Arabia, bread & democracy4 min read . Updated: 08 Feb 2011, 08:49 PM IST
Arabia, bread & democracy
Arabia, bread & democracy
The lack of popular protests in India against rising food prices has been an enduring puzzle. The close correlation between political change and food inflation is worth recounting: the initial Naxalite violence in the late 1960s, the JP movement in the mid 1970s, Indira Gandhi’s return to power in the late 1970s and the rapid loss of popularity for Rajiv Gandhi in the late 1980s. There were undoubtedly important political issues at the root of each episode, but it is worth remembering that food inflation was high at each juncture as well. There have been several explanations for the recent political quietism despite almost two years of double-digit food inflation, ranging from the emasculation of trade unions to the falling share of food spending in family budgets. India has moved on.
Has it? The spreading revolts in the Arab world should reopen the debate here in India. High food inflation is one of the sparks that seem to have lit the tinderbox in Tunisia, Egypt, Jordan and several other countries in the region. Even Serbia has seen street protests after its government decided to raise prices of items such as sugar, milk, coffee, fuel and public transport.
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The lesson has been learnt. Many Arab governments are already increasing food subsidies to prevent the protests from spreading. Morocco has said it will keep a lid on food prices “at any cost". Bahrain has hiked food subsidies. Others that have tried to suppress food inflation include countries such as Algeria, Libya, Jordan and Kuwait. The budgetary costs of such a defensive gambit will hurt only later, though less in the case of oil exporting countries that have fiscal surpluses because of the increase in global crude prices.
Some have even blamed ultra-loose US monetary policy for the political crisis in North Africa and West Asia. Many Western central banks are quite happy to keep interest rates low and inflate their economies. Their policies have pushed up commodity prices. Autocratic regimes on another continent have been rattled. There seems to be enough meat in such reasoning for US Federal Reserve chairman Ben Bernanke to last week come out with a defence. He reportedly said that developing countries should use their own monetary policy tools to fight domestic inflation. “It’s really up to emerging markets to find appropriate tools to balance their own growth," said Bernanke.
An interesting chart prepared by Bloomberg and based on data from the International Monetary Fund shows that high inflation and stagnant incomes have been a particularly volatile mix in Egypt. Per capita income in Egypt has barely budged between 1989 and 2009—from $2,155 to $2,160. Other countries that are seeing discontent have done better: Algeria (where average incomes have increased at a compounded annual growth rate of 1.40% since 1989), Jordan (3.18%), Morocco (3.42%), Tunisia (3.78%) and Syria (4.25%). The Bloomberg chart covers 13 nations in North Africa and West Asia. But a comparison with India is instructive. Average Indian incomes in terms of US dollars grew at a compounded average of 5.6% in the same period.
The underlying inflation dynamics could thus be important. Are we seeing stagflation or growth-led inflation? The Indian policy establishment now seems to have come around to the view that the rising prices of vegetables, fruits, milk and fish are the result of higher demand, as rising incomes have given families the opportunity to eat better. In that limited sense, high food inflation is being seen as the inevitable cost of faster economic growth.
Not that this explanation eases the pain in any way. The rush to peg Mahatma Gandhi National Rural Employment Guarantee Scheme (MGMREGS) wages to inflation is an implicit admission that real wages are falling for the poorest Indians, a significant worry. However, a fiscally constrained government cannot budget for higher food subsidies and income support without capping other items of expenditure.
It is quite likely that inflation will be high in the next couple of years, thanks to higher demand for food and fuel as well as loose monetary policies in the Western economies. Managing inflation without killing growth will test the skills of both the finance ministry and the Reserve Bank of India. Prime Minister Manmohan Singh warned last week that inflation is a serious threat to growth. The lazy bullishness in the stock market is already being replaced by more circumspect introspection: Will economic growth and corporate earnings be hit by tighter monetary and fiscal policies?
India is a democracy and may not see the sort of mass street protests that have brought some countries to a standstill. The chance to vote out leaders acts as a pressure valve. Four states go to the polls this year. These elections could act as a useful test for the belief that inflation is no longer a major political issue in India.
Niranjan Rajadhyaksha is managingeditor of Mint. Your comments arewelcome at firstname.lastname@example.org