The message from the stock market, controlled by just about 400 big foreign financial institutions (FIIs), was loud and clear: don't fiddle with the interest rates. The next day, January 28, 2009, the government released the food price inflation figure, which, at 17.40 per cent, was the highest in recent memory. The wholesale price index (WPI) for all commodities itself jumped to 7.31 per cent in December, up from 4.78 per cent in November. The government expected the WPI might move up to nine per cent or more by the end of this fiscal, which is barely two months away.

Industry and the stock market were unhappy with the release of the official data of an uncomfortable inflation rate on the eve of RBI's meet to revisit its monetary policy. Unsolicited advices from both market and corporate economists started pouring in. All orchestrated the same theme: there is no need to panic and the inflationary pressure will ease in two to three months. They were against any hasty decision on the interest rate review. At best, RBI could fiddle with banks' reserve requirement, they suggested. An increase in interest rate will squeeze industry's profit margins and hit the sectors such as real estate, automobile and banking.

Therefore, it came as no surprise when on January 29, RBI announced its mid-season monetary policy, restricting its inflation control measures to a single action programme by only marginally increasing the cash reserve ratio (CRR) of banks - the proportion of total deposits banks are supposed to keep with the central bank - from five per cent to 5.75 per cent. Since most commercial banks are flooded with cash, both RBI and commercial banks agreed that the measure will not lead to a rate hike. This was exactly what industry, trade and the stock market wanted. The market sentiment was bullish, again. So were the feelings of grain traders, hoarders and processed foods manufacturers. They feared no immediate pressure on their businesses. The stock market enjoyed precedence over the grain market. While another dearness allowance (DA) hike will keep the already fat-salaried government servants and a small privileged section of bank and organised sector employees happy, the common man will continue to struggle to feed his belly.

The bitter truth is that the stock market in India, which deals in less than 4,000 active joint-stock companies' shares on any single day, represents neither the society, nor economy. Although a bullish stock market generally implies a bullish economy and bullish investor sentiment, it is less relevant in Indian conditions where only a microscopic section of population has anything to do directly with company shares. The Indian stock market does not even represent industry, which is almost entirely family-managed or privately held and managed. Even most multinational companies, manufacturing or services, operating in India are not stock exchange listed.

Yet, the stock market has been carrying a big clout with the nation's policy makers ever since the government embraced the IMF-World Bank-prompted economic reform in 1991-92. The economic policies of the successive Congress, NDA and UPA governments have given excessive importance to the stock market, often ignoring the key concerns of the common man for food, cloth, shelter, water and sanitation, education and health. The spend-thrift government has paid little attention to these concerns despite running huge budget deficits year after year. More money is being spent on import of luxury products and accessories than the common man's daily necessities, which are in short supply. The capital inflow on account of foreign direct investment represents only a fraction of the capital outflow on account of import. With the cost of administration spiralling, economy is perpetually stressed under heavy debt, both foreign and domestic, and unproductive government machinery.

It is time that the government strikes a balance between the tiny stock market and the large grain market in fulfilling their respective aspirations. The way to the stock market should be through the grain market. The health of the grain market should decide the health of the stock market. Most large economies in the world, including the USA, China, Germany and France, boast healthy local grain market. Inflation affects mostly the industrial products, commodities that go into industrial production, luxury items and service sectors. The price inflation of basic food items is minimal there. The society is more concerned with the job data than food price data. Basic food items are affordable to anyone who has a job, full-time or part-time. In India, where the income level of a vast majority of people is despicably low, the prices of basic food items really matter.

While a combination of strong monetary policy, fiscal policy and nation-wide anti-hoarding drive can contain the food price inflation to a good extent, the central and state governments must recognise the fact that substantial amounts of basic food items are being smuggled out to neighbouring countries by a section of dishonest traders in connivance with the security and customs staff and act strongly against the illegal trade in food articles. Simultaneously, some ways should be found to contain the increasing rate of diversion of basic food items such as grains, cereals, sugar, spices, vegetable, cooking oil and oil seeds and milk from the market to the food processing units. The latter have multiplied over the years reducing the availability of basic foods in the market, leading to rise in their prices.

The stock market-centric monetary policy will not help contain inflation, especially the food price inflation. All policy focus must shift to the grain market which concerns a vast section of the society. The food shortage is genuine. If it is the result of the government's rural job guarantee schemes, as some officials have proudly claimed, let us not talk about them. The implied meaning of such claims is more painful - these doles have saved millions from starvation death! Let the government first concern with the availability of food to the poor, before it opens some petty part-time jobs for them. For the cash-rich, it is time to show some semblance of austerity. Higher interest rates would be of some help to that end. (IPA Service)