The Anatomy of Inflation

PROF. RAJAN KAPOOR

Inflation has crossed all limits and has broken all previous records. Presently, it stands at  its peak. The unreasonable hike in the prices of diesel and a cap on subsidized cylinders has further given an impetus to inflation. The spiraling process has made the life of common man miserable as all his efforts to restructure his budget has gone off the mark. He is in the tight grip of inflation and has been leading a tough life . The middle class which too feels the heat of inflation get a bit relief from the monster of inflation as it get  dearness allowance twice in a year. This cushions the effect of inflation on this class. But,  for Above Poverty Line (APL) and Below Poverty Line (BPL) families, it has become almost difficult to get two squares meals a day. Given the conditions, they have been going through a virtual hell on this planet. The cause of this unbridled inflation has its roots in the pro-capitalist policies of the UPA government which in the guise of “economic reforms’’ has pushed the country to a dark corner of poverty and inflation.  The introduction of free trade and market oriented policies in 1991 changed the dynamics of Indian economy. It underwent from being a socialist to liberal. The Structural Adjustment Programme(SAP) that the Government of India(GOI) unleashed under the dictates of World Bank and International Monetary fund ——— the pillars of international finance further made a cut on subsidies, making the poor and the weaker sections of society more vulnerable to market driven economy and inflation. The one negative fallout of the liberalization was dismantling of  Public Distribution System (PDS). It was virtually distmantled on the filmsy and exaggerated claim that it led to huge loss of foodgrain and other items as this system is badly seeped in corruption. Basically, it was an attempt to cut subsidies on foodgrains and kerosene which  were given to a poor section, of society to insulate them from the deleterious effect of inflation. In 1997, the Targeted Public Distribution system (TPDS) was introduced under which two sets of PDS prices were fixed, one each for APL and BPL households. Consequently, selling price of wheat under PDS to BPL and APL families increased drastically. This, in turn, narrowed down the difference  between the free market and PDS prices, making it difficult for APL and BPL families to buy foodgrains from PDS outlets.

With the aim of liberalizing  trade in agriculture, the government removed quantitative restrictions in April 2001. As a result, India exported large quantities of wheat and rice upto July 2003, evenwhile a large guantities of the country’s population went hungry. The country exported 12. 4 and 10.1millions of foodgrains in 2002-03 and 2003-04 respectively. The export price of wheat during this period was pegged at Rs 4,310 per tone. The government was selling grains to foreign countries at the price which it was sold to BPL families,i.e half of FCI’s economic cost .The government did not cut the issue price for BPLfamilies on the contention that it would further increase subsidy burden. This was done to protect the interests of the traders. However, it is pertinent to mention here that government that is hell bent to liberalize trade in agriculture is coming out with a food security bill !

 Post-1991 agricultural reforms led to steep inflation. Reforms changed the dynamics of traditional ‘peasant based agriculture’ to ‘contract farming’. Since contract farming promoted diversification of crops and cultivation of high value cash crops like horticulture and floriculture. This  diversion  from  “Wage-Goods’ to these high –tech  products adversely affected the welfare of the poor. It may be noted the gross cropped area under cereals and pulses have declined with the diversification of crops, endangering the food security of masses Given the more than57millions are malnourished in India out of the world’s  146 million malnourished, this switch over from traditional crops to high value goods/crops does not augur well for the food security of millions of the poor. 

The biggest reason for the inflation to soar is government’s  liberal and munificent attitude towards corporate houses. The fiscal deficit of  the financial year 2013 is put at 65.7%. To bridge this huge fiscal deficit , the government  levies a variety of taxes and burden the common man and  cuts subsidies. But, huge and unreasonable  benefits which are being given  to capitalist/corporate houses in the form of tax concessions, economic stimulus and bail out packages are never treated as burden on national exchequer, rather they are hailed as “development Packages”. In the six years from 2005-06, the government of India (GOI) wrote off income tax of big corporate houses of worth Rs 3,74,93 crore—— more than twice the 2G scam! Further, as per an estimate the union budget waives Rs 240 crore in corporate income tax every single day on average.  There is no proposal to put wealth tax on these supra –rich  corporate. On the contrary, ,the UPA government  imposes an additional mobilization of Rs 45,940 crore through indirect taxes, the burden of which is solely borne by common man. The Kelkar Panel in its reports submitted to the government recently has pointed out that the Indian economy is poised on the edge of ‘fiscal Precipice’ and has recommended  a complete elimination of subsidy on diesel by 2014. To avoid fiscal deficit to touch a point of no return , the government reduces subsidies on social welfare schemes. The subsidies on fuel have been reduced by Rs 25000 crore and that of fertilizers Rs 6000 crore . The allocation to MNREGA is too cut by Rs. 7000crore in 2012-13.The subsidies regime can be kept intact, if the government imposes  wealth tax on  corporate houses and stops giving unreasonable concession to these “ big houses”. 

 The squandering away of the wealth of the nation by those who are at the helm of affairs is also a key factor to push up inflation. The planning commission which unabashedly fixes Rs 32 per day for urban areas and Rs 26 for rural areas as a criterion for being above  poverty line wasted  Rs 35 lacs on constructing two toilets! The PMO spent Rs 30 lac to host a dinner party to its coalition partners to celebrate its anniversary!

Corruption is another factor that fuels  inflation. The scams and scandals have put economy on downward spiral. Unless and until corruption is checked, inflation can not be tamed.  There is strong need to have a relook at the neo-liberal policies  to arrest  the graph of rising prices.