Food inflation, ostensibly a fall-out of drought, may well overshoot the Reserve Bank's projection of 6.5 per cent rate of inflation overall by the end of March next year. In the event, the apex bank may have to step in with some monetary tightening during its policy review in January to prevent inflationary pressures from rocking not just the farm sector but the entire economy.

Ironically, the media cell of the Congress too has expressed concern about the increase in food prices. The party found it necessary to remind the government of its responsibility to curb the price rise but also made the point that it was a coalition government. “Though we are the major party in the government, we are only first among equals,” it said. This was its way of putting the responsibility for controlling prices on Agriculture Minister, Sharad Pawar of the Nationalist Congress Party.

Before the procurement of rice started in the end of September, there was a stock of 47 million tonnes of food grains available for public distribution. Of this, 28-29 million tonnes of wheat could have helped us to tide over the crisis due to decline in the production of rice because of drought. What really required was judicious release of food grains to check rise in their prices. The government has defaulted on this.

Monetary policy, however, has a crucial role to play in keeping aggregate demand at a reasonable level. Even though it may not have a direct impact on bridging the gap between demand and supply of food grains, it can regulate money supply. To rule out the role of monetary policy for excessive liquidity can pushed up prices, especially in the case of foodgrains. But the Finance Ministry is still keen on a cheap money policy which provides the main “stimulus” to the corporate sector and in term has boosted only the production of some articles of elitist demand and consumption.

Large corporate houses can raise - and have raised - funds from the stock markets and other form of savings in the economy if they have projects that are worthwhile. They have also managed to get back credit at low rates of interest. As far as the Small and Media Enterprises (SMEs) are concerned, the banking system is wary of accommodating their credit requirements unless it is convinced that the demand for credit of SMEs is at a sustainable level. This approach is due to the difference in perception. While SMEs feel they are not getting adequate credit, the banking system looks at a different calculus in terms of risk and the viability.

The problem is that foreign capital inflows till recently were moderate and are only now picking up. At the present moment they can be easily absorbed by the system. The PM's advisory council has estimated that the gross capital inflows from abroad could be around $57 billion this year and current account deficit could be around $25 billion. Therefore, the net addition to financial reserves could be around $20 billion. It s not a very large increase to cause concern for the policy-makers in the UPA government who are only eager to provide “incentives” to attract foreign credit. The policy makers also resist the idea of imposition of tax on capital inflows as Brazil has done. Some countries have hiked cash reserve ratio also to curb capital inflows at a gainful level. India government had, however, taken a variety of measures in 2007-08 which relaxed restrictions on capital inflows to ease the domestic financial crisis. They believe that foreign direct investment (FDI) is good. But inflow of capital for financing dubious transactions is risky.

The budget for the current financial year was framed with a view to letting the stimulus continue for the corporate business. However, it is being considered whether the government should begin reversing the process if the economy picks up by the next fiscal; otherwise it will be difficult to control the rise in fiscal deficit. But the Finance Ministry is more keen on going on with stimulus for corporate growth rates, economic stability. Steps are required to bring down the fiscal deficit. The government may really be forced to cut down welfare schemes next year to make this possible. This will hit the vulnerable sections already suffering from inflation of commodity prices as well as increase in the prices of essential commodities for the mass of the people. This will hit the populist-political pretensions of the ruling Congress party.

The Congress leadership is desperately trying to evade accountability on price inflation. But revival of market-friendly economic growth is also important for it both for political and social considerations. Its policy measures are based on myths rather than reality of the prevailing economic and social environment in India.

Week after week, statistics have been presented by the government to show decline in the rate of inflation. It was claimed that on February 27 this year, the inflation rate had come down to only 3.2 per cent as against 13 per cent in October last year and then had became negative.

The trick in this presentation on prices was that the rate of inflation on point to point basis was arrived at by comparing it with its level in the previous year. On this basis even when wholesale price index went up, rate of inflation was shown to have gone down. Actually there was further rise over and above the high touched in the previous year rather than a fall. The fall in the rate of inflation was not a relief in prices but aggravation for the consumers.

The fact is that the rate of inflation started to rise in 2006 and touched its highest point in 2008. There was slowdown in the rate of economic growth and loss of jobs and purchasing power of the incomes as well. The cumulative effect on the level of the rise in wholesale price index combined with slowdown of economic activity became intolerable. The steeper rise of retail prices made the position of the consumer worse, specially for the vulnerable sections of the population, which are a majority in India and does not have any protection from the rise in prices. The self-employed and unorganised workers have indeed been facing destitution.

The facile calculations of prevailing mass poverty in the country have indeed become irrelevant in these circumstances. The official claim, which was found to be exaggerated by competent observers, that only 26 per cent of the population in India is below the official poverty line in any bumper crop year and in the wake of a period of relative price stability, no longer carries conviction. Those who are below the poverty line even conservatively estimated, cannot now be less than 50 per cent of the population, with a much bigger proportion in the rural areas and urban slums sunk in abject poverty. (IPA Service)