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Tackle inflation in macro way, take trade unions into confidence

Tackle inflation in macro way, take trade unions into confidence
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First Published: Wed, Apr 18 2007. 12 29 AM IST
Updated: Wed, Apr 18 2007. 12 29 AM IST
Economist Yoginder K. Alagh, who succeeded Verghese Kurien late last year as the chairman of the Institute of Rural Management Anand (Irma), has been part of the Planning Commission and a Union minister for science and technology, planning, and power.
In New Delhi for a seminar organized by the Institute of Economic Growth, the rural development guru spoke to Mint.
What is behind the general crisis in agriculture and fluctuating production?
There are two things here. One, (there is) a serious problem of resource scarcity.
Cropped area going down, canal area going down, land quality—all this happened because of misuse of resources. Tushar Shah (former director of Irma) has identified 100 districts where we managed the ground water very badly. These are the underlyingproblems and you cannotturn them around in a single day. You need long-term strategies here.
Secondly, in the nineties, we dismantled the functioning systems—support prices, purchases, state-directed supplies of inputs, etc.—but did not position new policies. So you saw this dramatic fall in agricultural profitability of around 15%.
Public investment in agriculture was falling anyway because of financial crunch, then even private investment started falling.
The East Asian crisis meant that exports collapsed after 1995, and imports went up substantially in cotton, edi-ble oils, pulses—in pulses we have a real problem. So thisis a combination of all these effects.
In the last couple of years, there has been some turnaround. Commodity prices are firming up world over. Some positive trends have emerged. Fertilizer consumption growth collapsed to 3% in the nineties, but it is back to 5-6% now. The farmers don’t eat fertilizer, so this is going somewhere.
The worst is definitely over, but if we mismanage again, we might go back.
Are low primary product supplies causing inflation? Why isn’t the government able to tackle it?
For the last four months, we are facing a high basic inflation. High prices or interest rates are unacceptable when you are a globalized economy. When your interest rates go up, your investments are affected, and you also start accumulating a lot of unwanted dollars.
But this is unavoidable. A large part of the press wrongly thinks that we can keep having free lunches. You are now competing with China, Japan, and the US, where such inflation rates are unacceptable. There are going to be more hikes in interest rates to control credit growth.
Of course, we need fiscal measures too. Fiscal contraction is not possible right now because of the politics of the day. The previous government was really restricting production. Manmohan Singh came and raised budgets. Industrial production revived after 10 years. But you can always go to a limit when prices get out of hand, which is when we’ll have to contract. We have to understand that growth is not an easy process.
What I don’t like is the price fixing. We’re a liberalized economy; we’ve to play the game with carrots and incentives. But suddenly the housewife says wheat prices are rising, so you fix wheat prices. What about all the years when the poor kisan (farmer) was suffering and you didn’t help him saying this was a globalized economy, now that he’s getting some honey, you want to choke it off.
Fortunately, despite some hawkish statements, the government hasn’t resorted to large-scale imports at subsidized rates.
The way to fight inflation is the macro way. Don’t believe these jokers who tell you that the mai-baap sarkar (paternalistic government) can control prices. It can’t. We tried for 40-50 years and couldn’t. Instead, have a macro policy, take a few people, say trade unions, into confidence.
Globalization also means that you have to have a social compact. Nobel winning economist Phelps (Edmund S. Phelps) says when you face the monetary trilemma (according to this theory, an economy can only have two of the following three conditions at any point in time: fixed exchange rates, free capital mobility, and independent monetary policy), you need to work back to institutions, the corporate sector, the trade unions.
We don’t seem to like him (Phelps) here. We’re not taking everybody into confidence, and we’re going to hurt farmers’ interests.
What about the average farmer? Is he getting an economic price at all?
True, because of market imperfections, the farmers don’t get all the benefits of higher prices, but he gets some. This year, the wheat farmer is reasonably happy. They got good rains, yields are up, production is going up to over 74 million tonnes. They are getting good prices.
Also, the farmer is pretty savvy now. I don’t believe they are all unhappy.
Will the ban on futures trading help or hurt the farmers?
It is absurd. Of course, it will hurt farmers.
In Gondal (Gujarat), they are using the futures for red chillies; in Idukki and Kollam, they are using futures for vanilla.
They are talking about diversification, from where we get a third of our agricultural growth now. And that involves 40 commodities.
The Economic Survey clearly says futures trading helps the farmer. The market in some commodities is very thin, true, but it isn’t going to become non-thin by knocking off futures; in fact it will get thinner.
The Canadians track the money we are putting in research in pulses, because they know that Indians eat a lot of dal. That’s how policies should work. The government at the highest level is admitting that it was a political decision; this is unthinkable.
Do you feel Indian agriculture suffers from a lot of policy muddle?
You do need strategic intervention. If you need better markets, you have to give land and develop a regulatory framework. But there are a lot of wrong interventions here.
In the late nineties, imports were booming—the wrong ones—and the government wouldn’t even accept it. There were years where a fifth of our sugar was imported; now we’re overprotecting the sector.
You’ve imported wheat at prices higher than what you are giving to our own farmers. That’s very bad intervention; the costs can run into thousands of crores, because you’re actually protecting the Australian farmer. We all know we had excessive intervention in wheat, and too little intervention in cotton. Now if you think giving benefits will stop farmers’ suicides, you’re wrong.
We should use institutions to protect the farmers, like futures or insurance. The days are gone when you should be buying 90% of the crop. Just buy as much as you need to give to say, a pregnant mother, because that’s our future generation. Just encourage non-statistical institutions and you can intervene effectively.
So you’re right, the state should withdraw, let institutions work, encourage farmers’ associations, encourage farmers to be globally competitive.
The 11th Plan has an ambitious farm growth target. Will it be possible for us to meet it?
I’m a very optimistic person. There are some credit, irrigation and fertilizer use data which show that the worst is over.
We’re growing at 2% now, compared with 1.5% in the nineties. Unless we bungle, we will get 3%, maybe 3.5%. Anyway, plans are supposed to be extra-cautious. I have been in the (Planning) Commission too; we plan for 5% and if we get 4%, we’re happy, the farmer is happy.
The more important question is: Have we turned around, are we going to do better, and can we create better opportunities for farmers in Bengal, Orissa, Chhattisgarh, etc. which are still untouched.
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First Published: Wed, Apr 18 2007. 12 29 AM IST
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