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usm-red.gif (844 bytes)Economist Column
Column By Ashish Kumar Banerjee


The rise in prices of essential commodities haspricegraph.jpg (7852 bytes) almost coincided with award of Nobel Prize to Amartya Sen in our country.Though the inflation was experienced for quite some time, the present rise in prices is not a simple phenomenon of inflation, but hyperinflation.So there cannot be any single reason for this. Instead ,various reasons have contributed to the present crisis.

The mismatch between demand and supply as a cause for inflation is only half-truth.The cause lies in an analysis of factors causing shifts in the demand and supply. In the short run as well as the long run, the supply of money has to be increased from time to time. But the rise in supply of money in India during the last eighteen months has been excessive. In 1997,M 3 rose by 16% to 18 %.This further rose in 1998.During the last months of August and September, it went as far as 20%.There is no doubt in saying that this rise is abnormally high. But this rise has only been due to rising budget deficit, nuclear ptrogramme of the Central Government etc. If the supply of commodities are not increasing , but the money supply is increasing, then more money is chasing for too few goods, and in effect we have inflation.

However, the rise in money supply may be one of the reasons for recent inflation, but certainly not the major reason. Currently it is the food price that has been affected.Prices of rice, edible oil,potato,onions have been on the rise.The salary hike has affected the middle, upper middle and the higher income community.These people spend the excess money on consumer durables or investment and not on essentials.This does not mean an increase in demand for food.

The demand for food increases when money reaches the hands of have-nots.But the increase in supply of money during the last two years have not reached the impoverished.Although estimates of poverty cannot be obtained from official statistics, the estimate given by the Planning Commission in 1993 showed that the impoverished constitute 40% of the total population.

The question of justifiability of salary hike of organised workforce is a separate question.But the fact that they have not contributed to a sudden spurt in demand for food is relevant.The other fact responsible for inflation has been the psychological factor in the case of the buyers.Fear of crisis creates an increase in artificial demand.This creates a further crisis in supply.The buyers take recourse to storage instead of consmption.Such baseless scarcities are often caused by rumours purposively spread by the traders.One can take the example of the rumour of scarcity of salt in recent times.

The reasons behind inflation in the food market mostly rest in supply factors rather than the demand factors as the tastes and preferences of the people do not change drastically in the short run.The concept of supply need not be confused with the concept of production.The Central Government tried to convince the people that inflation was preceded by bad production due to bad monsoon. But the weather experts and agriculturists have falsified the claim.Only onions are an exception.The production of onions have dropped by 30% in the last year, but the production of pulses, potato and other food items have either remained constant or increased. But the interesing fact is that 1998 production figures for food items have not reached the market till now. The food that we are buying from the market are all last year’s production. Hence how can the fall in production in the current year(if at all any) affect inflation today?

In a country like India, the difference between the market for industrial goods and agricultural goods is the fact that it is the traders who determine the supply in the agricultural sector and not the producers.In the case of industrial goods, it is the employers in the factories who determine the price. The peasants deliver their production in the hands of the traders after production. Only the lanlords are exception to this rule. This is no place to elaborate why this process is a compulsion for the peasants. Again the peasants look forward to these traders for taking agricultural loans.Hence one can understand the marked influence of the traders in determining agricultural prices.

The traders also exploit this condition and release the foodstuff in the market according to the conditions of the market.In this context it is important to know the expectations of the traders regarding the conditions of the market.If the traders expect lesser production, then they also expect rising prices. The traders feared that recent Bangladesh floods would cause lessened supply of potatoes and onions, and their expectations helped in raising prices. This has also increased illegal trafficking of food products across the border. In the case of rice, the peasants concentrated more on the production of fine exportable rice like Baasamati and the area under coarse rice production fell. This has reduced supply.

However, not only the traders, the government policy is also responsible for the price hike.Our experience from various countries shows that if the government is strong in its will to reduce prices then the traders are bound to release the stocks. But the government had completely failed to take up a clear stand on the issue. The government should be able to guess the extent of hoarding in the different commodities. Economic policing is to be done in the interests of the people of the country. The job is not even a difficult one. There should be standard official estimates of demand as well supply of today and tomorrow. Necessary action should then be taken identifying the shortages. This process was operating in our country, but the process has suffered severe lapses during the last few years. In recent times, the government has attempted to do away with the system. The top level leaders of the present government are busy in setting up a religious state rather than deal with this type of earthly matters.

The only way to do away with this kind of price hike caused by speculative hoarding is persuing a policy in advance. If there is any sign of crisis, exports need to be banned and tax-subsidy framework needs to be restructured. The government information system need also to be utilised for enforcing policy decisions.The traders should be made to feel that the government is serious in containing inflation.

The speculative hoarding in the case of agricultural goods resembles the speculation in the stock markets.The two are related also.When share prices fall, the speculative activity shifts from the sphere of share market to the agricultural goods' market .Uncertain of its own position, the government is also unable to take a strong decision on the price rule and inflation continues.

Author : Professor of Economics, University of Calcutta

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