Rana says the commission agents dictate terms to the farmers now. “Marginal farmers get money from these agents, but their profits are so low that they are unable to pay the agents back. In order to survive, the farmers pay back the agents in instalments at higher rates of interest and get into an unofficial contract where the agents ask the farmers to buy ration, groceries and clothes from shops where they have fixed commissions. The price here is higher than the market price. This is a vicious circle of debt which the farmers cannot escape. Such forms of bondage can be seen across Punjab and Haryana,” says Rana.
Pushed to the wall, many of them are ready to work as causal labourers. In one of his studies, Sukhpal Singh of PAU writes about farmers joining the unskilled labour force: “The process of de-peasantisation in Punjab began since the early 1990s and gathered momentum since 2000. More than two lakh small/marginal farmers have left farming due to economic distress. An extensive field survey showed that 22 per cent joined the labour market, 23 per cent joined the low-paid private/government jobs and 27 per cent started some low-skill self-employed venture…. There are no strategies to assist them. Those who sold land in distress to repay old debts were not better off. Ten per cent were living on meagre land rent as ‘distress-rentiers’ and are more prone to drug addiction. Those who left since long have again become worse off.”
If that is the worst that can happen to a farmer, the condition of agricultural labourers is beyond words. Traditionally, Jat Sikhs in Punjab and Jats in Haryana have owned the bulk of the cultivable land, and Dalits have worked in their fields. But the mounting pressure on farmers to cut costs has resulted in the exploitation of agricultural workers. Most of these workers stay in separate colonies in a village (mostly on the western underdeveloped side of the village) in temporary shacks with bare minimum essentials to survive. The landlords often pay them a pittance.
Frontline visited two such villages in the Malwa region in Punjab – Khiala and Tamkot in Mansa district – and one in Haryana, Utla in Jind district. In the past five years, both States have seen a huge influx of agricultural workers from Bihar and eastern Uttar Pradesh, where survival has been even more difficult. This has led to a bitter conflict between local agricultural labourers and the migrant workers. Migrant workers who are ready to work 24 hours, guard the fields and work for low wages out of sheer necessity have become the favourites of landlords.
Last year, at Khiala village, local agricultural workers led a movement demanding minimum wages from the landlords and proper housing from the government (“Promised land”, Frontline, July 17, 2009). They were arrested and the Jat Sikh landlords boycotted them for several days. Darshan Singh, an agricultural worker at Tamkot, stays in a 10 x12 feet house, which has no electricity. “I can offer you tea but without sugar or milk,” he says, adding that he has stopped buying these items. He lost his arm in an accident while working in the field six years ago. His wife, Sarjeet Kaur, is now the breadwinner of the family with two children. But work is not there for more than 10 days in a month.
WAITING FOR WORK at the labour mandi in Mansa town in Punjab. With agriculture becoming unviable, many farmers have joined the labour force.
Sarjeet Kaur says they have stopped eating dal. Instead, they eat only rotis and achar (pickle). “Some farmers have given me their goats and buffaloes to take care of. They have promised to give me half the amount when they sell them,” she says.
In the run-up to the last parliamentary elections, the Shiromani Akali Dal (Badal) government in Punjab fixed an electricity meter at Darshan’s house to lure him to vote for the party. (The party is run mostly by Jat Sikhs.) Three months later, the family got an electricity bill for Rs.25,000, for running one bulb and a fan. When Darshan could not pay, the electricity connection was cut.
This is the story of many agricultural workers in Khiala and Tamkot and many other villages of Punjab and Haryana.
It is 24×7 work for almost eight months of the farming season for Md. Azeem and 15 of his friends who migrated to Utla village in Jind district from Purnea in Bihar. He says he earns up to Rs.12,000, but his cost of living has increased so much that he can send only slightly more than Rs.5,000 to feed five mouths back home. He has no other choice as floods in the Kosi river have destroyed his fields in his native place.
“The only respite for the local agricultural workers is the MGNREGS [Mahatma Gandhi National Rural Employment Guarantee Scheme] which gets them work, but even that is not for more than 50 days a year,” says Bhagwant Samaon of the Mazdoor Mukti Morcha.
“The rest of the days, the workers have to find work at labour markets, but there, too, the days of work do not cross 10 days a month. The workers walk or cycle 25 km to reach the nearest town to find work in these markets but return empty-handed. When they get work, they return with a maximum of Rs.150 a day, which should feed them until they find more work. I have never seen such insecurity among agricultural workers in years.”
Fall in labour
Sukhpal Singh of PAU says after cultivators, agricultural labour is the largest rural worker category: they account for 30.5 per cent of total workers, slightly lower than that for India as a whole (31.8 per cent). “The demand for human labour in the farm sector in Punjab has decreased significantly since the late 1980s [after the introduction of technology in farming]. On the basis of per hectare labour use in the crop sector, the demand for human labour is estimated to have fallen from 479.3 million mandays in 1983-84 to 421.93 million mandays in 2000-01.”
Consequently, farmers and agricultural workers are driven to suicide. A census conducted in the two districts of Bhatinda and Sangrur shows that from 2000 to 2008, there were 2,890 suicides by farmers and agricultural labourers. Of this, 1,133 (39.2 per cent) were agricultural labourers. Debt forced 1,288 farmers to take their own lives; 469 committed suicide for other reasons. While 671 farm labourers committed suicide owing to indebtedness, the remaining 462 did it for other reasons. Today, both farmers and agricultural workers fear that big farmers and agro-companies will buy off their lands and eventually they will have to work in their own fields as labourers. Their fears are not out of place. Suneet Chopra of the All India Agricultural Workers Union makes a detailed analysis of how the government is pushing farmers to the brink so that the multinational companies can take over.
“The diesel price was hiked at a time when farmers were getting ready to sow the fields and required diesel. It is even worse when the supply of electricity is low for the farmers. Grains are rotting in the godowns instead of being distributed to the poor through the public distribution system. Fertilizer prices have increased,” he says.
He says the Ministry of Chemicals and Fertilizers in the first United Progressive Alliance government closed down seven public sector fertilizer plants, saying that the production costs were $120 a tonne when the country could import it for $84. “But when a market like India becomes a consumer, the prices are bound to go up. Today, we are buying fertilizer for $250 a tonne. There is a complete lack of institutional finances, leading to huge debts among farmers. One must also realise the systematic neglect of agriculture and farmers. While the industrial sector gets loans at 4 per cent interest, the farmers are charged 9 per cent. This shows that the government is engineering the inflation,” Chopra says.
He says the government is spending less on rural development than before. The Budget expenditure on rural development and agriculture was 15 per cent of the total Budget outlay in the early 1980s. It was 6 per cent in 2009-10, he says.
“It is not a surprise then that the farmer in Punjab or Haryana has to spend around Rs.2 lakh to get a submersible motor to drain out water from the ground. The government’s argument that groundwater levels are decreasing is absurd. It is its duty to provide them irrigation facilities. Because of such cruel government policies, the percentage contribution of agriculture to the GDP has come down to 15.74 per cent from nearly 30 per cent in the 1980s. However, the percentage of people working in the agrarian sector is more or less the same [around 52 per cent of the total workforce],” Chopra says.
He says allowing futures trading in commodities and opening up the market to multinationals are an incentive for hoarding and contribute to inflation. “During the National Democratic Alliance’s regime, the Australian Wheat Board bought most of the wheat in Punjab at around Rs.850 a tonne. A food crisis in India followed, after which the government purchased the same wheat at around Rs.1,250 a tonne. In such situations, the government takes care to lure big landlords by supporting khaps and Jat Sikhs and talks about social problems as isolated ones, separate from production issues, so that real economic issues could be kept at bay,” Chopra says.
Inflation has impacted the lives of lakhs of tribal families living in the backward regions of Orissa like never before.
AS the sun rises over the green-clad hills in Pipalsahi hamlet under Tikabali block of Orissa’s Kandhamal district, Bipra Mallick and his wife, Ambati Mallick, wake up and worry about their day’s income and expenditure. How will they sustain the family of six when the prices of essential commodities are rising by the day? Bipra’s family has been eligible for 25 kilogrammes of rice at Rs.2 a kg under the below poverty line (BPL) ration card scheme since 2008. Since this is not sufficient for the whole month, he buys more low-quality rice from the market at Rs.16 or Rs.17 a kg.
There is extreme poverty, food scarcity and lack of job opportunities in the area. That was why Bipra sent away two of his young sons to work in a coir manufacturing unit in far-off Kerala about a month ago. The couple, their two daughters, the youngest son and Bipra’s widowed mother subsist on the daily wage he earns.
Bipra is a landless agricultural labourer for most part of the year. He also gets work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). But since he does not get work on a daily basis and since labour-intensive work, such as building infrastructure, is not undertaken all through the year, he struggles to make ends meet. The rainy season is the worst part of the year for the Mallicks and the other families living in the hamlet as no construction work is undertaken in those months. The hamlet has one pucca house and a few dwelling units provided to BPL families under the Indira Awas Yojana.
Tribal villagers carrybundles of firewood to be sold in Phulbani town in Kandhamal district.
Bipra’s family is not the only one affected by inflation and price rise. Inflation has impacted the lives of millions of poor tribal people living in the backward interior regions of Orissa like never before.
Prasanta Bindhani, a 30-year-old tribal youth of Kambadanga village situated along the Phulbani-Tikabali road finds it difficult to meet the day-to-day needs of his three-member family as he does not possess a BPL card and does not own landed property. In addition to this, he has to find money to buy medicines for his daughter whenever she has an attack of malaria, which is endemic in the region.
Three years ago, Prasanta had applied for a BPL card to avail himself of rice at Rs.2 a kg. But the card has not been issued to him till date. The local sarpanch told him that the authorities had stopped issuing new BPL cards for the past several months.
Rajendra Kumar Gurgi, a sharecropper in Bedasunga village located a few kilometres from the Tikabali block headquarters town, was working in the fields near his home when this correspondent met him. He also does not possess a BPL card, which would have helped him cope with price rise. “I have serious problems in meeting the daily needs of the family. Moreover, lack of irrigation facilities in the region is affecting my agricultural operations,” he said.
Sixty-year-old Patras Mallick accuses the Naveen Patnaik government of thriving on “false promises”. He and his family have been living in a tent in Shanti Nagar, a rehabilitation colony for the victims of the anti-Christian riots of 2008, at Nandagiri village near G. Udaygiri town. Fifty-eight families had fled their villages during the communal violence that broke out in the aftermath of the killing of Vishwa Hindu Parishad leader Laxmanananda Saraswati. Eleven families, including that of Patras Mallick, are yet to be given land and financial help to build a dwelling unit in Shanti Nagar.
PRASANTA BINDHANI OF Kambadanga village finds it hard to meet the basic needs of his three-member family.
The residents of Shanti Nagar complained that the price rise had affected them badly. “The situation is so bad that whenever work is not available in the neighbourhood we are unable to travel out to get work as daily wagers because we don’t have money to buy bus tickets,” a resident said.
Price rise has dealt a severe blow to the 58 families living in the colony particularly because the government has not provided them any land for cultivation. Also, they are not covered under the NREGS or any other employment generation scheme.
In fact, Kandhamal presents a classic example of poverty amidst plenty. It is said to be the richest district in the State as far as forest resources are concerned. But poverty in the tribal-dominated forested region seems to be a deep-rooted malady.
With very little cultivable land and with the virtual absence of irrigation facilities, the tribal people of Kandhamal face severe shortages of food and income. The business community of Kandhamal mainly consists of people from other districts of the State such as Ganjam, Nayagarh and Puri. These traders pay only a small amount to the tribal and non-tribal farmers for their produce, depriving them of an adequate good income.
In 2008, when the district hit the headlines in the wake of widespread anti-Christian riots, it was also identified as an “extremely food insecure” district of Orissa. The “Food Security Atlas of Rural Orissa”, which was prepared by World Food Programme (WFP) in association with the New Delhi-based Institute of Human Development (IHD), said that the rate of food insecurity was higher in Kandhamal than in the districts coming under the backward KBK (Kalahandi, Bolangir and Koraput) region of the State. Kandhamal has not been included in the KBK region, which receives Central funds under various developmental projects.
BIPRA MALLICK WITH his family at Pipalsahi village in the district. He is unemployed for most part of the year.
The state of uncertainty that has gripped the tribal populations in Gajapati, Rayagada, Koraput, Malkangiri, Sundargarh and Keonjhar districts as a result of the lack of development in every sphere has not spared Kandhamal.
The situation in the region has remained unchanged basically because of a lack of employment opportunities and the dismal functioning of the public distribution system. The administration has failed to issue BPL cards to a large number of poverty-stricken families, adding to the misery of hundreds of tribal families.
The visit to the interior villages and the interaction with the residents made one thing clear: Those in authority who shed crocodile tears for the tribal people and the other economically backward communities are unaware of the ground realities in the tribal areas.
Faced with utter neglect, the tribal people are becoming more and more inclined towards the Maoist ideology. The civil administration seems to be virtually absent in the interior areas of the tribal-dominated regions. The Police Department is, however, more active as the forces are fighting the Maoists.
It is high time bureaucrats running the different departments of the State government started visiting the districts that are far away from Bhubaneswar to oversee the implementation of the anti-poverty schemes of the State and Central governments.
Industrial workers are fighting to keep their jobs and make ends meet as prices rise in the neoliberal set-up.
FOR the past six months, 32-year-old Bharat Kanse has been unemployed. He lost his job when the pharmaceutical company he was working for shut down. Since then he has been fighting for adequate compensation. He supports his wife and two children. Kanse is among hundreds of industrial workers in Mumbai who were rendered jobless when the companies sold their property for commercial or residential development – a far more lucrative option than manufacturing products.
Kanse was not earning a high income. He took home an average monthly salary of Rs.4,000, but at least it was something. Fortunately for him, his father, a Railways pensioner, supports the family. “There are so many others who are either living on hand loans or have returned to their native villages because they have no money,” he says.
“We need at least Rs.15,000 a month to lead a fairly decent life in Mumbai. Our minimum expenses include rent, school fees, medical bills, transport and, most importantly, food. If I don’t get a job soon we are going to be eating only one meal a day and will end up on the streets,” says Kanse. “Every month now I ask myself, where I will find the money to pay the rent and feed the family?” Mumbai has repeatedly been certified by researchers as one of the world’s most expensive cities. A recent survey by Mercer, a global consulting agency, ranks Mumbai 48 among 143 costliest cities in the world. The survey points out that Mumbai has moved up four notches since 2009, which makes it even more expensive than cities such as Singapore, which are traditionally high on the cost of living index. With prices of every essential item skyrocketing, how do the poor people and those in the lower- and middle-income groups manage? “Not very well,” says Vivek Monteiro of the Centre of Indian Trade Unions (CITU). “The working class has really had to cut down on daily expenses. While prices have gone up substantially over the past three years, salaries have not.”
“Yet, while we might think that remuneration is crucial, the working man’s struggle is actually to hold on to his job. Job security is a priority now for unions to work on. The industrial worker has been hit hard in this economy – he has to fight for his job and then hope to make ends meet with his meagre earnings.”
Historically, Mumbai has been home to thousands of industrial workers. As the hub of manufacturing industries such as chemicals, textiles, pharmaceuticals and engineering, it has been a city of opportunity for the working class. In fact, several city historians of Mumbai say the city was built on the sweat of industrial workers. They unhesitatingly attribute the city’s growth, prosperity and popularity to this section of the populace.
Unfortunately, during the past two decades and post liberalisation, the industrial worker in Mumbai has received several hard knocks. The best known story is that of the textile mills that shut down due to industrial strikes in the 1980s. With some tweaking in the development rules and lobbying by builders, the mills never reopened and their land was sold for residential and commercial development. It is said that in the 1950s and 1960s, two out of every three industrial workers were employed by the mills. Thousands of people lost their livelihoods during the strike. The chawls (workers’ tenements) in Central Mumbai are crammed with former mill workers’ families who, a generation later, have come to terms with their predicament.
The future for many of them continues to look bleak. Since they did not have the resources to spend on their children’s education, many in the next generation are not qualified for white-collar employment that is part of the new economy (sectors such as banking, telecom, hospitality and call centres). Furthermore, these sectors are less labour-intensive and so offer fewer opportunities.
Chandrakant Gotal lost two fingers while operating a machine. He works in an auxiliary unit that makes wipers for every major Indian automobile brand. He has not been paid any compensation, nor has he been transferred to a section which is less dangerous. Gotal says the machine was over 40 years old, and he knows 16 people who have lost either one or two fingers to the outdated machine.
He has taken the company to court over the accident. But he could risk losing his job. At 51, Gotal cannot take any chances. “Nobody gets a company job these days. At least I have some security. Where will I get work at my age?” He says his involvement with the union has infuriated the management, and it refuses to change his job profile, saying, “Either he can work where he is told to, or leave.”
MILL WORKERS BLOCK roads in Mumbai to highlight their plight, on April 5.
Gotal has been working for 20 years. His take-home salary, after deductions, comes to Rs.5,000. “Hardly enough to look after my family,” he says. He spends Rs.20 every day to commute to work. The only silver lining is that he owns his 10 feet by 10 feet house in a low-income workers’ colony in north-western Mumbai.
The family consumes at least 22 kilogrammes of rice and at least 4 kg of sugar. The price of rice has gone up from Rs.20 a kg to Rs.35 and sugar, which was Rs.18 a kg just a year ago, now costs Rs.34. Ration shops never have supplies, so the family is at the mercy of retail stores. “We are finding it difficult but I cannot find work anywhere else. At my age and with two fingers missing, who will hire me?”
Yet Gotal says his life is better than a colleague’s who was forced to retire at 57. “They gave him a settlement of Rs.85,000 and told him to leave. He had worked for 21 years. That money will not even last one year given the price level today.”
There are hundreds of industrial workers who are working at supposed minimum wages but really take home a pittance, says Vinod Shetty, a lawyer and labour rights activist. The automobile industry is a rapidly growing sector, having already registered a 12 per cent growth this year. “It is a shame that companies, in spite of doing so well, cannot look after the very people who prop them up,” says Shetty. “These are big, well-known profitable brands. There should be some fairness for people like Gotal.”
Narendra Chandane’s muscles in the left arm have begun to deteriorate. He was a driver with the pharmaceutical company in which Bharat Kanse worked. When his arm started giving him trouble, Chandane requested to be shifted to the security department. Within a few months the company closed shop. Chandane was left without a salary and, therefore, had no money to pay his medical bills. He was earning Rs.3,000 a month.
“In spite of working in the company for 20 years they never made an ESI [Employees State Insurance Corporation] card for me. So I could never get my medical bills paid. I had an ESI number but the hospital told me that unless I had a card they could not treat me. I spent all my savings on my treatment at private hospitals,” says Chandane.
Chandane has suffered from malaria, jaundice (twice) and water accumulation in his lungs during the past two years. Other minor ailments continue to plague him. He is 52, physically very weak, and will probably never work again. He says he earns Rs.2,200 as interest from some money he has saved. This takes care of some of the family’s monthly expenses. His provident fund has been released and he hopes to save it so that the interest accrued will add to his income. For now, his wife’s family pitches in when it can. Soon his daughter will pass out of school and he will have to find the means to send her to college. “They must study. That is the only way out of their misery,” he says.
Kanse and Chandane are among 155 employees of the pharmaceutical company who were laid off. “Our dearness allowance was called Textile DA so we were paid according to the mill wages and we followed mill rules. Therefore, we are entitled to the same benefits/formula being given to mill workers,” says Kanse. The one-third formula essentially ensures that one-third of the mill land is given for providing housing to workers. Additionally, any commercial enterprise that comes up on the land should provide employment to the displaced workers.
“Even if they earn Rs.10,000 a month it is not a good salary today,” says P.M. Wartak, a union leader with and a member of the CITU. “You need much more to buy good food. They are constantly compromising. That isn’t fair to hard-working salaried workers.”
Wartak is fighting companies in the printing business to increase the minimum wage and pay a decent increment. He says industrial workers are affected in many ways. Companies are constantly downsizing and so job security is an issue. The salaries are hardly enough, what with the price rise in the last three years. “They take loans and live the rest of their lives repaying them.”
“We live because we have to. This is no life to lead,” says Avinash Kamble, a printing industry worker whose services were terminated a few months ago. “The only problem with going into contract labour or the unorganised sectors is that there is no social security. In a company job there is at least some assurance of that.”
WORKERS AT THE Ambattur Industrial estate in Chennai.
Wartak says this is what attracts people to the so-called “company jobs”. Although the unorganised sector pays more, social security is very important. A maid or a driver in upmarket Malabar Hill earns more than an industrial worker these days, he says. That is what things have come to.
In 1960, 51 per cent of the jobs in Mumbai were in the organised sector, where workers had permanent employment and benefits such as provident fund. In the early 2000s, the CITU says, 65 per cent of the city’s workers were in the unorganised sector. Now, thousands of migrants from Uttar Pradesh and Bihar, willing to work for lower wages and for longer hours on a temporary basis, are replacing the permanent industrial worker, Wartak says.
Solutions are few. The industrial worker is clearly a dying breed in Mumbai. They can be saved if those who employ them and the law-makers recognise the fact that without the worker there will be no product and so no profit.
Bearing the brunt of inflation
“My association with these fabricating tools dates back to 1990. Even after almost 20 years of service in different small and tiny units, I draw only Rs.5,700 a month. The spiralling prices of essential articles have made my life more miserable,” laments C. Sampath, a worker at a small-scale unit in Ambattur, the industrial hub of Chennai.
Though Sampath is only 43, his wrinkled face and eyes, filled with despair, make him look much older. The only breadwinner of the family of four is fortunate enough to have his own shelter at Kallikuppam, around 5 km from the work spot.
C. SAMPATH AND C. Meyyappan, industrial workers at Ambattur. Low-paid and hit by inflation, they are caught in a debt trap.
He says his family has been leading a hand-to-mouth existence. “In recent months, things have taken a turn for the worse. We find it difficult to meet the routine expenses.” Though his family receives 20 kg of rice at Re.1 a kg from the ration shops, it has to purchase extra rice from the market at Rs.30 a kg. “The steep hike in the price of cooking gas has added to our misery,” he says.
The story of C. Meyyappan, a 58-year-old sawmill worker in the same area, is pathetic. A native of Karaikudi, he came to Chennai four decades ago. With a wage of Rs.7,000, he has to take care of his wife and four underemployed sons. He finds it difficult to clear ever-increasing salary advances. Owing to deductions and his personal expenses, he is able to give only Rs.1,500 to his family. He pays a monthly rent of Rs.2,500 for the house. As he is unable to afford cooking gas, his family uses firewood.
Radha, 53, a helper at a gas stove company, earns Rs.2,500 a month. Her husband, a lathe worker, gets around Rs.5,000. They have to take care of their daughter who is recuperating after a heart surgery and a school-going granddaughter.
These are not isolated cases. There are several lakhs of small-scale and tiny sector workers who are hit hard by inflation and its cascading effect.
According to informed sources, there are around 7.5 lakh registered small-scale industries and 6.5 lakh unregistered ones in the State. With the introduction of the Micro, Small and Medium Enterprises Development Act, 2006, even service enterprises with an investment of Rs.2 crore and below have been brought under the small-scale sector.
Official sources stated that there were 5.57 lakh micro, small and medium registered enterprises in the State in 2007-2008, employing 39.46 lakh persons. The workers in the unregistered sector are more or less equal in number to those employed by the registered units, trade union sources say.
Though these workers are by and large defenceless against the onslaught of the price spiral, the Central and State governments have ignored their plight, trade unions allege.
Workers cannot even imagine purchasing certain essential articles in the open market in view of the steep price increases, I. Rani, wife of a worker in the small sector at Mogappair, close to the Ambattur Industrial Estate, said. Citing examples, she said the price of sugar had jumped to Rs.40 a kg from last year’s price of Rs.17, and pigeon pea was sold at Rs.88 a kg now, while it was Rs.50 last year.
Another issue that continues to haunt the SSIs and tiny units is the declared and undeclared power cuts.
Close on the heels of the “Bharat Bandh” called by several opposition parties in Tamil Nadu, Chief Minister M. Karunanidhi on July 6 claimed that the people of Tamil Nadu, unlike those in the other States, were not hit by price rise.
He also said that his Dravida Munnetra Kazhagam government had been safeguarding the interest of the people from the spiralling prices. He cited several measures it had taken, including the distribution of rice at Re.1 a kg and certain grocery items at concessional rates and the embargo on bus fare hikes.
However, the Left parties and the trade unions have criticised the government for the way it handled the bandh. They have also disputed the government’s claims about tackling the situation arising out of the increase in the prices of essential articles.
A.K. Padmanabhan, State CITU president, told Frontline that when the prices of essential commodities went up, only a very small section of workers and employees belonging to government departments, public sector establishments and larger units in the private sector was compensated by increased dearness allowance. A vast majority of workers in the unorganised, small and tiny and medium sectors did not get any component of wages that would neutralise the pressure of inflation on their day-to-day life. This was precisely because they drew fixed wages, and once a year or once in two years they might get a small increase, he pointed out.
Referring to reports that the price of primary food articles had increased by 16.5 per cent since May last year, he said the workers in these sectors found it difficult to cope with the pressure. “We should not forget that the data on increase in the prices of food articles is based on the wholesale price index,” he said, adding that if the prices were calculated on the basis of data from the retail market, the hike would be much higher.
Even a small or micro family of the worker struggled with a deficit budget owing to the incredible increase in medical bills, school fees and house rents, Padmanabhan said.
The Central and State governments had done nothing tangible to arrest the deterioration of the quality of life of these ordinary workers, he said.
With no safety net
in Gurgaon and Delhi
Those hit the hardest by the price rise are workers in the unorganised sector.
THE sprawling network of roads, multi-lane flyovers, and swanky exteriors of offices of multinational companies overwhelm a person driving down the Delhi-Jaipur highway. On either side of it, towards and beyond the international and national airports, lies Gurgaon, a spectacle of state-of-the-art urban development and a symbol of industrialisation in Haryana. But beyond this facade is a different world. Thousands live here in the congested and inhospitable back lanes of the old city and in and around the erstwhile villages. Theirs are the hands that build the modern city and its residential complexes that house families with six-figure incomes.
Also invisible to the indiscriminate eye are the labour chowks where hundreds of people wait from the early hours of the day until sundown to be “picked up” for work. There are three such labour chowks in Gurgaon, which Chief Minister Bhupinder Singh Hooda aspires to transform into another Singapore. At one such labour chowk, called the Bhooteshwar Mandir chowk, Frontline met dozens of workers, some of them sitting with their tools, hoping that someone would alight from a vehicle and call them for work – any work, even if it is back-breaking.
The workers, all migrants from Bihar, Uttar Pradesh, Rajasthan, Madhya Pradesh and West Bengal, have little choice but to wait, braving the weather. At any time of day, there are dozens of them huddled together under an occasional tree. There is no shed for them to wait in or water to drink, let alone toilet facilities. Women suffer the most, as they are forced to use open spaces as toilets.
Seema Devi, a jobseeker from Hardoi district in Uttar Pradesh, is in her early forties. Hungry, tired and wet from the rain, she broke down on being asked to narrate her problems. One day, after several days of waiting, a contractor offered her work as a beldar (doing earthwork at a construction site) at Rs.250 a day. But at the end of an arduous day, all she got was Rs.100.
This when the revised minimum wages in Haryana with effect from February 1 has been Rs.4,214 a month, or Rs.162 a day, for unskilled work; Rs.167 and Rs.172 a day for two categories of semi-skilled work; Rs.177 and Rs.182 for skilled work; and Rs.187 a day for highly skilled work.
Almost every worker Frontline spoke to had similar stories of exploitation to tell. Some said there were times when contractors beat them up for being assertive. Now, adding to the woes of the hapless people was the rise in the prices of essential items. “What shall I eat and feed my children?” asked Seema Devi in a choked voice.
Ironically, there is also not enough work to find. Shahbuddin, a painter in his mid-fifties, hails from Rajasthan. He said the workers considered it fortunate if they got work for 15 days in a month. “There are too many workers and not enough work. We will be lucky if one of us gets picked up though we all try hard to catch the eye of the contractor and are willing to work at any rate quoted by him,” he said.
Raghunandan from Siwan district in Bihar is also a painter. He pointed to the cesspools formed after a spell of rain. “All this will lead to malaria and other diseases. Our children will suffer from stomach-related diseases, and we will end up spending most of what we earn paying a doctor. Isn’t the government supposed to do something about this?” he asked.
Neeraj Pandey, in his early twenties, came from Faizabad district in Uttar Pradesh a month ago. After lifting 200 bags of cement weighing 50 kg each a few hours earlier, he was back at the labour chowk looking for more work. “The contractor promised me Rs.350 but gave me only Rs.200. What can we do? We are outsiders, we have no rights,” he said.
WORKERS REST AT a construction site in Gurgaon. It is estimated that around three lakh people are employed in the unorganised sector in the district, a large number of them in the construction of roads and buildings.
Outsiders in their own country, most of the workers share their cramped quarters with at least 10 others. “It is with much difficulty that we are able to afford some sort of accommodation, but some sleep on the footpaths,” said Udaiveer from Aligarh, pointing to a Rajasthani family sleeping on the pavement.
The biggest problem, Shahbuddin said, was the low wages for back-breaking work. “I came to Gurgaon eight years ago. I was getting Rs.160 then. Today the official daily wage for a mistri [a skilled construction worker] is Rs.350, but we don’t get anything near that amount,” he said.
The workers see themselves as nobodies. “The locals resent us, the shopkeepers look at us as vermin, and the police are there only to help the system in exploiting us further,” he said.
The workers are not registered with any government office and their names do not figure in any official list; the employers preferred not to include their names in the muster rolls as this exempted them from paying minimum wages, or giving compensation to workers in cases of accidents or any kind of social security benefit.
None of the workers had any BPL (below poverty line) card that would entitle them to food rations at subsidised rates.
Prakash Sharma, who came from Alwar in Rajasthan recently, is prepared to do “any kind of work”. Many like him offer their services out of sheer necessity, knowing full well that the wages at the end of the day are uncertain.
It is estimated that around three lakh people are employed in the unorganised sector in Gurgaon alone. A large number of them are involved in the construction of roads and buildings; thousands of others work in the automobile sector and its ancillary units, in export houses, and in the IT sector. Additionally, there are autorickshaw drivers, cycle-rickshaw men and roadside vendors, who, like the others, suffer constant harassment at the hands of the police and the administration because they are obstacles to the beautification of the city.
The rise in the prices of essential commodities has broken the backs of these workers. A midday meal worker (there are an estimated 600-700 such workers, all women, in primary schools in the villages of Gurgaon) said that with the kind of income she had, it was becoming difficult even to afford the modest chapati, the staple in northern India.
EMPLOYERS PREFER NOT to include the names of workers in muster rolls as this exempts them from paying minimum wages, or giving compensation to them in case of accidents or any kind of social security benefit. Here, a woman worker in Gurgaon.
In September 2007, the United Progressive Alliance government, in the Unorganised Sector Workers Social Security Bill, included a proposal to fix a national minimum wage for all jobs, a demand that had emerged from the central trade unions. There are an estimated 369 million workers in the unorganised sector (NSSO 1999-2000) in India. The construction industry alone employs around 31 million workers, of whom 27 million are contract workers.
Nearly 80 million workers constitute the total contract labour market in the country. Of them, around three lakh people are in the organised sector. They are called the “unorganised in the organised sector”. During the recession in 2008, a Delhi-based industry body, the Construction Industry Development Council, estimated that nearly 180,000 unskilled and semi-skilled workers had lost their jobs in the housing sector alone.
The construction workers Frontline met had not heard of the decision in 2008 of the newly set up Labour Welfare Board on making a provision of Rs.75,000 towards insurance cover for each worker involved in building and construction works. They were not eligible for the welfare measure as they were not registered anywhere. Neither did any of them have any form of identification, for instance, a ration card.
None knew about the Rashtriya Swasthya Bima Yojana, a national health insurance scheme launched two years ago for the unorganised sector which provides a cover of Rs.30,000 for hospitalisation and surgical expenses for workers in the sector. Targeted for the BPL category, it is said to have enrolled 60 million people in 22 States.
A 2005 report of the International Labour Organisation calls the unorganised sector in India the “other India at work”. According to it, this sector contributed 45 per cent of the country’s national income and accounted for 93 per cent of the workforce but offered no protection against retrenchment or provided any social security. Calling them the “ultimate entrepreneurs” for their ability to sustain livelihoods with very little capital, the report said these workers lived and worked in abysmal conditions (“The other India”, Frontline, November 18, 2005).
“There is no provision for housing for them either by the government or by the industrialists,” said Satbir, district secretary of the Centre of Indian Trade Unions (CITU). He said nothing had been done by the Haryana Building and Other Construction Workers’ Welfare Board for the health, education, safety or skill upgradation of the workers, as stipulated in the 1996 Central Act (The Building and other Construction Workers – Regulation of Employment and Conditions of Service Act). “Is it so difficult to construct a shed for these workers?” he asked.
The non-implementation of protective legislation has compounded the misery caused by price rise. Munni, a midday meal worker in Basai village, said the price rise was “killing her”. Frustrated at not finding work, her husband, a daily wage worker, had taken to drinking, and this worsened her problems. “The rates for grinding wheat have doubled to Rs.2 from Re.1 a kilo, which we find difficult to afford,” she said.
Her colleague, Sunita, is a widow with four daughters. She gets her widow pension, but has no BPL card. Her eldest daughter works in a garment unit in Gurgaon. “Travelling up and down to the workplace costs her Rs.14 every day. Most of the time she walks back home through unlit, dangerous lanes to save Rs.7. The other day, she came home late, at 9-30 p.m.,” said a distraught Sunita, adding that “for a poor person, even Rs.7 means a lot”.
Midday meal workers are technically government employees as the fund comes from the Central government, but they are not treated as such. They get no minimum wage or social security benefit from the government. “How can one manage with Rs.1,000? We put in six hours of work, cooking food, cleaning utensils and feeding children. We spend almost 12 hours outside our homes because of the commuting involved from our villages,” said Munni.
There are some 200 units in the Wazirpur industrial area located in north Delhi. Each unit employs 20 to 25 people. When most of Delhi got de-industrialised, thanks to judicial interventions to make a pollution-free Delhi, many of the units were relocated. But some shut shop, leaving many workers high and dry. Though neighbouring the affluent Ashok Vihar, the industrial area has no proper roads or drainage and sanitation facilities. For want of proper toilet facilities, people defecate on either side of the lanes leading to the industrial units. The workers here live and work in such inhospitable surroundings.
ANOTHER WORKER IN Gurgaon. In 2008, during the recession, the Delhi-based Construction Industry Development Council estimated that nearly 180,000 unskilled and semi-skilled workers had lost their jobs in the housing sector alone.
Most of them live in rented accommodations, just like their counterparts in Gurgaon, sometimes 10 of them in a room as small as eight feet by ten feet. Rents for such holes are up to Rs.1,200 a month.
The minimum wages notified by the Delhi government in February are not implemented here. The official monthly wage rates are Rs.5,272 (unskilled), Rs.5,850 (semi-skilled) and Rs.6,448 (skilled). The daily wages for the same categories are Rs.203, Rs.225 and Rs.248 respectively. But most of the workers in Wazirpur are paid anywhere between Rs.2,800 and Rs.3,000.
“The workers here have a subhuman existence, worse than insects,” said Pradyutman Malakar, a local doctor. People come to his clinic for treatment of grave injuries as well as for minor cuts, which are common and for which the owners give as little as Rs.10 for treatment. “The health centre closes at 5 p.m. Even in the mornings, they don’t start working before 11 a.m. despite there being long queues of sick and ailing workers and their families,” said Motilal, originally from Azamgarh in Uttar Pradesh. “I pay Rs.600 as rent and have been working for the last five years now,” he said. A mistri, he gets only Rs.4,200 a month.
The majority of the workers have no BPL cards and are forced to buy essentials from the market. “Kerosene costs Rs.35 a litre; we buy it in the black market for Rs.60 a litre. We cannot get cooking gas connections as we have no proof of identity,” said Chandradhaari, also from Azamgarh.
“Even the cheapest matar dal costs a lot now. Back home, we pay Rs.19 a kilo, but here it is Rs.24,” he said, adding that eating arhar or toor dal was next to impossible given the current rates. “They used to say in our village, ‘Dal, roti khao, Prabhu ke gun gao’ (eat dal and roti, be happy and sing praises of the Lord), but even affording that dal and roti is not easy anymore,” said Motilal.
Surender from Sultanpur district in Uttar Pradesh said that six years ago he used to earn Rs.1,800 a month. Now it is Rs.3,600 (much less than the minimum wage). “Forget dal, even vegetables are expensive. Potatoes cost Rs.10 a kilo, parval [a gourd popular in the north] costs Rs.32 a kilo and onions Rs.15. If we have full meals, there will be nothing left to send home to feed our families,” he said. Pointing to his grey stubble, he said in a lighter vein, “I do not shave every day. It used to cost me Rs.3; now it is Rs.10. I’ll shave when I get my salary, which is on the tenth of every month. I’ll have a haircut too then. If need be, I’ll borrow some money from someone.”
Manager Prasad, the leader of a trade union affiliated with the CITU, said that Provident Fund contributions of the workers were seldom deposited at the office concerned. “In June, we mobilised the workers for a protest in front of the [Provident Fund] Commissioner’s office. He said he would look into it in a month. We are still waiting,” he said.
For much of the unorganised sector, this is going to be a long wait. The conditions of the unorganised class of workers are very much the same everywhere, depending on the extent to which the respective State government has responded in implementing the welfare measures under existing statutes. Ironically, it is worse in those States that boast high per capita incomes and high minimum wages.
Volume 24 – Issue 04 :: Feb. 24-Mar. 09, 2007
INDIA’S NATIONAL MAGAZINE
from the publishers of THE HINDU
Of inflation and interest rates
Unless the government penalises speculators and tightens further the regulations on futures trading, buoyancy in prices is likely to persist.
The Headquarters of the Reserve Bank of India in Mumbai.
WITH inflation as measured by the wholesale price index inching towards 7 per cent and that measured by the consumer price indices ruling even higher, the government and the Reserve Bank of India have decided to sit up and take note. Exports of some essential commodities have been restrained and the prices of petrol and diesel reduced. The cash reserve ratio is to be hiked in stages to impound the equivalent of Rs.14,000 crores of loanable funds. None of these steps has as yet been effective in curbing inflation. Even if they impact prices with a lag, they are likely to be neutralised by speculation, facilitated by excess liquidity and a liberalised futures market. Unless the government penalises speculators and tightens further the regulations on futures trading, buoyancy in prices is likely to persist.
An obvious consequence of inflation that is of serious concern is its impact on the real earnings of the common man, especially since the price increase is sharper in the case of essential commodities. But a less discussed fallout could be on interest rates as banks are forced to raise deposit rates to neutralise the effects of inflation and keep depositors happy.
Since interest rates have already been rising, the latest increase could take them close to levels that prevailed during the much-maligned, pre-reform years of `financial repression’. This would in turn necessitate an increase in lending rates, which would have adverse consequences for growth.
One of the successes of financial sector reform, according to the government and RBI, is the reduction in nominal interest rates when compared with the pre-reform period. These low rates have not only shored up corporate profits but also encouraged the debt-financed spending spree, which is an important driver of India’s high growth. Retail lending and housing finance have been growing at a pace that has forced RBI to warn banks repeatedly against overexposure in these markets. The danger is that a quick and sharp rise in interest rates may not just correct such overexposure but dampen debt-financed consumer spending and housing construction and spoil the party for a government that prides itself on having moved the country onto a higher growth trajectory. This effect on demand and growth would be more severe if rising rates precipitate widespread default of floating rate debt payments.
The evidence shows that even before inflation raised its head interest rates had been on the rise. Part of the reason was that banks were being forced to raise deposit rates to attract depositors and were pushed into raising lending rates to cover the higher cost of funds. Deposit rates have to be hiked because savers now earn better returns on instruments such as mutual funds and unit-linked insurance. Those better returns are drawing savings away from traditional investments such as deposits at a time when banks are finding new opportunities to lend in the housing and consumer finance market. To cater to this demand, banks were competing with one another and with other financial businesses to offer better deposit rates since they were confident of finding people willing to borrow even when lending rates were raised to cover the higher cost of funds.
This has created a situation where banks have a special interest in this year’s Budget. Normally, so long as the Budget is `growth-oriented’ in the sense that it is likely to keep growth going or spur it on, banks should be happy. A booming economy should spell booming business for the banks. But at the moment banks are finding it difficult to keep their traditional business going without raising interest rates to mobilise more deposits. Since this would require raising lending rates as well, it may prove contrary. Higher interest rates in the retail and housing finance markets may curb credit demand. Banks today get a significant share of their income from other areas into which they are diversifying. But lending based on deposits is what banks still know to do best.
They would, therefore, like a situation where they can continue with business as usual without raising rates. But for that the differences in rates of return in different financial markets must not widen. Unfortunately, the government has been privileging the equity market at the expense of banks. By relaxing regulations and norms that apply to both domestic and foreign investors in the stock market, it has encouraged a flow of funds into that market, which has resulted in a prolonged boom not warranted by fundamentals. With returns on stock market investments placed at close to 50 per cent, the security of bank deposits appears to be a small recompense for the much lower returns they offer.
In addition, the government has been spurring the market by encouraging new investors such as those in charge of government pension funds to move into the market and privileging financial savings in forms other than bank deposits through its tax policies. Tax benefits given on equity investments, such as the abolition of the long-term capital gains tax on investments in the stock market and the decision not to tax dividends in the hands of the recipient, have all discouraged savings in bank deposits and encouraged investments in other kinds of financial assets. This is why there are demands being made that the coming Budget must `level the playing field’ for the banks. That would save them from pushing interest rates to higher levels.
This pressure on the banks notwithstanding, the recent hike in rates would not have happened if RBI were not also keen on higher rates. The central bank’s call for moving up interest rates is driven by a completely different motivation: its concern with overheating in the economy, reflected in rising inflation.
Though RBI had chosen to focus more attention on growth and exchange rate management during the years of moderate inflation, in the final analysis, like all conservative central banks, it is inflation that constitutes its primary concern.
RBI has only two levers to control inflation: curbing credit expansion and raising interest rates. Curbing credit growth is a problem because RBI has recently been buying up dollars flowing into the economy in order to prevent an appreciation of the rupee. And in recent months that inflow of foreign exchange has been unrelenting. The rupees RBI outlays to buy up these dollars are contributing to an increase in liquidity and money supply.
To limit further credit creation on the basis of this increase in liquidity, it has recently chosen to raise the cash reserve ratio to be maintained by banks and expects to pre-empt around Rs.14,000 crores of loanable funds. But this only increases the desire of banks to increase their deposit intake so as to maintain credit growth, contributing further to their tendency to hike interest rates.
This has made the task of the central bank easier when it comes to the second of the levers it has at hand to curb inflation: raising interest rates. Not surprisingly what the central bank has done is to signal its desire to keep interest rates rising by raising the Repo Rate to 7.50 per cent from 7.25 per cent. This has created a rift between the central bank and the Finance Ministry. The latter, enamoured by the high growth the economy is recording, is against raising interest rates since that could slow down growth. It has, in fact, tried to pressure public sector banks not to raise interest rates on housing loans. But faced with little option in protecting their profits, banks are unwilling to oblige. Many public sector banks have indeed hiked their prime lending and housing finance rates. The Finance Ministry cannot make the banks pay the cost of its honeymoon with the stock market.
This raises the question as to which is better for the economy and the common man: higher or lower interest rates. In principle, higher interest rates benefit the rentier classes at the expense of those involved in productive activity.
Higher rates, therefore, are not good for a developing economy. In post-reform India, this feature of high interest rates is worsened by the fact that growth has come to depend heavily on debt. Higher interest rates are adverse for entrepreneurs not only because as investors they are hit by the higher cost of capital, they could also be hit by the fact that expensive credit can curtail the growth in demand for their products.
This is a fact that is forgotten when low interest rates are principally seen as reducing the return on deposits by individuals in the banking system. These individuals are also income earners who could benefit from a growing economy, unless they are retired senior citizens depending on interest rates from fixed deposits for their income. This should influence the Finance Minister not just to focus on inflation but actually to consider the case of the banks and level the playing field between the deposit market and the market for other kinds of financial assets so that they can keep deposit and lending rates down. As is the case currently, the concerns of senior citizens can be dealt with separately.
But such a move would go contrary to the Finance Ministry’s recent tendency to adopt measures aimed at sustaining the irrational boom in the stock market. It would require a change in the mindset that believes that a rising Sensex is a more potent indicator of the success of reform than low interest rates. If not, the growth rates it proudly reports could be the casualty.
Slaves of the mines
The book gives a fictional account from a Marxist angle of the very real problems faced by coal miners in West Bengal and Jharkhand.
A PROGRESSIVE person of the Marxist persuasion, K. Chinnappa Bharathi is arguably the only one of his kind in Tamil Nadu, combining in himself a relentless fighter and a resolute writer fired by an insatiable thirst to liberate victims of exploitation. Describing him as “a humanist with a fighting spirit”, fellow Tamil novelist Ponneelan evaluates him as an uncompromising realist for whom literature is nothing but an honest expression of social life.
Although Bharathi’s novels number only six, each one of them bears the impress of his world view and literary policy that the foremost duty of a writer is to be on the side of the suffering masses in their struggle to fight poverty and to end disparities of all sorts. The very fact that all his five earlier novels have been translated into several languages indicates the success of his literary efforts. Thaagam (Thirst), considered by many as his masterpiece, has been translated into Bengali, Malayalam and Telugu, besides English. Sangam (The Union) has been rendered into English, French and six Indian languages including Hindi. In his forewords to the English versions of Thaagam and Sangam, the Marxist ideologue E.M.S. Namboodiripad calls Bharathi “a talented writer” and hails his success in portraying in the two novels “a society that is regenerating itself” and “a new society that is emerging”.
Thaagam gives one an understanding of the agrarian society in Tamil Nadu and shows how the bitter experiences of the rural poor “fire the once-humble farmer and coolie with the spirit of resistance and how they begin a new life”.
Sangam is about the travails of the tribal people in Tamil Nadu’s Kolli Hills – about the attempts made by these hapless people to free themselves through organised struggles from the clutches of the avaricious moneylenders and tradesmen from the plains and corrupt forest officials. Sri Lankan Tamil scholar Karthikesu Sivathamby rates Thaagam as one of about 25 significant novels of the 20th century and suggests that Bharathi’s works deserve deeper study.
The author’s latest novel, Surangam (Mine), is no different from the earlier ones inasmuch as it deals with the same subject of exploitation of the toiling masses and their organised resistance. What distinguishes it from the others is that it deals with a people alien to his familiar Tamil soil. In response to a request from Bikash Chowdhury (1932-2005), one of the dedicated leaders of the All India Coal Workers Federation (affiliated to the Centre of Indian Trade Unions) and who represented the well-known coal mine centre of Asansol in the Lok Sabha, Bharathi chose the miseries of the mine workers of West Bengal and Jharkhand for his story.
ARUNANGSU ROY CHOWDHURY
Members of A rescue team coming out of the Bhatdih colliery of Bharat Coking Coal Limited near Dhanbad, Jharkhand, in the wee hours of September 8, 2006. Fifty-four miners were trapped inside the mine following an explosion two days before. Most of them died.
Bharathi explains in his preface how hesitant he was initially to take up the challenging task, particularly because of his limitations in internalising the social and cultural moorings of the people, separated by thousands of kilometres from his home State, on whose lives and problems he had to write. Encouraged by the information that he was perhaps the first to write a fictional account from a Marxist angle on the problems of coal workers, he spent many days visiting coal mines in Asansol, Dhanbad and other places to get first-hand knowledge, albeit limited, of the technical problems involved and staying with the workers’ families to see for himself their living conditions. He does not hesitate to admit that his limitations in this field and the cultural barriers understandably affected his ability to etch out the characters and hampered the narrative, too, substantially. This inadequacy, if it can be called so, is, however, more than compensated for by his deft handling of their problems. Their problems, in fact, are common to the exploited sections of almost all societies cutting across castes, religions and languages.
The author’s description of the living quarters of the coal mine workers and his assertion that they are no different from a modern city slum give a very confident start to the novel. The novelist gives a detailed account of the workers’ daily schedule in the coal mines and the humiliation they suffer at the hands of the “mining sardar” and the “mining munshi”, who supervise their work. Through the characters he brings out the corruption indulged in by the owners of the mine in collusion with contractors and supervisors. The denial of basic human rights, the manipulation of wages, the exploitation of the workers’ ignorance, and the inhuman treatment meted out to women by these persons and the moneylenders of the village have all been highlighted.
In almost all mines, the miners are forced to work in primitive conditions with absolutely no regard for safety aspects. The efforts of a couple of motivated young leaders to set up a resistance to the atrocities by creating awareness among the workers about the need to fight for their rights form the core of the story. The principal character, one of the two leaders, is named Bikas, perhaps in honour of Bikash Chowdhury. Alternating between fears and hopes, the workers gradually learn by experience that only a united, organised struggle can bring them solace. In the process, they learn that their objective should be to take up issues larger than a mere pay hike and that their struggle should be made more broad-based by involving a larger number of suffering people.
Nationalisation of mines also did not bring the desired results in many cases. The conditions of workers in the nationalised mines were no better, since in most mines officials donned the owners’ role as exploiters. Workers were forced to live in unhealthy conditions and to work unmindful of the scant attention the managements paid to safety standards. Significantly, this has been going on in mines across the globe, from the United States to China. Frequent accidents in mines, which take a heavy toll, are reported in many countries even today. In China alone, 6,027 people were killed in 3,639 mine accidents in 2004. This is part of the price the country has to pay for rapid economic growth, which forces the mines to work overtime, flouting all safety rules. Poor industrial administration, insufficient supervision over production, and security lapses are believed to be the other factors responsible for the frequent mine accidents. In India, at Chas Nala (now in Jharkhand), about 400 people were killed on December 28, 1975, in one of its worst coal mine accidents. Twenty years later 60 miners were killed in a similar accident at Ghastiland in the Dhanbad district of the same State. In both places flooding of the mines caused the accidents.
Bharathi ends the novel with the flooding of a coal mine caused by the officials’ utter disregard for safety norms despite being cautioned by workers. The 300 workers who are trapped inside the mine lose their lives. The accident occurs at a time when the workers are making preparations for a strike. Among those killed is Dilip Paswan, Bikas’s associate. Paying homage to the dead, Bikas declares: “Humans die, but humankind does not.” The novel ends on this optimistic note. The heart-rending scene will keep disturbing the reader for weeks on end.
Volume 28 – Issue 03 :: Jan. 29-Feb. 11, 2011
INDIA’S NATIONAL MAGAZINE
from the publishers of THE HINDU
Wages of tokenism
The revised daily wage for NREGS workers is still lower than the minimum wages paid in several States.
PRIME MINISTER MANMOHAN Singh and UPA chairperson Sonia Gandhi at Mahatma Gandhi NREGA Sammelan 2010 , in New Delhi in February 2010. Wages of NREGA workers were revised after Sonia Gandhi brought the matter to the Prime Minister’s attention.
A CONTROVERSY seems to have surfaced between the Prime Minister’s Office and the National Advisory Council (NAC) on the issue of wages under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The NAC has been arguing for some time that there should be parity between wages under the National Rural Employment Guarantee Scheme (NREGS) and the minimum wage paid in the States. In some States, the minimum wage is much higher than the ceiling of Rs.100 prescribed under the NREGS.
Apart from the NAC, agricultural workers’ organisations and political parties, including the Left parties, have objected to the existing daily wage under the NREGA. The demand for a revision has become strident now given the rise in prices of essential commodities and basic food items. Social audits conducted in the States have also highlighted complaints raised by labourers about the measly disbursement and also diversion of the sanctioned amount.
The present brouhaha began following a communication from NAC head and United Progressive Alliance (UPA) chairperson Sonia Gandhi to Prime Minister Manmohan Singh on November 11 last year. She wrote that workers under the NREGS were being paid less than the statutory minimum wage. Additional Solicitor General Indira Jaising held that the payment of wages below the minimum wage would amount to forced labour.
In his reply, the Prime Minister explained that the wage rate fixed by the government could be indexed to inflation and not to the Minimum Wages Act of 1948.
The UPA government then came up with a new structure whereby wages under the NREGA would go up from 17 to 30 per cent, keeping Rs. 100 as the base wage and linking it to the Consumer Price Index. The revised wages came into effect on January 1 this year. Even this is not adequate to meet the inflation and is still less than the minimum wages paid in several States, critics argue.
Rural Development Minister C.P. Joshi said that the revision was effected after detailed discussions. His Ministry’s suggestion to double the number of days and link the wages to the annual inflation rate was ignored.
Joshi said the Ministry was looking forward to the report of the committee headed by Pranab Sen, Secretary in the Ministry of Statistics and Programme Implementation, on the matter of fixing an NREGS minimum wage indexed to the Consumer Price Index for Agricultural Labour (CPIAL).
It was in January 2009 that the Centre fixed the wages to be paid under the NREGA at Rs.100. But at least 19 States – Kerala, Rajasthan (where the hike came into effect recently), Andhra Pradesh, Chhattisgarh, Jharkhand, Bihar and Karnataka – were paying more than Rs.100 a day.
A subcommittee of the NAC had sought an amendment to the NREGA, given its potential to clash with the Minimum Wages Act, but this has been ignored by the government. Section 6 (1) of the NREGA says the Centre can specify wage rates; the States can make variations but cannot go below the minimum rate specified by the Centre.
As the gap between the NREGA-stipulated wage and the minimum wages in different States increased, it created unrest between different classes of workers, induced employers to violate the Minimum Wages Act by reducing agricultural wages and rendered irrelevant the NREGS’ objective.
Reactions of workers’ organisations
Vijoo Krishnan, an office-bearer of the All India Kisan Sabha (AIKS), said it was peculiar that the government appeared to show a progressive and sympathetic attitude towards agricultural workers and at the same time rejected the very proposals meant for their uplift.
The All India Agricultural Workers’ Union (AIAWU) said the Prime Minister had betrayed the interests of the toiling masses by delinking NREGA wages from the Minimum Wages Act at a time when his government had failed to control the prices of essential commodities.
AIAWU general secretary A. Vijayraghavan and president P. Ramaiah said that the move was a deliberate ploy to deny MNREGA workers the possibility of getting higher minimum wages statutorily fixed by different States. It violated the constitutionally guaranteed rights of the workers and threatened the minimum wage system, which acted as a guarantee against arbitrary changes and inflation, they said. They pointed out that the 19 States that guaranteed a minimum wage higher than Rs.100 “reflected a greater sensitivity to high inflation”.
WORK ON FLOOD banks in progress under the National Rural Employment Guarantee Scheme at Panchrukhia village in Patna district of Bihar. At least 19 States, including Bihar and Jharkhand, were paying more than Rs.100 a day even before the January 2009 hike came into effect.
The AIAWU is of the opinion that indexing the wage rate under the NREGA to the CPIAL will not raise the wages of NREGA workers to the statutory minimum wages fixed in many States. Even after indexing, the MNREGA workers in Kerala, Andhra Pradesh, Chhattisgarh, Goa, Karnataka and Mizoram would get less than the prevailing statutory minimum wages, the AIAWU leaders said.
The UPA government had claimed that it would protect a real wage of Rs.100 a day by indexing the wage rate to the CPIAL, they pointed out. However, this base wage of Rs.100 would be reset only in 2014. Whatever increase would accrue then would be a pittance when compared with the rise in the prices of essential goods, they said. Thus the efforts of State governments to fix socially just wages would be diluted. The Kerala government and the AIAWU have demanded that the wages payable under the MNREGA must be at least Rs.200 a day. The AIKS, on its part, has demanded that the number of days of employment be increased from 100 to 200.
The AIAWU feels that as in the case of the Food Security Act, the government decision on the NREGA wages is “an attempt to subvert the programme and to shirk its responsibility of paying higher minimum wages”. Organisations such as the Rajasthan-based Mazdoor Kisan Shakti Sangathan (MKSS), which has a long history of doing social audits in the State, also protested against the decision.
The Minister of State of Labour and Employment said in November 2010 that the minimum wages in the Central sphere for unskilled workers and for all scheduled employment ranged from Rs.146 to Rs.163 higher than the NREGS wage. The minimum wage was the highest in Delhi, Rs.203, followed by Kerala, where for unskilled agricultural workers the rate was Rs. 200 for hard work and Rs. 150 for light work (which was higher than what most States gave for what would be construed as hard work). In Punjab and Haryana, which received many migrants, the wages for agricultural work were Rs.127 and Rs.167 respectively.
The National Federation of Indian Women (NFIW) too has protested against the government decision. The organisation said that it was a known fact that MGNREGA helped poor workers get better wages for their labour in the unorganised sector, especially agriculture. The Prime Minister, it said, had taken this decision to protect the interests of big farmers, who were known for violation of the Minimum Wages Act. Accusing the government of double standards, it said the decision would create an illegal precedence of payment of wages below the minimum wage. The worst victims would be women, who constituted 52 per cent of the total workforce employed under the NREGS; 42 per cent of NREGS workers belonged to the Scheduled Castes and Scheduled Tribes. The NREGS, the organisation said, had been created under an Act of Parliament and hence the government was the principal employer.
Reports and bills
The report of the National Commission for Enterprises in the Unorganised Sector (NCEUS) found that in 2004-05, 90.7 per cent of agricultural labourers, 64.5 per cent of rural workers and 52.3 per cent of casual non-agricultural workers received wages below the national minimum wage designated by the Central government (Rs.66 a day). Even 57.3 per cent of unorganised regular workers in rural areas and 47.2 per cent in urban areas received wages below this minimum.
The report stated that the 37th session of the Labour Ministers’ Conference held in 1987 was of the view that the problem was not one of lack of Central legislation, but one of implementation of existing laws such as the Minimum Wages Act, the Equal Remunerations Act and other such laws applicable to workers in the unorganised sector, including agricultural workers.
The Unorganised Sector Workers Social Security Bill, 2004, which was passed by Parliament in December 2008, set provisions for minimum conditions of work, including an eight-hour work day with a 30-minute break; overtime at twice the ordinary rate of wages; and payment of wages at rates not less than the statutory minimum wages.
The NCEUS had mooted a concept of minimum wages. This, it said, depended on the minimum needs of the worker and his/her family which should be met by the wage earnings and the particular industry’s capacity to pay. In general, there must be an irreducible ‘minimum’, which must correspond to a basic subsistence that minimum wages must meet. In its report, the NCEUS recalled that way back in December 1947, the Government of India had appointed a Central Advisory Council to advise on issues of fair wage to labour and fair return on capital. This council appointed a high-powered tripartite committee called the Committee on Fair Wages, which was asked “to determine the principles on which fair wages should be based and to suggest the line on which these principles should be applied”.
“The Committee, in its report submitted in 1948, drew a distinction between ‘minimum wage’, ‘fair wage’ and ‘living wage’. ‘Minimum wage’, according to the committee, should provide for the maintenance of the efficiency of the worker as well as his other (current) basic needs,” observed the NCEUS report. Even a cursory look at the three categories reveals that the NREGS daily wage of Rs.100 in today’s inflationary environment does not fall in any of these.
A minimum wage, according to this committee, must provide not merely for the bare sustenance of life but for the preservation of the efficiency of the worker. For this purpose, the minimum wage must also provide for some measure of education, medical requirements and amenities.
WORKERS ENGAGED IN weeding at a kole wetland near Thrissur in Kerala. The Kerala government has demanded that the wage payable under the NREGA must be at least Rs.200 a day since the minimum wage in the State is higher than the NREGA wage.
In 1957, the 15th Session of the Indian Labour Conference (ILC) emphasised that “minimum wage should be need-based in order to ensure minimum human needs of the industrial workers”. In 1992, the Supreme Court of India ruled in Raptakos Brett and Co. vs its workmen that children’s education, medical requirement, minimum recreation, including festival/ceremonies and provision for old age and marriage should further constitute 25 per cent of the total minimum wage and used as a guideline in determining minimum wages.
On the basis of these and other recommendations, the NCEUS devolved certain parameters to determine the national minimum wage. These included the monthly per capita consumption expenditure corresponding to the poverty line, the average size of labour households, the average ratio of dependents and earners in labour households and the average of total number of days of employment as brought out by the National Sample Survey (NSS).
The NCEUS said that the national minimum wage could be fixed for the country as a whole, on the basis of the above parameters, and the same could be adjusted for rural and urban areas and different States, as is done for estimating poverty lines at present. The unions too were hopeful of a basic national floor level wage – they had definitely not expected it to be Rs.100 a day.
What is clear is that the NREGA has taken off only where there have been active interventions by agricultural workers’ unions and farmers’ and women’s organisations. Organisations such as the All India Democratic Women’s Association (AIDWA) have constantly pointed out the harsh productivity norms linked to wages, which have denied many workers, women included, their minimum wages. The organisation observed that owing to the sheer hard labour involved in the nature of work under the NREGA and the piece-rate system of wages, many women fell sick, missed work or were unable to collect their full wages.
While there is a broad agreement that the NREGA as a concept was a radical piece of legislation, there is a strong feeling that the time has arrived to go beyond tokenism and to extend the entitlements under the Act in order to make it meaningful.
THE NATION’S BANKER
The Reserve Bank of India has a finger in every pie of the financial system. Its responsibilities span a host of economic parameters and objectives, and the demands of its multi-point agenda frequently create contradictions and internal conflict s. How well does the central bank manage the balancing act? In the context of the recent developments in the currency market, a look at the challenges and opportunities before the RBI under Governor Bimal Jalan.
IT is not easy being the nation’s banker even in an economically advanced and prosperous country. The Bank of Japan, which has locked horns with the Japanese government over its interest rate policy, would quite easily testify to this. It is more difficu lt being the central bank in a developing nation, if the experience of the Reserve Bank of India (RBI) is any indication.
Dr. Bimal Jalan, Governor, Reserve Bank of India. “Whatever be the nature of the government at the Centre, the RBI tries to ensure that its relationship with the government, its response to economic objectives and its policies remain in harmony.”
Indeed, given a chance, it is quite possible that the RBI would opt for a radical re-ordering or even downsizing of its responsibilities and functions. For in the current scheme of things, it has a finger in every pie in the financial system and is not a ble to do full justice to any of its responsibilities. The RBI has a multi-point agenda, and frequently the demands of that agenda pose serious contradictions and internal conflicts.
Consider, for instance, the RBI’s roles as guarantor of financial system stability (involving supervision and regulation of banks and other financial companies) and as the government’s debt manager. As debt manager, it conducts the government’s market bo rrowings and naturally wants to borrow for the longest possible maturities. But being responsible for the soundness of the financial system, it should be quite concerned if the borrowings are for long maturities. For banks’ resources comprise mainly of d eposits with maturity up to three years. It is quite clear that any loan or investment made for longer than that period with liabilities which have to be paid back in less than that time pose grave financial risks for the investing institutions (the bank s) and for the financial system.
Here lies the conflict of interest. How is the RBI going to resolve this?
The larger environment
These are challenging times for central banks the world over. They not only have to grapple with economic uncertainties which have become more complex and which could render ineffective many of their traditional policy tools, but also contend with more c onventional and long-standing issues such as the nature of their relationship with the political executive, and in deciding where the buck stops insofar as economic policy-making and its consequences go.
The spat between the Bank of Japan and the Japanese government on the appropriateness of an interest rate hike highlights the tense nature of the relationship between the political executive and a central bank. This unease between the elected establishme nt and an “unelected” body of officials, is a well-known feature of the overall environment in the advanced countries. And, over a period of time, both governments and central banks seem to have perfected the art of co-existence.
The situation has so evolved that governments now largely restrict themselves to laying down the ends or some concrete economic objective – for instance, inflation to be maintained in a range. Central banks are then left to adopt and pursue whatever poli cies/strategies are necessary to attain those objectives. In a way, this arrangement simply reinforces the supremacy of the political executive but provides a large measure of professional freedom, clarity and focus to the central bank’s policy-making.
In harmony with government but contradictions galore
Closer home, the RBI has not embarked on any strategy to defy the government. Far from it, its policy objectives mesh with that of the government, as the Governor of the central bank says in the accompanying interview. In other words, there is no uneasin ess and tension in the relationship between the government and the RBI.
And in this task of working alongside the government (and not independent of it, the RBI has been more than successful in fulfilling its responsibilities, fairly heavy ones at that. Indeed, very few central banks in the world have the kind of responsibil ities that the RBI, so gamely and without complaint, shoulders in so routine a manner.
While being admirable in one sense, the present arrangement in which the RBI is responsible for a host of economic parameters/objectives also poses tremendous problems in reconciling them. Quite frequently, the inherently conflicting nature of the arrang ement lands the RBI in some kind of a paralysis. In such a situation, a particular policy move with respect to one objective could be seen to be directly undermining progress in the attainment of another. The result: half-hearted measures in respect of b oth objectives.
The RBI is not only a monetary authority with a responsibility to determine the price and adequacy of credit facilities in the economy but it has broad (and loosely defined) responsibilities with respect to checking inflation. More demanding are the resp onsibilities thrust on it as a public debt manager and as manager of the external sector of the economy.
On the right side of the inflation curve
A fortuitous combination of circumstances – a series of good monsoons, a tame international price environment for the past years and the increasing exposure of the Indian economy to global price trends – may have contributed to the country’s satisfactory performance on the inflation front in the past few years. The wholesale price inflation has on average ruled around 5 per cent in the past five or six years compared to the double digit increases previously.
The RBI may not, therefore, get all the credit for the not-so-poor performance on the inflation front. A more important issue here, from the viewpoint of assessing the bank’s performance, is when the overall economic environment relating to prices change s for the worse. Since the central bank does not have any clear-cut mandate on inflation, will the RBI be held responsible for any uptick in inflation and will it be given the leeway to undertake whatever policy measures necessary to counter inflationary pressures?
Conflicts in public debt management
A study of the RBI’s public debt management and how it has executed that responsibility highlights the institutional rigidities and constraints within which it is functioning.
It is well known that governments in independent India have run budget deficits. While earlier, bridging the budgetary gap was easy (the government merely asked the RBI to print fresh currency to the extent of the deficit and also took recourse to prescr ibing high reserve requirements for banks making them invest Rs.38.5 of every Rs.100 of deposits in government securities) the government now has to compete in the broad market with other users of funds for borrowing money. The RBI’s task has become more demanding with the proportion of market borrowings in the total financing requirement going up (Table 1). No more printing of currency to bridge the gap, although, given its onerous responsibilities, the RBI has provided itself some leeway to skirt an a greement which forbids currency printing.
Public debt management involves the issue of government securities in the market and the mobilisation of funds to bridge the budgetary gap, and more crucially extends to issues such as the terms on which the government borrows – the cost of borrowing and the period for which the government borrows.
Borrowers would normally want to borrow for the longest maturity and at the lowest rates possible. While this was possible and quite easy for the government earlier (when currency was printed to bridge budgetary gaps and even later till the introduction of the auction system of floating government loans), it is not so easy in the present market-related system.
The RBI therefore faces tremendous challenges in pushing through (selling) a large and rising government borrowing programme in the market. It has to lengthen the period for which the government borrows and do so at the lowest possible rates. This is an extremely difficult combination of outcomes to achieve.
Tables 2 and 3 indicate that while the RBI has had some success in lowering the rates at which the government borrows, this has come at the cost of a sharp shortening of the periods for which borrowings are made. More recent experience with respect to pu blic debt management, though, has been quite favourable for the government. In 1999-2000, there was no issue of government securities for a period less than five years. Also, around 65 per cent (Rs.56,630 crores) of the total amount of securities issued (Rs.86,630 crores) during the year was for above 10 years.
The RBI would like to keep the borrowing costs for the government down. But if inflation is a concern and the market demands higher rates on lending to government, will the RBI accede to such a demand? Would the RBI subject the government also to higher interest rates as will be the normal market response to any borrower seeking to raise funds in a rising inflation scenario? Institutional reforms are crucial to relieve the RBI of its public debt management responsibilities.
The RBI’s role with respect to the external sector of the economy is another key policy area bristling with challenges and conflicts. Here again, the bank has been bravely holding out against tremendous odds. Although the global economy has gone through economic and political upheavals in the past few years, the performance of the external sector causes much concern.
Institutional reforms seem imperative in this area too. For, while grave challenges have been successfully met in the past, that does not necessarily pave the way for a comfortable and trouble-free future. One definite step to ensure better management of problems would be to provide institutional freedom to the RBI.
Conservatism, particularly since the balance of payments crisis of 1990, and deft management of recurring problems could be identified as two factors that largely enabled India to come out relatively unscathed from the South-East Asian currency and econo mic crisis.
Conservatism with regard to opening up the financial sector to external participation ensured that India did not face problems such as large-scale flight of capital, the kind that forced the South-East Asian economies to make extremely difficult policy c hoices. Indian banks and companies do not run up huge liabilities in foreign currency (a factor responsible for making larger economy vulnerable to capital flight) and their borrowing in the international markets is still subject to restrictions. The RBI has, however, gradually eased some of the restrictions. The large overhang of repatriable non-resident Indian (NRI) deposits is another vulnerable area, if the experience of 1990-91 is anything to go by.
The inherent conservatism in financial sector policy therefore dramatically shrunk the dimensions of problems in the external sector even as the economy of Korea and Thailand almost went down because of financial excesses. India did not escape totally fr om the crises that spread across from East Asia. Deft management by the RBI at this stage has, however, meant that the Indian economy and markets project a picture of relative stability in the face of continuing uncertainty in other economies.
A comparative study of the movements of three currencies – the Indian rupee, the Korean won and the Thai baht – in the past three years would seem to provide some evidence of the relatively higher degree of stability obtaining in Indian financial markets .
The baht is now at around 41 units to the dollar. It ruled around 26 units in July 1997. That works out to a total depreciation of around 58 per cent. Much of this depreciation came about in a few months after the currency crisis in July 1997.
The won at around 1,115 units to the dollar now is down by around 33 per cent from its July 1997 level of 840 units to the dollar. The won, in fact, was ruling even lower in early 1998. At around 1,460 to the dollar, it had then lost almost 75 per cent o f its July 1997 value. The won’s current levels therefore represent a good gain from its early 1998 depths.
But what stands out in the case of both the baht and the won is the huge volatility. Won, down 75 per cent at one point, has clawed its way back to be only 33 per cent down now.
The rupee in the same period – July 1997 until now – has also lost some value. At 45.80 to the dollar, it is down around 30 per cent from its July 1997 rate of 35.70 to the dollar. But unlike the wild swings noticed in the case of the other two currencie s, the rupee’s fall has been more gradual and more evenly spread out. The rupee, on average, has lost around 8 to 9 per cent of its value in the past three years.
A graduated and controlled fall has its own implications. It could, for instance, enable better economic planning (say at the level of an individual company) and help avoid or lessen the magnitude of other economic shocks.
THE RBI’s handling of the external sector in the past few years does show the central bank in good light, especially when compared with the external sector performance in other emerging market economies.
The challenges, though, are formidable. Much of it has to do with what role the RBI sees for itself in the external sector, which is steadily integrating with the world markets. With rapidly disintegrating controls and barriers to linkages with the globa l markets – both goods and financial – the ability of the RBI to deliver a certain “rate” of performance on the external sector (in terms of ensuring only gradual falls in the rupee) would also come under severe strain. Indeed, the macro-economic environ ment relating to Indian external trade appears to be evolving in such a way (a case in point being commitments under the World Trade Organisation (WTO) to end quantitative import restrictions) that the RBI’s ability to control the flow of foreign exchang e could be seriously impaired. The central bank cannot build enough foreign exchange reserves to be able to take care of imbalances in demand/supply of foreign exchange in the market as it is doing now. The adjustment mechanism in such an environment wil l necessarily have to only operate through the exchange rate.
The present level of responsibility that the RBI has with respect to the rupee’s exchange rate also quite frequently brings it in conflict with its public debt management concerns. The recent developments in the currency market (with the rupee under stro ng downward pressure) and the public debt market have clearly brought out the contradictions inherent in the RBI’s multi-point agenda.
Maintaining status quo in the institutional arrangements relating to the central bank does not appear that easy in the evolving economic environment. More important, the status quo also does not seem capable of delivering optimum economic r esults. The sooner the government and the RBI work on this issue, the better it would be for the overall economy.
‘Our reserves are high, our policies proactive’
Interview with RBI Governor Dr. Bimal Jalan.
“Whatever be the nature of the government at the Centre, RBI tries to ensure that its relationship with the government, its response to economic objectives and its policies remain in harmony,” says Dr. Bimal Jalan, Governor, Reserve Bank of India, who is into his third year in office.
An economist by training, Dr. Jalan (59) has held several administrative and advisory positions in the Government of India. He was Chief Economic Adviser to the Union Government from November 1981 to July 1983; Special Secretary and Chief Economic Advise r between July 1983 and February 1985; Secretary, Banking, between February 1985 and June 1986; Secretary and Chief Economic Adviser in 1988; and Finance Secretary in 1990. As Finance Secretary, he was also on RBI’s Central Board of Directors. Dr. Jalan was also the Chairman of the Economic Advisory Council to the Prime Minister between January 1991 and September 1992. He has also served as the Executive Director representing India on the Boards of the International Monetary Fund and the World Bank. He was also Member-Secretary, Planning Commission in 1997.
Educated in Presidency College, Calcutta, as well as in Oxford and Cambridge Universities, Dr. Jalan has written extensively on the critical policy choices for India and on international economic issues. Among the books he has authored on the Indian econ omy are India’s Economic Crisis: The Way Ahead (Oxford University Press, 1991), and India’s Economic Policy: Preparing for the Twenty-First Century (Viking, 1996) and edited The Indian Economy: Problems and Prospects (Penguin, 1993).
RBI is virtually in the eye of the storm created by the volatility in the rupee-dollar market. With the rupee at its all-time low against the dollar, RBI has reversed its policy of lowering interest rates (which it had done six times between January 1998 and April 2000), by raising the Bank Rate and the Cash Reserve Ratio (CRR) on July 21. This, according to Dr. Jalan, had to be done as “international market conditions had changed in respect of interest rates and we need to respond to changing condition s”.
In his Mumbai office, Dr. Jalan spoke to T.B. Kapali and Asha Krishnakumar on a range of issues, including the current situation in the forex market, the role of RBI as the regulator of the financial system, its relationship with the Union government, and the central bank’s strategy to monitor, and regulate, such new developments as e-commerce and software exports that are predicted to take off and zoom in the next few years.
The Finance Minister has more than once spoken about interest rate decisions being solely in RBI’s domain. Can you outline the kind of autonomy and independence RBI has in formulating and implementing its interest rate views, especially, as it is the manager of the government’s debt portfolio and acts as the public debt manager?
I do not particularly like to use the words “independence”, “autonomy”, “freedom” and so on while talking about RBI’s relationship with the government. The reason is that in an emerging market economy, many public issues such as unemployment, regional ba lance, poverty alleviation, and monetary stability are involved. The economic situation in developing countries is complex and we cannot have a unitary objective or marked divergences in economic, fiscal and financial policies – with the central bank goi ng one way and government in another direction. What we need is harmony in order to deal with many conflicting objectives.
Thus, when RBI takes decisions on monetary issues, including interest rates, it gets a lot of inputs from the market participants, financial institutions, banks and the government. RBI takes into account the fiscal stance (of the government), before taki ng a decision and there is a fair amount of discussion with experts in the Ministry of Finance. And while the decision or the responsibility for taking a particular decision, such as on the Bank Rate, is that of RBI, the process of arriving at such a dec ision is a little more complicated.
Considering RBI’s responsibilities, does this kind of situation where it has the responsibility of taking a decision but has to follow a consultative mechanism help the bank attain its objectives?
Reserve Bank does not have any independent objectives, apart from shared objectives with government and also Parliament. And those, to put it very generally, are growth with price stability in order to reduce poverty and increase in income levels. What e xactly should be the policy-mix depends on a lot of things. For example, beginning in 1998 and considering the phase of the cycle at that time and many other indicators of the economy, RBI reduced interest rates a number of times. Monetary policy was als o easy as inflation was coming down and external capital flows were high. More recently, RBI increased the interest rate; a decision which was based on a number of considerations, particularly the sharp change in international environment.
What is your view on the effectiveness of using interest rates to contain inflation – a weapon which may probably be more appropriate for an advanced market economy?
A lot of academic work has been done in this area. Generally, the consensus view is that in a situation where the inflation rate is high because of excess demand on account of demand pressures the monetary instrument is effective and has to be used. On t he other hand, if inflationary pressures are seasonal or due to external shocks (such as oil price rise), the monetary instrument is less effective in the short run.
If, as you say, RBI does not have any independent objective and its decisions on interest rates and such other economic targets are in consultation with the government, then, political control or direction from the government becomes an accepted fact. In such a situation, do you think RBI has more operating space or leeway in the present environment of a coalition government rather than a single-party rule at the Centre?
I do not want to make any comment on the political aspects except to say that whatever be the nature of the government at the Centre, RBI tries to ensure that its relationship with the government, its response to economic objectives and its policies rema in in harmony. If there is no harmony or if there is conflict, economic or monetary policies cannot be effective in emerging market economies.
For example, the write-off or waiver of loans made by banks was possible primarily under a single-party government at the Centre, but it may not be as easy under a coalition government…
Factually, this is not correct. However, as I said, it is not proper for me to make any comments on political aspects.
Does the legislation on fiscal responsibility or the fiscal deficit cap of the Union Government by RBI make any sense in the Indian context where the Centre and RBI have to work together on development issues which entail increased fiscal expenditure?
The content of a fiscal responsibility or tolerance levels in a country like India may be different, but the need for some rules and transparency with regard to accounting, how and where to spend public money, is necessary. The fiscal responsibility Act per se does not vitiate the objective of spending for development or infrastructure. It does not contend with “for what” but makes fiscal spending and rules more transparent. Thus, the content of the Act can be made suitable to our kind of environment.
In this context, what are the views of RBI on the system of ad hoc Treasury Bills which have been phased out? The agreement to phase it out was hailed as a landmark development in the Indian financial history. But what is the legal sanctity of the agr eement?
Parliament is sovereign. So obviously any agreement can be changed by Parliament or government. The agreement on ad hoc Treasury Bills was arrived at because it was in the country’s interest, and I do not see why it would be changed.
Regarding the recent RBI guidelines on one-time settlement of the non-performing assets (NPAs) of the public sector banks, given that the government is a major shareholder in public sector banks, is it within RBI’s domain to come out with such guideli nes? Don’t you think the government should be dealing with it rather than RBI?
In this situation, I do not think this is really the core issue. Whatever the guidelines, settlements and procedures issued, it is always done in consultation with the government, the financial institutions and the banks. The idea is to look forward and try and make sure that this tremendous overhang of the NPAs and the inordinate delays in processes to realise them do not affect the financial health of banks.
The NPAs of the banks are estimated at Rs.52,000 crores. How do you propose to deal with the issue?
I do not know if you had the opportunity to read RBI’s study on NPAs in public sector banks. A large proportion of the NPAs are very old ones, including those of factories, industries, and units which are now closed. These issues require resolution. Diff erent approaches have been tried. Settlement schemes have been worked out. Government has also set up tribunals to deal with pending cases speedily, and banks also propose to make increasing use of Lok Adalats to resolve disputes.
Is RBI’s registration of institutions, other than banks, that take deposits complete?
The final phase of the registration process of NBFCs with net worth less than Rs.25 lakhs is on and is likely to be completed soon.
There are thousands of NBFCs meeting this criterion. Is RBI planning to work out a system of exception rather than focussing on all of them?
You are absolutely right. RBI is also discussing this issue. There are very small NBFCs, which are more localised. We would like to encourage their operations with a self-regulatory mechanism. As far as the smaller NBFCs are concerned, RBI is encouraging and laying emphasis on off-site surveillance. We hope to have some discussion on this and make the process simpler.
Is there a proposal to bring under one regulatory body the deposit-taking activity of all entities other than banks? For instance, the manufacturing companies taking deposits come under the DCA, the NBFCs under the Reserve Bank and so on. Does it not dilute the regulatory focus?
This has been discussed from time to time. The answer is not simple. To my mind, overburdening a single agency would create its own problems.
Considering the high interest rates promised by some NBFCs and the subsequent closure of many of them (particularly in the South) making lakhs of gullible investors face ruin, what is RBI’s system of monitoring and regulating such companies?
The Reserve Bank has said more than once that it, in fact, encourages NBFCs. It encourages the development of NBFCs on sound lines. The future direction, as I see, involves much greater investor awareness. They ought to know whether the NBFCs are registe red/unregistered by the RBI and so on. Some of the initial regulations are also in place. And, we hope that the system works more by exception rather than detailed on-site inspection.
The RBI gives interest rate guidelines. If the NBFCs advertise very high interest rates for public deposits, this is wrong. We cannot prevent NBFCs from trying to cheat. They can only be penalised.
There seems to be some kind of an impression that the rupee can only depreciate vis-a-vis the dollar. Will this create a one-way street for speculators? Even when capital and other inflows are quite strong the rupee does not appreciate. There always s eems to be a bias towards depreciation. Does this give scope and potential for speculation in the Indian market? How does RBI deal with it?
Management of capital flows is always a difficult question. For example, if you have large capital flows, there could be very sharp appreciation in these markets followed by a turnaround and very sharp depreciation when there is a reduction in capital fl ows. The real issue is whether an emerging market economy can withstand that kind of sharp volatility. I am not sure whether there is a clear answer to this. The only clear answer I have is that this is a difficult problem during an era of volatile capit al flows.
Why did RBI see the need to intervene in the market and raise the Bank Rate and the CRR on July 21, reversing totally the nature of its intervention over the last two years. Also, particularly when the dollar is stronger even against other currencies such as euro and yen, would not Indian goods become competitive in the international market?
We have tried to explain this in our recent statement of August 3. The reality of the emerging market economy is that even relatively small changes in supply-demand position can have major impact on forex markets. Even euro has been very volatile. Second , we also have a very skewed market, in the sense that much of the demand is lumpy and cannot be postponed (for instance, crude oil imports). Supply on the other hand, is much more spread out and is much more sensitive to expectations of future exchange rate changes. Therefore it creates a market condition which is not really perfect or very deep. We have to do our best to tackle this problem.
However, using common standards of international competitiveness, we are not doing too badly.
In the latest (August 3) statement, RBI has stated that it will take whatever measures necessary to meet lumpy demands such as oil sector purchases. Some time ago, RBI set up the Venugopal Reddy Committee to go into the foreign exchange hedging activi ties of the public sector units, and a report was also submitted. What is the progress on the front?
Not much so far. But this is independent on the hedging problem. Even if the demand is spaced, the volumes are large.
Do we take advantage of some price developments in the international market?
We hear that most of the purchases of foreign exchange by all the oil PSUs are mainly in the spot market and this causes a lot of volatility in the market. Is it true?
In certain periods it could be. That is why the Reserve Bank intervenes.
Does RBI encourage the PSUs to go in for hedging?
Yes, we would like them to hedge with appropriate accounting and financial rules.
On an overall reckoning, what would be the central bank’s comfort level with the kind of risk management practices in PSUs now?
I am not an expert in this field, and cannot give a definite answer.
Various institutions have come out with varying perceptions of the economy. What is RBI’s perception of the economy now?
Last year was a very good one. I do not see why it should change this year. Our reserves are high, exports are good, our policies for management of external markets are proactive, the monsoon is also good. The major uncertainty relates to the internation al situation, particularly extraordinarily high crude oil prices and high interest rates.
There is a system of taking inputs and feedback from outside the central bank also – from the broad market – in the central banking systems of advanced markets such as the Bank of England. Is there any such mechanism in RBI?
Yes. The Reserve Bank has opened up considerably. There are lots of groups and panels, meetings and discussions on all aspects of monetary policy at various levels. There is a weekly meeting of the Committee of the Central Board of RBI where that week’s developments are discussed. And whether we should proceed to the next stage of involving in the central bank policy-making with outside experts who are not full-time officials is an open question. But we have enough outside experts advising us on various issues.
Experts say that e-commerce is expanding rapidly. Is RBI working out mechanisms to monitor the international e-trade?
The subject of e-trade is handled by the government. RBI has been taking a proactive stance as far as e-commerce is concerned. We are in the process of working out mechanisms to make it safe and secure.
Software exports are predicted to boom from $4-5 billions to $50 billions in the next few years. What is the kind of mechanism RBI is putting in place to monitor that kind of flows into the economy?
We are looking forward to it. The software industries will have our full support. We are in touch with the industry (software exporters) and are interacting with them on this.
As RBI’s August 3 statement mentions, there is always a possibility of export earnings not being repatriated in time to take advantage of a falling rupee. Do you envisage this kind of a problem with software exports also?
If there are software exports of the magnitude that is envisaged, the problem of demand-supply mismatches would simply disappear.
Fiscal policy: A long view
Barring the 1950s when it adopted a restrictive monetary policy to fight off inflationary pressures, the RBI functioned as the handmaiden of the government ever since its establishment in 1935. It is only since the 1990s that it has attempted to reinvent itself to regain its hard-earned control of the monetary system.
CENTRAL banks are essentially 20th century institutions whose emergence affirmed the nation-state’s evolution as an economic entity and was a dirge of lament at the demise of the open 19th century world economy. The 1920s saw the birth of many central ba nks under the tutelage of the Bank of England, which attempted to set itself up as a secular Vatican of monetary orthodoxy two decades before the Bretton Woods institution, the International Monetary Fund (IMF), came into existence in that role. The Bank of England intended these central banks as the first line of defence of an open international economy and the embattled financial oligarchy sponsoring it, against growing democratic and anti-colonial sentiment in their respective countries.
The Reserve Bank of India headquarters in Mumbai.
Ever since, central bankers and central banking have been in the thick of politics even when they profess to be guided by seemingly neutral and technical principles. In the 1920s Bank of England officials regarded themselves as practitioners of an esoter ic calling whose precepts were beyond the understanding of economists, let alone the lay persons who lost their livelihoods because of the bank’s policies. But as Keynes’s questioning of Montagu Norman, Governor of the Bank of England for a quarter of a century and the high priest of inter-war central banking, in the Macmillan Committee (1931) revealed, this self-conscious priest had little idea about how the economy or how its policy instruments worked.
The fortunes and stature of central banks declined the world over during the next half-century as most countries, including advanced industrial economies, imposed wide-ranging controls on external transactions and governments began to play a bigger role in managing the economy, often with a view to promoting employment. Though central banks began to re-emerge from the shadows two decades ago, the determined use of the Federal Reserve and the Bank of England by President Ronald Reagan and Prime Minister Margaret Thatcher to fight their respective political battles brought these institutions little credit.
The mid-1990s saw the re-invention of Alan Greenspan as a savant and of the Bank of England as a public institution following transparent policies made by a technical committee. But as Joseph Stiglitz’s recent article in the New Republic on the IM F’s handling of the 1997-98 crises shows, whether this institution (which is arguably the world’s central bank) acted in the way it did from dogma or deceit, its reputation has not been enhanced by those events. Recent European Union (E.U.) wrangling ove r the powers of the European central bank have also brought the political aspect of monetary policy to the fore.
In India too politics and monetary policies have often gone hand in hand. In 1913, Keynes mooted a central bank as a means of deepening the Indian financial system. But the Reserve Bank of India was set up in 1935 to protect London’s financial interests from damage at the hands of the representative government that was expected to take office under the Government of India Act, 1935. In the event, this Act made ‘finance’ a ‘reserved’ subject to be handled by a non-elected British official. Meanwhile, the RBI’s plan went horribly wrong for the Government. Set up as a share-holders’ bank in the hope of insulating it from nationalist politics, British officials in India were aghast to find businessmen with Congress sympathies being elected to the bank’s ce ntral board.
In 1936, this central board wanted to ease the monetary policy to help weather a depression, which, because of the government’s policies, had lasted longer in India than elsewhere. The board’s views found an unexpected champion in Osborne Smith, the Aust ralian banker hand-picked and trained by Norman to head the new institution. But P.J. Grigg, an angular but orthodox treasury mandarin exiled to India as finance member, refused to heed this recommendation. Worse, suspecting Smith’s loyalty, Grigg had hi s mail, and that of his alleged mistress, intercepted, and their telephones tapped. No evidence was found against Smith, but a violent slanging match between the two ended with Grigg threatening to put in his papers if Smith was not made to go. The first Governor of the RBI was compensated for his unceremonious exit with a generous pension and inclusion in the King’s birthday honours list.
By comparison, the next two decades were years of relative peace for the RBI though it had, in the meantime, passed into public ownership and had, in 1951, energised itself under B. Rama Rau to adopt a restrictive monetary policy to fight off inflationar y pressures arising from the Korean boom. The bank’s tranquility was interrupted in 1956 when T.T. Krishnamachari succeeded C.D. Deshmukh as Finance Minister.
Probably independent India’s most imaginative Finance Minister, TTK had strong views on monetary policy. As an energetic back-bencher in Parliament he had crossed swords with Rama Rau over the future of the Imperial Bank of India. As Finance Minister he did not hesitate to make public pronouncements on policy matters that had earlier been handled by the RBI. Financing the Second Five-Year Plan was proving to be a heavy burden on the economy, and TTK’s attitude towards institutions such as the RBI tended , against this background, to be instrumental, even ad hoc. Rama Rau, on the other hand, was protective of the RBI’s autonomy, and it was not long before the two attitudes came into conflict.
TTK and Rama Rau differed over the monetary policy in the 1956-57 peak season. But differences broke out into open quarrel between the Finance Minister and the Governor in November 1956 when the former took powers to vary the stamp duty on bills, and thu s, indirectly, the effective RBI lending rate against bills under its bill market scheme. As if to add insult to injury, TTK told Parliament, while tabling his supplementary tax proposals, that the stamp duty was a “fiscal measure with monetary intent”. According to B.K. Nehru’s memoirs, TTK reportedly objected to Rama Rau lobbying against the stamp duty with Prime Minister Jawaharlal Nehru and his Cabinet, and when the two met afterwards, “let fly in no uncertain terms and in the loudest of voices”. TT K followed it up by making public criticisms of the RBI and the State Bank. Both took their case to Nehru. Obviously loathe to let another Finance Minister go – it had only been a few months since Deshmukh had departed over the future of Bombay but two decades since a RBI Governor had been made to quit – Nehru sided with TTK and acquiesced in Rama Rau’s resignation.
RAMA RAU’S successor, H.V.R. Iengar, and TTK worked closely, though not without their differences. It was TTK’s responsibility to find resources for the ambitious Second Plan, but the RBI and Iengar were deeply worried about the inflationary impact of th e government’s spending programme and its manner of financing it. These differences came out into the open towards the end of the Second Plan (by now Morarji Desai had replaced TTK who was forced out of office by the Mundhra affair) and in the early year s of the Third Plan period. If newspaper reports are to be believed the RBI pressed higher interest rates upon the government in 1960 and again two years later. The government was in no mood for anti-inflationary measures that pushed up its own costs of borrowing, forcing a rather frustrated Iengar to note on the eve of relinquishing office in 1962 that differences over monetary policy were likely to drive a deep wedge between the bank and the government.
No government can keep nominal interest rates down in a competitive market without affecting the market for its own loans. But this danger could be averted if quantity controls over credit were put in place and the capital market were segmented. Since 19 51, the RBI’s major means of placing commercial banks in funds was by lending to them in the busy season (October to April) against government paper. With the government resisting increases in the Bank Rate, from 1960 the RBI began to restrict commercial banks’ access to its accommodation through a variety of quota schemes. Shortly afterwards, the capital market was also effectively segmented by raising the ‘liquidity’ requirements of banks through the statutory liquidity ratio (SLR). In 1956, an innoce nt RBI agreed to lend virtually without limit to the Government of India against ad hoc Treasury Bills. This and the SLR requirements, which was to some extent the bank’s own insurance against the government’s excessive recourse to ad hocs, together help ed relax market-checks on the government’s borrowing programme. Consequently, though interest rates hikes could not be avoided as the economy went deeper into crisis towards the mid-1960s, credit control increasingly came to mean controlling private sect or credit through an exceptional degree of micro-management of credit allocation between users, sectors and industries.
These initiatives inevitably marked the institutional weakening of the RBI vis-a-vis. the government. A good instance of the RBI’s growing irrelevance to policy-making is offered by the 1966 devaluation of the rupee. Although its Governor, P.C. Bh attacharyya, was an active participant in the exercise, no one else at the bank, including its Deputy Governors, was involved in the decision. For the next two decades, the RBI functioned rather (as TTK intended), as a hand-maiden of the Finance Ministry . It is only since, and especially in the last decade that the institution has attempted to steer a more independent course. But as its mixed success in arresting the rupee’s current slide shows, the RBI’s hard-earned control over the monetary system cou ld already be under threat from the markets.
G. Balachandran teaches at the Delhi School of Economics.
The myth of ‘autonomy’
The RBI’s recent initiatives aimed at stabilising the rupee confirm its recently acquired image of being autonomous, but the central bank is neither independent of international finance nor is its intervention always effective.
AN impressionistic reading of the financial press suggests that India’s central bank has suffered a loss in popularity. Industrialists and exporters are sore about the manner in which the Reserve Bank of India has dealt with the recent slide in the rupee ‘s value. The rupee’s depreciation itself was not too substantial, especially given the perception that currencies of India’s competitors have, since the South-East Asian crisis, fallen far more vis-a-vis the dollar. What appears to have bothered the RBI is the pace at which that depreciation occurred. Sensing that the unusually sharp depreciation was driven by speculation, the RBI responded in two ways.
It first put a halt to and marginally reversed its drive to reduce interest rates by easing liquidity and cutting the Bank Rate. On July 21, the Bank Rate, which had in six instalments been brought down from 11 per cent in January 1998 to 7 per cent in A pril 2000, was hiked by one percentage point to 8 per cent. The Cash Reserve Ratio (CRR) too was raised by half a percentage point to 8.5 per cent. The RBI had decided to stabilise the rupee by squeezing credit and rendering it more expensive. Underlying those moves was the perception that easy access to liquidity at low interest rates was encouraging agents eligible to trade in foreign exchange markets to book profits through arbitrage. So long as the expected slide in the rupee vis-a-vis the do llar exceeded the cost of acquiring and using rupee debt to purchase dollars, it paid to borrow rupee funds and invest them in dollars for speculative purposes. In the belief that such speculation played a role in the rupee’s sudden depreciation, the RBI chose to mop up some of the liquidity in the system and render credit more expensive.
When this action failed to halt the rupee’s slide, the RBI decided to force exporters to convert into rupees a substantial part of their dollar holdings under the Exchange Earners’ Foreign Currency (EEFC) account scheme introduced in 1992. That scheme al lowed exporters to hold a portion of their exchange earnings in foreign currency accounts. Since exporters were eligible to avail themselves of credit against such holdings to meet current expenses, holding on to dollar revenues in the form of long-term deposits was not much of a problem. What is more, to the extent that the rupee depreciated, increasing the rupee value of these dollar holdings, the exporters garnered a higher rupee return. Thus, the scheme, which was meant to facilitate easy access to foreign exchange by exporters, became a means to maximise returns by speculating on the likely depreciation of the rupee. Having discovered that at the time of the rupee’s slide exporters were holding dollar deposits amounting to $2 billion, the RBI dec ided to reduce the ceiling on such deposits by 50 per cent, with an August 23 deadline for conversion. This triggered a conversion rush that stabilised and even pushed up the value of the rupee. However, after the deadline, by which date $850 million had reportedly been converted, the rupee resumed its downward slide, nearing the Rs.46-to-the-dollar mark.
The initiatives aimed at stabilising the rupee seem to confirm the RBI’s recently acquired image of being an independent and autonomous central bank that can go against the grain and discipline the private sector in the pursuit of its objectives. They ha ve also created the impression that Governor Bimal Jalan is India’s own version of an Alan Greenspan (Chairman of the Federal Reserve Board of the United States), willing to exercise the authority that the newly acquired status of the central bank vests in him. The decision to hike interest rates, coming in the midst of signs that industrial growth is once again slowing, has been criticised by industry associations and individual captains of industry. And exporters are sore about the curtailment of the EEFC account benefit. Rumour has it that sections of the bureaucracy which are keen to dispel the impression that the growth rates of output and exports during the years of reform have been low and volatile, and are therefore in favour of a further lower ing of interest rates and a depreciation of the rupee so as to stimulate industrial growth and exports respectively, are uncomfortable with the tough-acting central bank chief.
Interestingly, it was this section of the bureaucracy inspired by the International Monetary Fund (IMF) and the World Bank that had made the case for an independent and autonomous central bank. In theory, central bank autonomy was seen as the process of rendering central bank operations relatively independent of the fiscal decisions of the government, so that the RBI could adopt an effective monetary policy. Until the early 1990s, a major way in which the deficit in the budget of the Central government was financed was through the issue of ad hoc Treasury Bills, which provided the government access to funds at a relatively low interest rate. Once the volume of open market borrowing by the government was decided upon, the remaining gap in the budget was automatically monetised through the issue of ad hocs, as they were called, which the RBI was expected to finance compulsorily.
This obviously reduced the central bank’s control over money supply. Fiscal decisions that increased the bank’s credit to the government also increased the high-powered money base in the system, leading to an increase in money supply. Since the prevailin g monetarism believed that money supply trends were responsible for inflationary conditions, the central bank’s pursuit of what was seen as its primary objective, namely maintaining price stability, was seen as having been eroded. Restoring a role for mo netary policy was predicated on curbing the ability of the government to finance its deficits through the issue of ad hoc Treasury Bills.
It was not only because of their faith in monetary policy that the reformers were in favour of central bank autonomy. They also believed that once the government’s access to cheap credit from the RBI was curtailed, government borrowing would be limited f or two reasons: excessive borrowing from the open market will push up interest rates, providing a signal to the government of the impact of its behaviour on the cost and availability of credit; excessive borrowing will also result in sharp increases in t he interest burden on the government’s budget, and act as a corrective against such borrowing. Since the reformers were persuaded by the view that the size of the fiscal deficit constituted India’s number one economic problem, they backed central bank au tonomy as a solution to that problem.
In the event, as part of the financial reform effort, the issue of ad hoc Treasury Bills was initially capped and subsequently done away with and replaced with a scheme of ways and means advances. However, as the evidence shows, this has not helped ensur e any substantial reduction in the fiscal deficit. In fact, there have been three years after the launch of reform during which the fiscal deficit to gross domestic product (GDP) ratio has come close to the levels seen during the crisis of 1990-91. First in 1993-94, when government expenditure was increased to combat the immediate post-adjustment recession. And second, during 1998-99 and 1999-2000, when the implementation of the Pay Commission’s recommendations pushed up the salary bill of the governmen t.
What is disconcerting is that this increase in the deficit has not provided any major expansionary stimulus to the system. This is because associated with a higher fiscal deficit has been a lower tax-GDP ratio, resulting from the fact that while indirect tax collections, especially customs duty collections, have fallen as a result of reform-driven tariff reductions, direct tax collections have not risen enough to neutralise this fall. As a result, a higher fiscal deficit to GDP ratio does not imply an e quivalently higher expenditure to GDP ratio. The net impact has been that despite relatively high and rising fiscal deficits during the 1990s, industrial growth has been indifferent in most years.
One area in which the RBI has been forced to be active in the wake of reform is the liberalised foreign exchange market.
This fact of indifferent industrial performance did influence the conduct of the now autonomous central bank. In the initial years of liberalisation, the battle against inflation was the RBI’s principal concern. But this battle was soon won without much effort. After the initial period of monetary stringency that accompanied IMF-style adjustment, the RBI itself was hard put to curb money supply growth to reduce inflation. This was because, even while a fall in credit to the government limited the rise i n the central bank’s assets, the inflow of dollars into India’s liberalised financial markets was forcing the RBI to demand and buy dollars in order to prevent an appreciation of the increasingly market-determined value of the rupee. In the event, the fo reign currency assets of the central bank tended to rise, increasing the high-powered money base and therefore the level of money supply. But this did not defeat the RBI’s drive to keep inflation under control, since the liberalisation of imports in the context of a decline in inflation worldwide and the reduction in the expansionary stimulus provided by government spending was in itself contributing to a dampening of inflation.
WITH inflation proving to be less of a problem, the RBI shifted the focus of its policy to growth. Since financial reform required a further curtailment of an expansionary stimulus provided by government spending, the only instrument that seemed to be av ailable to spur industrial growth was a reduction in interest rates. However, nominal interest rates in the system had reached extremely high levels in the wake of reform. And this high rate of interest persisted even as access to liquidity in the system was eased as a result of the rising foreign currency reserves.
There was one obvious reason why interest rates were sticky downwards. This was the high floor that risk-free government bonds provided to the structure of interest rates. With the government deprived of access to cheap funds from the mint as a result of the curb on the issue of ad hoc Treasury Bills, it had to finance its persisting fiscal deficits by borrowing from the open market at market-determined rates. Once the banks had met their statutory investment levels in government securities, government bonds could be placed in the market only if the interest rates on such investment offered a good enough spread to the banks relative to the deposit rates paid by them. Given the relative high interest rates that depositors could obtain from other investm ents in other savings instruments such as National Savings Certificates and provident funds and in risky holdings of equity, deposit rates had to be kept relatively high to attract funds into the banking system. This meant that the interest rates offered on government bonds had to remain high as well. Since these were virtually risk-free investments, carrying as they do a sovereign guarantee, these relatively high interest rates on government bonds defined the floor to the structure of interest rates wh ich at one time stretched to maximum levels of well above 20 per cent.
Faced with this situation and given its resolve to bring down interest rates, the RBI moved in four directions. First, it relaxed controls on interest rates on deposits, giving banks the flexibility to reduce them on longer term deposits and raise them o n short-term deposits, so as to reduce their average interest costs without curbing deposit growth. Second, it substantially enhanced liquidity in the system by systematically bringing down the CRR and releasing funds to be provided as credit by the bank s. Third, it reduced by as much as 4 percentage points the Bank Rate, which is the rate at which banks can obtain finance from the central bank and therefore serves as an indicative rate for the market for funds. And finally, it colluded with the governm ent in its effort to bring down the rate of interest on small savings instruments and provident funds, so as to encourage household investments in market instruments as well as to reduce the interest burden of the government, which is the principal borro wer of funds invested through those channels.
This combination of initiatives has indeed been successful in bringing down interest rates, making the now autonomous central bank appear doubly successful. It could claim success in dampening inflation and it could be satisfied with the results of its j oint effort with the government to bring down interest rates. However, the objective behind the drive to reduce interest rates, namely, that of stimulating industrial growth, remains unrealised. After a temporary reprieve during 1999-2000, the industrial sector is back to the sluggish performance recorded since 1997-98. The reason, of course, is a lack of any expansionary stimulus. While government expenditure net of interest payments is down relative to GDP, exports, which were to provide the new engin e of growth in the wake of reform, have remained at disappointing levels.
The point to note is that the lack of any fiscal stimulus is in large part the result of the effort to give the central bank greater independence. This has required not just a curb on the fiscal deficit, but also the abolishment of the practice of financ ing it with low interest ad hoc Treasury Bills. Thus the curb on deficit, during a period of shrinking revenues, has been accompanied by a rise in the interest burden on the government’s budget. Not surprisingly, the role of government expenditure as a s timulus to industrial growth has been substantially eroded. What is appalling is that this has occurred at a time when the combination of burgeoning food stocks that are proving to be an embarrassment, large foreign exchange reserves, low inflation and h igh unutilised capacity in industry, makes an obvious case for a major fiscal stimulus aimed at raising output and employment without stoking inflation. But that opportunity has been lost by the adherence to an orthodox monetary and fiscal policy regime that emphasises central bank autonomy.
BUT is the RBI really autonomous? One area in which the RBI has been forced to be active in the wake of reform is the liberalised foreign exchange market. The supply and demand for dollars in that market does influence the level of the exchange rate. How ever, in the wake of financial reform, the supply of dollars is no more determined by the inflow of foreign exchange due to current account transactions such as exports and remittances. Rather, inflows on the capital account in the form of private debt a nd foreign direct and portfolio investment, are a major determinant of supply at the margin.
Such inflows have increased significantly in the wake of the financial reform of the 1990s. But such increased inflows have not been matched by the demand for dollars from a not-too-buoyant economy. In the event, an excess supply of foreign exchange in t he market has tended to push up the value of the rupee at a time when India has consistently recorded a deficit on its current account. In order to combat this, the central bank regularly has had to demand and purchase dollars, resulting in a substantial rise in the foreign currency assets of the central bank. Such a rise, by contributing to money supply increases, limits the autonomy of the central bank on the monetary policy front.
That is not all. The volatility in foreign capital flows tends to limit further the manoeuvrability of the central bank even further. Consider for example the year 1999-2000, which was one in which foreign investment inflows into the country, having fall en from $5.4 billion in 1997-98 to $2.4 billion in 1998-99, rose once again to touch $5.2 billion. This should have strengthened the rupee. It did not because the RBI, as in the past, stepped in to buy dollars, increase the demand for that currency and s tabilise its value vis-a-vis the rupee. Net purchases of foreign currency from the market by the RBI amounted to $3.25 billion between end-March 1999 and end-March 2000. These purchases resulted, among other things, in an increase in the foreign c urrency assets of the central bank from $29.5 billion at the end of 1998-99 to $35.1 billion at the end of 1999-2000. The large demand for dollars that this intervention by the RBI in foreign exchange markets resulted in, helped keep the rupee relatively stable during financial year 1999-2000.
But things changed suddenly in the current financial year. Over the first three months of 2000-01, for which we have information, while exports have staged a recovery, imports have grown even faster, resulting in an increase in the trade deficit relative to the corresponding period of the previous year. But what has been an even more depressing influence on the rupee are signs that portfolio investments have turned negative, and rapidly so. Net FII (Foreign Institutional Investor) investments, which in April stood at $617 million, fell to $111 million in May, and turned negative as of June, with outflows estimated at $218 million in June and around $300 million in July.
Clearly, institutional investors are cashing in on a part of their past investments and diverting funds to other markets. According to market sources, the strengthening of interest rates in the U.S. and the recovery of markets elsewhere in Asia have enco uraged a shift of FII focus away from India. The point is that this consequence of developments elsewhere has had a dampening effect on the value of the rupee, which is now perceived as being “overvalued”.
This should not have mattered much, given the fact that the rupee has appreciated vis-a-vis a range of currencies other than the dollar. However, given the liberalised nature of financial markets, any perception that a currency is overvalued and t hat it is headed downwards sets off speculation on the currency. And once such speculative activity is triggered, speculative expectations tend to realise themselves, leading to a downward spiral in the currency’s value. The RBI’s “knee-jerk” reaction to the recent slide in the rupee’s value suggests that it believed that some authorised dealers and exporters were acquiring and holding dollars for speculative purposes, so that an ostensibly warranted and welcome depreciation of the rupee could soon turn into collapse, with a host of adverse implications. It is only that perception that can explain the heavy-handed response of the central bank in the form of a squeeze in liquidity, hike in interest rates and a cap on dollar holdings in EEFC accounts.
Whatever the sequence of events that led up to that perception, it is clear that the whimsical behaviour of foreign investors and speculative activity in India’s liberalised foreign exchange markets has forced the RBI to divert from its well planned mone tary policy thrust aimed at stimulating growth. This makes nonsense of the view that reform has rendered the central bank more autonomous and monetary policy more effective. The accumulation of foreign currency assets in the hands of the RBI, which exerc ises a crucial influence on money supply, is clearly determined by the whimsical behaviour of the foreign financial investor. And despite such accumulation aimed at regulating the rupee’s movement, the RBI has found itself in a situation where it has ha d to make changes to the Bank Rate, the CRR and the ease of access to foreign exchange, in order to counter speculation in the market for foreign exchange. Yet, the evidence of success on that front is still ambiguous. Clearly, the central bank is neithe r independent of international finance, nor is its intervention always effective.
A wake-up call
The uprising in Tunisia that brought down the 23-year-old government of President Ben Ali may be a sign of things to come.
In Amman, Jordan, women protesting against price rise hold placards with bread taped on them, on January 14.
THE regime change brought about in Tunisia, where the people spontaneously took to the streets to protest against rising prices and unemployment, is a wake-up call for governments around the world. It was the first time that a popular uprising in the Arab world brought an end to an authoritarian regime. The main reasons for the revolt were food inflation and unemployment.
Tunisia was considered by the West and international banking institutions as one of the best run states in the Arab world. The month-long “jasmine revolution” (named after the country’s national flower) of the Tunisian people started after an unemployed graduate set himself on fire in protest against the confiscation of his food cart, the sole means of survival for him and his family. The young man’s desperate act ignited public opinion in a country where the security apparatus was omnipresent. A 150,000-strong internal security force kept a close watch over a population of 10.6 million.
Even as the protests were going on, large private agricultural monopolies in the country increased the prices of fruits and vegetables, further stoking the fires of popular anger. The protests had started with people demanding jobs and affordable food. But after a brutal crackdown by the security forces, the people’s wrath turned against their long-serving President, Zine El Abidine Ben Ali. The President, a close ally of the West, had ruled unchallenged since the mid-1980s. His unceremonious departure from the country on January 14 has sent alarm bells ringing in presidential palaces round the region.
Meanwhile, inspired by the events in Tunisia, anti-government demonstrations have begun in other countries in the region. The main reason is rising food prices and unemployment. In neighbouring Algeria, protests started immediately after the self-immolation in Tunisia. The high prices of basic necessities are once again driving people to the barricades. In the wake of the protests, the government in Algiers reduced the price of bread and some other essential food items.
In the early 1960s, governments in the region had bought peace with their subjects by subsidising the prices of basic food items, especially bread and milk. But the social compact collapsed after the governments were pressured into embracing International Monetary Fund (IMF)-inspired market policies in the late 1980s. The decontrol of prices that followed led to “bread riots” in Algeria and Jordan. The riots forced the Algerian government to introduce multiparty democracy in 1988, which saw the mildly Islamist Islamic Salvation Front (FIS) getting voted to power in 1991. That election was annulled but now, after 20 years, things seem to be going back to square one.
Incidents of self-immolation have been reported in Algeria, Mauritania and Egypt. Media reports have said that the situation is explosive in the Maghreb and the poorer Arab states of West Asia. “Soaring food prices, extensive joblessness and a widening gap between the rich and the poor are the main complaints,” Financial Times reported recently. Egypt particularly seems to have a serious problem. It is the Arab country with the biggest population. Sixty per cent of its 80-million-strong population is below the age of 30. Nine out of 10 in this age group are unemployed. The structural adjustment programme the government implemented resulted in 40 per cent of the population living on less than $2 a day. As in India, the prices of basic necessities have increased substantially in recent months. The government in Cairo has taken emergency measures to import corn. Egypt’s close relations with the United States have let it temporarily weather the storm. A senior Jordanian editor once told this correspondent that if the supply of wheat from the U.S. stopped, there would be food riots in Egypt.
In recent weeks Libya has reduced the taxes on wheat-based products, Morocco has increased subsidies on wheat, and Jordan has cut taxes on fuel and basic food items. There was a demonstration in the comparatively well-off Oman too. In the third week of January, around 2,000 Omanis demanded that the government do more to tackle the high cost of living. Banners held by the demonstrators said “No to high prices” and “No to merchant’s greed”. Meanwhile, the ruler of Kuwait announced the distribution of $4 billion and free food to all citizens for 14 months.
The rest of the world is also facing similar challenges. Russia and China are planning to import massive amounts of grain this year to meet domestic shortfall. Massive flooding in Pakistan and Australia and a heat wave in Russia have seriously affected the global wheat and rice output. Scientists are predicting more floods and droughts. The price of staple foods and vegetables are at their highest in two years. Global wheat and maize prices jumped 30 per cent in three weeks by early January.
Opinion is still divided over whether the current situation is comparable to that of 2008, when there were serious food riots in 25 countries, most of them in Africa. In September 2010, serious food riots in Mozambique claimed the lives of 13 people. The riots took place after the government increased bread prices by 30 per cent. This time, according to experts, sub-Saharan Africa is much better off as even many drought-prone countries such as Niger had bountiful harvests of foodgrain.
The governments of Kenya, Uganda, Nigeria, Indonesia, Brazil and the Philippines have issued warnings of food shortages this year. Many governments are not taking any chances. The global surge in commodity prices has pushed food prices up all over Latin America. In the region, food typically accounts for one-fifth of a family’s budget. The Mexican government is buying corn futures to prevent an unmanageable price rise. In Mexico City, members of the middle class are selling their precious personal items so that they can put food on the table. Late last year in Bolivia, rioting mobs forced the government to go back on its plans for a steep hike in fuel prices. In January, there were protests by workers in Chile against price rise.
Venezuela is among the countries worst hit by inflation, with a rate that has reached 27 per cent. But with oil prices hovering around $100 a barrel and a public distribution system in place, the government is expected to rise to the challenge. Venezuela is among the world’s leading oil exporters. Because of rising food costs, inflation in Argentina is around 27 per cent. Rising prices threaten serious turmoil in Argentina and the rest of the region in the coming months as labour unions have started demanding a rise in wages in response to the soaring cost of living. Brazil, like India, is grappling with double-digit food inflation.
In China, food inflation has jumped to double digits and the government has imposed price controls. South Korea took measures in early January to increase the supply of food to help control prices. The United Nation’s Food and Agricultural Organisation (FAO) announced in early January that the food price index had hit an all-time high in December 2010.
The FAO said that sugar and meat prices were at their highest levels since documentation of the prices began in 1990 and that the price of wheat, corn, rice and other cereals were at their highest levels since the 2008 crisis. Abdolreza Abbassian, an economist with the FAO, has warned that the international community is “entering dangerous territory”.
Food inflation has become an issue of concern in many developed countries too. French President Nicolas Sarkozy has asked the World Bank to conduct urgent research on the impact of food prices. France, which currently holds the chairmanship of the G20 grouping of countries, wants a collective response to the “excessive volatility” in food prices. In the U.S., where income disparity is growing along with unemployment, the government is taking steps to tackle emergency situations that could arise.
The Pentagon’s “Unified Quest 2011” is a training programme in which soldiers are prepared to handle evacuation and detainment as a response to rioting related to economic disaster. There have been reports in the European media that the U.S. and France have reached a preliminary agreement following the events in Tunisia to create a U.S.-European Union armed force tasked to counter a worldwide uprising that could erupt in the face of a global food crisis. World Bank chief Robert Zoellick recently warned that the world was “just one poor harvest away from chaos”.
…and I am Sid Harth
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