Views | Elections, interest rates and inflation

Views | Elections, interest rates and inflation

On 25 October, the Reserve Bank of India (RBI) announced a 25 basis point hike in the repo rate, in its latest move to curb inflation. Banks and industry had more or less been resigned themselves to this happening, and there were hardly any groans heard in public. But on the same day, the Cabinet Committee on Economic Affairs also hiked the minimum support price (MSP) of rabi crops such as wheat, mustard and gram, ranging from 15% to as high as 38%. Strangely enough, not too much noise was made about that either.

• • •

News Report

RBI hikes policy rates by another 25 basis points

• • •

How on earth do you reconcile the two acts committed on the same day by the government: raising interest rates to curb inflation, and raising MSP which will definitely increase food prices?

Simple answer: you can’t. The cabinet decision was explained to the press by law minister Salman Khurshid as “a Diwali bonanza for farmers". Well then, one must say that the farming life has been quite a bonanza under the UPA government. Since it came to power in 2004, the MSP for wheat has more than doubled. And last year, the Government even added a bonus of Rs50 a quintal over and above the MSP of Rs1,120, when procuring wheat. According to the food ministry (which reportedly opposed the hike), the average cost of producing a quintal of wheat is Rs927. At the new MSP of Rs1,285, that’s a margin of 39%.

Besides wheat, the Centre’s focus this time has been on oilseeds, the MSPs of which have been hiked by 35-38%. The support prices for mustard and safflower have been increased by Rs650 and Rs700 respectively to Rs2,500 a quintal. The strategy, apparently, is to encourage more farmers to take up the cultivation of oilseeds in the rabi season, which will reduce the edible oil import bill.

Of course, the government has been mum on the food subsidy bill, which could this year cross Rs110,000 crore, compared to last year’s Rs63,000 crore.

“We cannot be completely blind to the fact that there is inflationary pressure which is a very serious concern for us," said Khurshid. “Just like the growth versus inflation debate, this is a difficult balancing act." Yes, Mr Minister. But why does one get the feeling that the UPA government is less concerned about inflation than the fact that the Punjab and Uttar Pradesh elections are coming up, maybe as early as February? And that the Congress lost all the four Lok Sabha by-elections held this month?

In the Union Budget 2008, finance minister P. Chidambaram had waived off Rs60,000 crore worth of farmers’ loans in a pre-election-year populist move that was extraordinary even by general Indian standards. Why does this raising of MSP at this point of time remind me of that grand act of largesse? And it will be interesting to know what the RBI governor’s first reaction was when he heard of the cabinet’s food price decision, right after he had announced the interest hike.