Cultivating inflation PDF Print E-mail
Thursday, 06 October 2011 00:00
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The finance ministry has done well if, as reported, it has opposed the agriculture ministry’s proposal that the minimum support price (MSP) of wheat be raised by 15%, to R1,350 per quintal. The finance ministry and the food ministry have opposed the proposal on the grounds that, at a time when food prices are refusing to come down, this will fuel inflation. Indeed, when the Commission for Agriculture Costs and Prices (CACP) had recommended a R160 per quintal hike in paddy prices earlier this year, the Cabinet had cleared a R80 hike. Whether the Cabinet will behave in a similar manner this time around, however, is not certain, given that state elections are around the corner. A study by Oxus Research & Advisory points out that MSPs have typically tended to rise the most during election years. The Oxus study, in fact, points out that the single-largest determinant of extra inflation in India appears to be procurement prices. For the period 2007-11, Oxus’ equation is CPI = 5.1 + 0.3 times the average hike in procurement prices. Based on the 75% hike in procurement prices in this period, its model says the additional annual inflation over 5.1% is 4.5 percentage points, taking CPI inflation for the period at an average of 9.6% annually—turns out the actual CPI inflation was 9.5% annually. Interestingly, during the election year of 2004, when the Oxus’ MSP Inflation model predicted MSPs would rise 6%, the Vajpayee government raised them just 2.4%—perhaps a factor in the election results!


Given the way inflation is refusing to come under control, unless the finance ministry steps in to do its bit, it is a given that, later this month, RBI will have no option but to raise interest rates again. Given the slowing in tax collections and the disinvestment fiasco, analysts are pointing out that the likely fiscal deficit may be 1 percentage point more than budgeted. In addition, the new poverty estimates are certain to cause an increase in anti-poverty expenditures—the new food bill alone is likely to raise costs by another R35,000 crore. It is unfair, and futile, to expect RBI to do all the heavy lifting on the inflation front.


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