The sharp spike in inflation has sent the government into overdrive. The cabinet committee on prices is expected to get into an emergency meeting later today. Several ministerial statements over the past few days show that inflation control has suddenly jumped to the top of the government’s agenda. And why not? The rising costs of essential commodities, both agricultural and industrial, could be an election spoiler.
Illustration: Malay Karmakar / Mint
The government would do well to distinguish between the short-term and long-term solutions — and ensure that one does not harm the other. Draconian measures such as trade restrictions and price controls will harm the long-term incentives to produce more food, steel, cement and other such stuff.
There is a new-found love for imposing bans on the export of agricultural commodities across Asia. India and Vietnam have already imposed restrictions on the rice trade. China is threatening to join them. Their moves have sent the price of rice skyrocketing in the world market. These bans shift the pressure from domestic to global consumers. The problem is that countries that export farm produce such as wheat — which India imports — could go in for their own export bans, in a modern variant of beggar thy neighbour protectionism. The end result will be trade friction.
Even that would be acceptable if the domestic effects are positive. But an export ban will keep down the domestic price of rice and reduce the incentive for farmers to shift to its cultivation. In short, emergency measures come in the way of long-term solutions to increase supplies.
The same applies to industrial commodities. Already, we have had a surfeit of moral suasion and plain old arm-twisting to keep a lid on prices of cement and steel. There is a clear and present danger that the government will extend the draconian Essential Commodities Act to some industrial commodities. That will be a sure-fire way to scare off investment in these sectors, and thus exacerbate the problem of rising prices.
A far better course of action will be to have higher interest rates to cool down industrial demand and live with the fact that the food subsidy will increase to protect the poor. The challenge then will be to clear obstacles to new projects in sectors such as steel, on the one hand, and ensure better targeting of food subsidies (through food stamps), on the other.
The last thing we need is a repeat of the price controls and trade restrictions of the mid-1970s. The Prime Minister should know. He was chief economic adviser to the Indira Gandhi government at the time.
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