People's Democracy

Editorial

Prepare For Mightier Struggles

THE UPA government, in its current disposition surviving on the support of the Samajwadi Party and on the basis of engineered defections through brazen horse-trading, has fired its first salvo in initiating retrograde economic policies.  It has privatised the employees provident fund.  This huge corpus of nearly Rs 3 lakh crore will now be controlled by private fund  managers. Employees will get a return based on how these funds are managed and not a guaranteed return as in the past, which was a major victory of the working people gained through long arduous struggles. More such anti-people measures are obviously in the offing that will facilitate profit maximisation for India Inc.

The policy measures announced by the Reserve Bank of India in the name of containing inflation will also impose further burdens on the people. The credit policy announced by the RBI on July 29 raises the interest rates with a view to reduce the overall money supply or liquidity in the economy. This, it reasons, will reduce demand and thereby ease the inflationary pressures.

As often argued in these columns in the past, this is an erroneous diagnosis for the current sky-rocketing price rise.  It is absurd to argue that the current inflation is because the people have too much money in their hands. Hence, their demand for products, not matched by adequate supply, is pushing prices higher.  In a situation where 78 per cent of Indian people just about manage to survive on less than Rs 20 a day, such a reasoning is amazing.  

The current price rise is fuelled by the rise in prices of essential commodities and the prices of petroleum products.  Both these are affected only at the margin by increased liquidity in the economy.  The rise in the world food and oil prices is a contributor. But, more importantly, the main contributor  as regards food prices in India is the rampant speculation in the trade in these commodities.  In response to relentless pressure by the Left parties, the UPA government reluctantly and belatedly banned futures forward trading in some essential commodities but not in all the 25 commodities as demanded by the parliamentary standing committee.  

Customs duty on imported edible oils was waived in order to control, if not reduce, their prices. On the contrary, the prices of imported edible oil continue to rise.  Why?  Where have the imports by private traders gone?  They have, obviously, not entered the market to reduce the prices.  Clearly, there is speculative hoarding expecting a further rise in prices.  The RBI had asked banks to undertake reviews on the extent to which bank credit helped fuel speculative hoarding and report the findings by May 15. The RBI has chosen not to make public these findings.

The rise in prices are taking place despite increases in the production of foodgains and increases in  the official procurement of foodgrains.  Clearly, this is happening not because of the greater liquidity in the economy but because of unfettered speculation and trading in these commodities.  Unless this is curbed by banning such trading, no other effort to contain the price rise can succeed.  This is the first step that must be taken.

The international prices of oil have come down from $145 to $125 per barrel in the past few weeks. The corresponding reduction in the retail prices domestically would have gone a long way  in containing this price rise. This needs to happen urgently. The UPA government, however, seems to be more pre-occupied with the profits of oil companies and refuses to impose windfall profit taxes  on private companies that are  making a huge bonanza without any effort on their part.  Ignoring widespread nationwide protests organised by the Left parties against the hikes in the prices of petroleum products, the government had argued that the price hike was necessary to maintain the health of the public sector oil companies.  On July 28, the ONGC had announced a massive 44 per cent jump in net profits in the first quarter of the current fiscal year.  The profits stood at a whopping Rs 6636 crores.  Could not a part of this be spared to provide relief to the people by not hiking the prices?  This, in turn, would have helped contain the overall inflationary pressures as  petroleum products are important inputs in a vast variety of production activities.  The reduction in the prices of petroleum products is the second  measure that must be undertaken to contain this price rise.  

Thirdly, with improved procurement of the foodgrains, the Public Distribution System must immediately be beefed up.  

Instead of undertaking these measures and the much-required long term policy initiative to ensure higher supplies (through substantially higher investments in agriculture), the government and the RBI have unfolded these monetary measures which are bound to be ineffective in containing inflation and, at the same time, be counterproductive by slowing down economic growth.  With higher input costs due to the current inflation and now with higher interest costs on borrowing capital, the costs of production will rise further.  This invariably will be passed on to the consumer contributing to further inflation.  This is the logic of the RBI's measures.

Further, with higher costs of borrowing, manufacturing units dependent on commercial  borrowing will find their costs of production soaring leading to contraction in production.  The manufacturing sector's growth rate fell sharply from 11.3 per cent in May, 2007 to 3.8 per cent in May, 2008.  This is bound to fall further with the current hike in the interest rates.  This, in turn, would lead to contraction of employment opportunities. Greater unemployment is, thus, in store.  The story, however, does not end here.  As unemployment increases, the purchasing capacity in the hands of the people declines, thus, reducing the overall aggregate demand in the economy.  This, in turn, will further depress  manufacturing.  This will not merely slow down industrial activity but it may well lead to recessionary conditions.  This will only mean greater misery for the working people with rising prices and rising unemployment.  

Finally, the rise in the interest rates would mean that crores of middle class families who have borrowed to buy their houses, cars or any other consumer durable will now have to pay a substantially higher monthly installment.  Apart from the direct burden on their levels of livelihood, this will also mean that they shall have correspondingly lower levels of disposable income to consume other commodities.  This, in turn, will reduce demand further, further depressing manufacturing and, therefore, the overall growth of the economy.  

Thus, these measures announced by the RBI aimed a mopping up around Rs  9,000 crore from the economy in order to contain inflation will only work to the contrary and impose greater burdens on the people in addition to the current relentless price rise. We must, thus, brace ourselves for mightier struggles to protect our livelihood levels in the coming days.