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Inflation is the central challenge: Pronab Sen

Inflation is the central challenge: Pronab Sen
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First Published: Thu, Jan 21 2010. 01 15 AM IST

Plain speaking: Pronab Sen. Ramesh Pathania / Mint
Plain speaking: Pronab Sen. Ramesh Pathania / Mint
Updated: Thu, Jan 21 2010. 11 57 AM IST
New Delhi: The first chief statistician of India and secretary, ministry of statistics and programme implementation, Pronab Sen, will be stepping down on 20 February. The economist, known for his candid views, took time off to speak to Mint on a range of issues, including the macroeconomic challenges before India. Edited excerpts:
What are your thoughts on the state of the economy in the run-up to the budget, when growth seems to be picking up and there is high food inflation?
Plain speaking: Pronab Sen. Ramesh Pathania / Mint
By and large, the impulses that were created from the global crisis have more or less been addressed. Which does not mean that the structural problems that we had prior to the global meltdown have gone away. Those problems have been fairly enumerated and they remain. What we were looking at is that 2009-10 and 2010-11 would represent the downside of the business cycle and it is only after that that you would start seeing the upside coming back.
The (global economic) crisis has basically brought forward a lot of the adjustments that would have happened in the business cycle. So, it becomes a little difficult to predict the pattern of recovery that we are having. So, what you are getting is a crisis-induced compression during the bottom of the business cycle. It is done very quickly, it is sharp and now we are recovering. Hopefully, this will sustain for two to three years. On that front, we seem to be on fairly good wicket at this point of time.
The price problem was going to come up. Once you have a bad monsoon, you have supply side pressure, speculative pressure. It also coincides with fairly sharp devaluation of the rupee, increasing the cost of imports. So that is not any big surprise.
The big surprises are the following two: There is far less popular protest against inflation. Particularly food inflation of this magnitude leads to a lot of pressure. The real question: is it because nominal income has risen so much that it is not pinching as bad as it would have otherwise. I do not think we are getting any indications of that. The second issue is that we need to come to grips with the nature of inflation this time around. Normally, your supply-side shocks show up immediately on wholesale prices and we have mechanisms to handle that. We have got the mandi inspector system. The entire administration system goes behind hoarding. What has happened this time around is inflation was first reflected in retail prices and showed up in wholesale prices with a lag, and with a much lower level of intensity.
So, there is something happening (that) we do not understand. The third thing is that we need to be careful. We forget that if we look at the period from 1998 onwards, manufactured goods inflation has hovered around 3%. We are currently running at about 5%. That is somehow getting obscured by the 20% food price inflation. But that’s where we need to be careful because that’s the level where excess demand will get reflected very quickly and that is not a supply-side effect.
To what extent had the demand from NREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) contributed to the food price inflation?
It should get reflected at the demand-supply level at the mandi stage. The demand and supply analysis is based on assumptions of a particular institutional structure. If something in the structure of the institution changes, how you measure demand and supply also has to change.
What is your sense of overall growth this fiscal?
The share of agriculture in GDP (gross domestic product) is still large at 17%. If you look at the non-agriculture sector, the revival is very, very strong; much stronger than anybody had expected, which seemed to suggest that we may be on the upswing of the cycle.
So, will it touch 8% this fiscal?
Unlikely, because of agriculture. The third quarter itself will come as a shocker if you just look at that headline GDP number—because that is going to come low. The entire kharif negative growth will show up in the third quarter with a small tail being left over for the fourth quarter. So, agriculture will see a huge dip. No matter how well the non-agriculture sector does, agriculture sector is going to pull it down.
So, the only way it can happen is if the fourth quarter growth more than offsets the third quarter dip?
Yes, but even for fourth quarter agriculture we should not hold too many expectations because you get the tail end of the kharif and you get only the starting part of the rabi, because the bulk of the rabi comes in the first quarter of the (next) fiscal.
What is the key macroeconomic challenge beyond inflation?
That is the key challenge. What it is doing is, it is really forcing you to walk a tightrope because you do not want it to spill over to general inflation. On the other hand, there is worry about the momentum of the economy, though the strength looks good.
Will high food inflation prevent the government from putting more money into social sector schemes due to the fear of fuelling inflation further?
I do not think that is an issue. At the end of the day what matters is the overall demand for goods and services in the economy. Now whether you put it in one scheme or the other does not matter. Sure the backward and forward linkages are bit different. But the simple fact of the matter is that the social sectors do need funds. We cannot wish that away.
Do you think the 20% food inflation is fuelling inflationary expectations?
It could. You see it actually at the manufacturing inflation. That is where the wage-price spiral really manifests itself. At the moment, it is mostly primary products, and manufacturing is showing relatively lower inflation. But it could actually spiral.
Which means the imperative to contain the fiscal deficit is much more than ever before?
Warning note: Sen says that the kharif contraction will show up in the third quarter with a small overhang in the fourth. The agriculture sector will see a huge dip and will pull down other sectors. Ramesh Pathania / Mint
Well, whether you need to do it through fiscal policy or monetary policy at this stage is a big question mark. The trade-offs are different. On one side, it is curtailing consumption and, on the other side, it is curtailing investment. The issue is which is more sensitive and what the impacts are.
What should the government do?
At the moment looking at the cycle we are going through, we have to be a little more careful to what you do to investments; because investments’ revival essentially has been projects that were started earlier (before the economic crisis). We do not really see a whole lot of new investment projects that are coming into the market. So it is really a tightrope situation. You need to do certain amount of monetary tightening to contain inflationary expectations. On the other hand, in order to really address the demand-supply balance, you may be better off looking at the fiscal side.
asit.m@livemint.com
In the second part of the interview, Sen talks about the challenges facing the statistical system in India and ways in which it can be tackled. This will be published tomorrow.
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First Published: Thu, Jan 21 2010. 01 15 AM IST