RBI's inflation nirvana package

Edit by Rao Malldi
New Delhi,(Surya April 3, 2007) RBI’s anti-inflation package and North Block’s informal bail out for Food Corporation of India (FCI) bring upfront the unresolved decade plus dichotomy over economic reforms, namely the reforms are for whose benefit: aam aadmi or a privileged class of few. The Mint Street prescriptions are primarily meant for keeping the rate of inflation below five percent. The concern over inflation is understandable. More so after upswing in prices resulted in the downswing in the electoral fortunes of the Congress in Punjab and Uttarakhand. A vocal section of economists and market players consider the RBI plan to reduce the availability of bank credit as illogical. In their considered opinion, we will soon return to days of high interest rate regime. They have a point.

Already many banks have pushed up their lending rates. Loans are on offer selectively. In so many words what this means is that you will no longer receive that fascinating call from a bank’s call centre offering you loans on your credit cards. Also you will have to put on hold plans to buy a car or a house. The stock market has already factored in this sentiment. Result was the Monday (April 2) mayhem and investors were left poorer by an estimated Rs. 1.42 lakh crores as shares of banks, auto companies and real estate firms were savaged. These are the three sectors that will be hit hard by the ‘belt tightening’, Telugu bidda, YV Reddy, has decreed.

Contrary to popular perception, the biggest borrower in India is not the middle class. That honour goes to the government. Now the governments, both central and states, will have to put brakes on their market borrowings and it will translate into less money for the sectors that depend entirely on government funding. In the short to medium term, it will mean cooling of the growth rate. For market economists this is nothing but sure recipe for socialism through back door.

Before answering these critics, it is essential to look at the FCI bail out. The FCI is not in pink of health by any stretch of imagination and it is indeed a surprise how it has survived thus far. But it is the only instrument left with the government if the central food reserve is to be given a fresh lease of life. These are the days of global shortages of wheat. Only India has a bumper wheat harvest. Most other wheat producing countries have had a bad crop. Many MNCs are eying Indian wheat and are willing to pay a higher price. So much so the Minimum Support Price (MSP) announced by the Agriculture Minister Mr Sharad Pawar with a flourish about a fortnight back looks ludicrously low. In other words, these are the days of a windfall for the Indian farmers.

Why should anyone grudge if the sturdy Indian farmer laughs all the way to the bank at least once in a way. That is the reason why questions are being raised about the finance ministry’s discreet diktat that FCI should be given the first dheko at the mandis. The FCI doesn’t have the deep pockets even like the ITC. It will not be able to offer the fancy price the private trader is willing to pay. Hence the argument that FCI alone should have unrestricted access to the mandis in the early part of the procurement season. It makes sense given the experience of past couple of years of going around the world from Australia to Brazil in search of extra grain.

There is a flip-side to the story. Our net work of fair price shops is in a bad shape. These are no longer patronised by most middle class families and even the needy amongst many BPL families. Also there is no guarantee that the FCI will strike it rich with its first mover advantage. No body can compel a farmer to sell at the MSP when it is public knowledge that private trader willing to shower him with currency is not far behind the FCI.

If some body says this is the price for bureaucratic mindset they have a point. But fact of the matter is there is no magic wand that can wish away supply-demand mismatches in the country. Every alternative route presently available to the policy makers has the potential of causing some hiccups. That too when the over riding need is to cater to the common man’s needs and to check speculation and conspicuous spending – the two factors that are undermining the India growth story. Eom