INFLATION

Bad Economics And Bad Polices

Suneet Chopra

IT is curious that the prime minister complained about the �politicisation� of the price rise.  Prices, in a world governed by the market principle are nothing if not political.  They reflect the clout different classes have in determining what sells and at what price beyond the parameters of brute scarcity.  Generally, prices reflect the relative strength and weakness of the producer and consumer or of the producer in relation to the wholesaler in ensuring prices that suit their interests.

When we look at the prices of agricultural raw materials like sugarcane paid to farmers in relation to the profits made by mill owners, we find that it is the larger producer who controls the market on the excuse that raw materials naturally are cheaper than the finished product. But then, when we look at the handloom sector, we find the rise in the price of mill-made yarn, the raw material, is much faster than that of the cotton or silk cloth produced by the weaver. It is evident that smaller producers are at a greater disadvantage in deals they enter into with producers much larger than themselves.

The consumer, on the other hand, in a country where over 70 percent survive on Rs 20 a day, has virtually no control over the seller because of his incapacity to hold his own against him. That is why he is an easy target to fleece. In such a state of affairs, the nature of government intervention in favour or against the powerful is crucial to the particular price structure that prevails. Policies the government initiates and implements are therefore far more important to protect people in countries like ours as the lack of such protection may affect the survival of a large section of the poor, of whom some 24 crores live on less than Rs 9 per day.

What are these policies? The first of these is the demand of ending �licence raj� or �less government� in the sphere of the market. If the government retreats from checking on speculators and hoarders then the space between them and a people with their backs to the wall fighting for survival can hardly be called �a level playing field�. But the central governments after the nineties and state governments supporting the financial prescriptions of the World Bank, IMF and now the WTO removed government intervention in agriculture by reducing state investment to a third of what it was a decade earlier on the belief that private investment would fill the space vacated by government investment. What happened was the reverse. Private investment followed government investment out of rural India instead, deepening the agrarian distress that reflects itself in a reduction of acreage under food-crops, 1,66,304 suicides of farmers and 20,000 hunger deaths in the last eight years and no less than 33 lakhs of farmers being forced to sell their land each year. The removal of quantitative restrictions on the import of agricultural products by the NDA government has also played an important role in the ruin of the peasantry.

Worse, the old system of across-the-board public distribution was replaced with a new 'above' and 'below' poverty line set up whose main effect was to allow the NDA and subsequent governments to raise APL prices, cut down state quotas and even export grain from government stocks while reimporting it at much higher rates. This shift of outlook was based on a fallacious understanding that abandoning one's food security was no threat to us as grain was cheaply available from outside. In their urgency to do the bidding of their global financial mentors what they failed to take note of was the fact that when a demand the size of India's entered the world market, the price would rise many times over, especially if that demand was for necessary items like food and fertilisers.

Our experience has demonstrated how false this economics is. We closed down seven fertiliser plants in eastern India on the excuse that we were producing fertiliser at $120 a tonne while the world price was $80.But the net result of the closure was the world price rising to $240 and more. In the same way, when we failed to provide a sufficient minimum support price for grain and allowed foreign companies to corner it at Rs 100 to Rs 200 more than the price we offered, we found ourselves unable to replenish our food-stocks. And when we went out to buy more grain the price had more than doubled. At the same time, the majority of the Indian people could not be provided BPL cards and APL prices were beyond their capacity to buy. Clearly this is bad economics and bad policies put together.

Similarly, there are two more fallacies that were trumped up to support the profiteers against producers. It was touted around that profits in the hands of a few would eventually 'trickle down' to the people they were drawn out of. But that did not happen. Profits generated in India have been extensively used to buy companies abroad, just as deposits made in rural areas found their way to financing urban projects. The loss this has resulted in for those already dispossessed in terms of output, value and employment is enormous. So this type of thinking, largely represented by economists like the deputy chairman of the Planning Commission, Montek Singh Ahluwalia, has made the poor poorer and the rich richer.

This sort of situation not only makes the monopolist more powerful than either the average producer or the consumer, but also allows the diversion of land necessary to feed the people and even of yields like maize and sugar-cane, to producing bio-fuel that not only increases the pressure on other crops but also raises prices to a height which leave the poorest in a state of famine of chronic malnutrition. In 1996, the World Food Summit promised to reduce the figure of those suffering from malnutrition (823 million) by half by 2015. But in 2006, their number increased to 854 million, of whom the highest number, 212 million, was in India. In the same period the profits of grain traders like Cargill and ADM crossed the $2000 million mark. So this is a policy of arm-twisting the hungry or plunging them into famine conditions while those who can afford it consume five times as much at least.

To add insult to injury, speculative funds are pumped into buying futures with huge bank loans in commodities like wheat, rice, lentils and foodstuffs, often going beyond the capacity of production and becoming a method by which traders and hoarders artificially raise prices in their speculative activity that eventually get passed on to the consumer. In fact, the Commodity Futures and Trading Commission of the US is already investigating how far speculative and fraudulent activities are responsible for the phenomenal price rise in oil. But its Indian counterpart could not come to a unanimous conclusion on the role of futures trading in raising food prices at present. So with one hand, governments committed to liberalisation, privatisation and globalisation fuel the price rise with loans to speculators, and with the other, take fiscal steps of no consequence to show the people they mean business. Ultimately prices only come to a halt when even profiteers cannot afford to buy; but by then the people would have been devastated.

In such a state of affairs people have no recourse but to protest against partisan economic policies and political measures that stem from them. They need to come down to the streets and resist. This has been happening in many countries around the world. And the perfectly logical anger of the people against the price rise must be directed towards a retreat from WTO policies and a rejection of the attempt to arm-twist developing and underdeveloped states in an attempted conclusion of the Doha round of talks on agriculture and non-agricultural market access, with India and similar regimes playing the role of �honest brokers� for dishonest profiteers. The Doha round as envisaged by the USA should not be allowed to be bargained over. It must be rejected.

In our country too, issues of massive government investment in food security, in job security through laws like NREGA, the functioning of the PDS with special stress on its generalised access to the masses, the provision of more investment in the rural areas, adequate credit to farmers producing food crops,  subsidies for inputs and remunerative  minimum support prices for their products and large scale distribution of land and house-sites to the landless are just a few of the issues that need to be taken up urgently to cope with the present distress. At the same time, state support to speculative futures trading in the necessaries of life and free entry of foreign speculative capital in our economy must be stopped, as must the dumping of agricultural products in our markets. It is evident that both the Congress and the BJP are incapable of leading such movements against this state of affairs as they are committed to the policies and economic measures that have led us to this pass. It is the duty of the Left to come forward and do so.