BackWhere were the policywallahs?
Where were the policywallahs?
PremiumIllustration: Jayachandran / Mint
In three months, opinion about India’s economic situation has been changing from euphoria to despair. The two- step hike in the cash reserve ratio, announced early on 17 April, will be praised by some for being tough on inflation. It will be criticized by others who think that food supply shocks cannot be tackled by curbing demand. We will evaluate the Reserve Bank of India’s (RBI’s) decision in a subsequent article.
Today, we would like to draw attention to the failure of our main policywallahs (central bankers, economists on national committees, leading bankers, finance ministry officials, financial heads of public sector firms, academics, corporate economists and regular columnists — the whole economics commentariat) to pre-emptively focus upon food prices. It is time to ask: Where were the policywallahs last year?
Let us start with RBI. Skimming through the titles of speeches delivered by governor Y.V. Reddy and deputy governor Rakesh Mohan during the latter half of 2007, not one of these titles is about what is now widely acknowledged to be the major global economic problem — food prices and/or supplies. Digging deeper into the text of these speeches, while the “risks posed by elevated food prices" are mentioned, the severity of the problem is ignored.
In a speech at Yale University on the Indian economy, Rakesh Mohan stated: “It is encouraging to note that despite high international crude oil prices, other commodity prices and elevated food prices, inflation remains low, and inflationary expectations appear to be consistent and stable (3 December 2007)." In an earlier speech at the Asia Forum, Singapore, he mentioned food as merely one out of 10 factors “that complicate the conduct of monetary policy (20 September, 2007)".
Reddy, our dear RBI governor, in a speech at the Bank of Mexico (13 September 2007) mentioned the “continuing firmness in key food prices." After the headline wholesale price index (WPI) at fiscal year end (week of 29 March) soared to 7.4%, at the World Leaders Forum in New York, he noted the severity of the latest rise and the commodity price explosion, but stated that “India has, by and large, experienced benign inflationary conditions averaging around 5.2% since 2004-05."
Please wait a minute, sir. Let us look at the three-year inflation averages before the latest March spike. Ending February 2007, the WPI three-year average is at the acceptable threshold, 5%. But for primary food articles (weight 15.4%), this figure is 6.3%, for wheat (weight 1.4%) it is 7.5% and for dal (all pulses, weight 0.6%) it is 11.9%. This is despite dal prices in the WPI having fallen in February/March 2007 over a year ago. How can we say India has experienced “benign inflationary conditions"? Benign for whom? The headline WPI is misleading due to the measly weights for rice, wheat and dal (combined 4.4%). In contrast, in the various outdated consumer price indices (CPIs), the food group weight varies between 46% and 70%.
Granted, RBI may not have high actual policy autonomy, but in his speeches Reddy could have better highlighted the dangers of rising food prices and the irrelevance of the WPI for consumer welfare. Over the last 10 or more years, why have not RBI, the Planning Commission, the various councils of economic advisors and the numerous committees repeatedly called for, and brought about, a switch from the WPI to the consumer price index (or different CPIs) as the index to base monetary policy upon? Surely, with distinguished economists at the helm at the highest levels, this switch should have been feasible. With regard to data, policymakers’ primary effort has been to ensure timely cyber release to meet IMF’s data dissemination criterion, instead of improving inflation data.
While the anti-liberalization, pro-United Progressive Alliance economists have been justly concerned about food prices, unfortunately their remedies — public distribution system and licence raj policies — are likely to worsen the situation. We should remember that before liberalization, food crises were endemic in India.
The world over, rising food and oil prices turn out to be dynamite even for long-standing dictatorships. In China, the political unrest culminating in the Tiananmen Square massacre in May 1989 was preceded by inflation at 20%-plus. In Indonesia, the reign of dictator Suharto from the mid-1960s ended after the Indonesian rupiah’s tumble from 2,500 to more than 10,000 per US dollar during the Asian currency crisis, and the resulting rice riots. In tightly controlled Myanmar, our obscure neighbour, protesting Buddhist monks and others were shot down last September. The protests followed a fourfold hike in the controlled price of petrol. From Haiti to Malaysia, regimes are now tottering from a food price backlash.
Last August, we pointed to the hardship caused by rising food prices, in a rejoinder to repeated, foolish assertions by Surjit Bhalla. He had argued that RBI should not tighten the policy since the Indian economy was not overheating and inflation would stay low. In our reply, “Overheating and undereating", we ended as follows: “The major task...in emerging economies now is how best to tackle rising food prices… Even when overall inflation is low or on target, but food inflation is too high, to avoid knee-jerk price controls, banning futures and similar tinkering, should a central bank squeeze GDP growth and reduce inflation to lower the burden of food prices? That is a long question… Hopefully, in the short run, we are all fed." (Business Standard, 11-12 August 2007). Sometimes, you should quote yourself. This, by the way, is a quote from George Bernard Shaw.
Vivek Moorthy is a professor of economics and Shrikant Kolhar a research scholar at IIM Bangalore. Comments are welcome at theirview@livemint.com
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