People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 08

February 21, 2010

On Price Rise: Lame Excuses and Fake Alibis


Brinda Karat


THE central government lost an important opportunity to work out a consensus of how to ensure food security for our people at the recent meeting of chief ministers on the price rise issue. The agenda note circulated at the meeting makes it clear that the UPA government has no intention of a course correction in the policies which have resulted in continuing high rates of inflation of food items which reached almost 18 per cent (WPI) in the week ending January 31. The government has consistently refused to accept its own responsibilities and has sought to explain away high prices through lame excuses, one of them being that high inflation rates are a global phenomenon. A comparison of the consumer price index of the G-20 group of countries shows why this alibi does not work. Clearly, domestic factors, not international ones are responsible for India having the highest annual inflation rates in the Consumer Price Index of the G-20 countries.


     G20 Countries: Consumer Price Inflation for December 2009



Annual Inflation Rate









South Africa




Saudi Arabia




United Kingdom




Republic of Korea


United States of America

















Source: The Economist


In fact it can be argued that India is responsible to an extent for the hardening of international prices in certain commodities over the last few years such as wheat and sugar. When a country like India announces its intentions to import vast quantities of a particular commodity it obviously leads to higher prices in international markets with big players and speculators driving up commodity futures prices. The government of India announced in advance its intention to import over five million tonnes of wheat in 2006 and then imported it in separate tranches, each tender proving more costly than the last one, as the international prices of wheat were pushed up. In sugar too, it was Indian imports, first of raw sugar, then of white refined sugar, totaling over 5 million tonnes which led to a further increase in international prices of sugar.





Two sets of data available in the same week that the meeting of chief ministers was held show how domestic policies have led to deprivation for the people and profits for the corporates. While the government is in a state of denial about the impact of recession on the working people, the report of the UN Department of Economic and Social Affairs has assessed that in 2009, 13.6 million more people were pushed into the ranks of the poor in India because of joblessness and high rates of inflation. At the other end, the profits of 33 sugar companies according to a calculation made by a national newspaper showed a huge increase of 2900 per cent from 30 crore rupees in 2008 to over 900 crore rupees in 2009, a record by any count!


The official note at the meeting did not provide any answers as to why the government had refused to build a sugar buffer stock when there was a bumper crop two years in a row till 2008. On the contrary the central government had incentivised exports to the extent of 1350 rupees a tonne of sugar from April 2007. The Maharashtra government had added another subsidy of 1000 rupees per tonne which meant that a sugar exporter from Maharashtra would be getting a subsidy of 2350 rupees a tonne. Considering that approximately 5 million tonnes of sugar was exported between 2007 and 2008 this would mean an export subsidy from the central government to sugar exporters of at least 675 crore rupees. The subsidy from the Maharashtra government would also run into an additional several hundred crores. Exports were incentivised till December 2008 when an export ban was imposed. Once the shortages thus created started impacting on the higher prices of sugar in the market, the central government incentivised imports by removing all duties firstly on raw sugar and then on white refined sugar. There was no control on the prices importers charged from market sales. So money was made both ways by the powerful sugar lobbies, through exports and then through imports and sale in the open market at high prices. It is hardly surprising that the profit lines of sugar companies have soared while consumers have to pay exorbitant retail prices of nearly 40 to 50 rupees a kilo.


It was a somewhat similar story with wheat. Wheat trading multinational companies as well as Indian corporates made a killing when the government deliberately retreated from procurement operations allowing them a free run to procure and hoard stocks. In spite of production increases government procurement of wheat was deliberately cut to low levels in 2006-2007 and 2007-2008 to 9.2 million tonnes and 11 million tonnes respectively compared to over 20 million tonnes a few years earlier. The consequent acute shortages created in the public distribution system were then met partially through imports but at a much higher price. The wheat shortage in the PDS was also used as a pretext to slash allocations of wheat to the states. Open market prices of wheat also increased. In fact it was the higher wheat prices that were driving the food inflation rates. In addition, the government clandestinely lifted the ban on future trade in wheat in May 2009 allowing speculative capital to push up prices further. Wheat prices continue to remain high.





The agenda note quotes the increase in �crude oil prices� as a contributory factor to food inflation. Hikes in petroleum products do affect food prices and other essential commodities, but who is responsible? After peaking in mid-2008, international fuel prices have fallen sharply throughout 2009; from June-July 2008 fuel prices have fallen by over 100 per cent. Even though they have risen recently the level is still far below the peak. The central government�s policies of frequent hikes in the prices of diesel and petrol have contributed to higher prices of food items. The UPA has raised the price of petrol and diesel ten times during the last six years, the last time in July 2009. The Kirit Parekh committee has recently recommended further substantial hikes and deregulation of the prices of petrol, diesel and cooking gas. This will have a disastrous impact.


Linked to the issue of petrol and diesel prices are the excise duties and tax policies of the government. A false impression is sought to be created among the people that whereas the central government is pro-people in its tax policies regarding essential commodities, it is the state governments which are imposing higher duties on fuel. The reality is somewhat different. Take for example the taxes on petrol and diesel. At present the crude oil price is 74 dollars a barrel (160 litres). Converted into rupees at the current rate of 47 rupees a dollar, it would mean that at the higher international price of crude oil, one litre of petrol would cost 21.46 rupees a litre and an additional 10 per cent for processing costs. So why should the Indian consumer have to pay almost double the price above 44 rupees for a litre of petrol and 32 rupees for a litre of diesel? This is because the central government continues to maintain a high tax regime of central customs and excise duties.

For example, for every rupee spent on petrol in Delhi, the cost of the fuel is 48.64 paise, central customs and excise duties comprise 34.69 paise whereas the state taxes are 16.67 paise. This can vary with different states but not substantially. So who is taxing the people more; the centre or the states? The centre must stop revenue mobilisation through high indirect taxes on petroleum products, particularly at a time when international prices are rising.


Another aspect is the class bias of the central government. Whereas it has hiked the tax rates on petrol and diesel, it has lowered the rates on aviation fuel. Today the tax on diesel is 3.71 rupees a litre while that on aviation fuel is down to 2.37 rupees a litre. Who benefits from this?




It is made out as though state governments were responsible for high prices of sugar because of the higher slabs of VAT on sugar including imported sugar. However, 23 of the 32 states listed in the note, have nil rate of VAT on imported sugar. Both West Bengal and Kerala have no taxes on the imported sugar. On the other hand, Jharkhand under president�s rule had the highest VAT rate of 12.5 per cent, Congress governments in Rajasthan and Haryana and the Congress supported DMK government in Tamilnadu have 4 per cent VAT on imported sugar. Even as far as VAT on other essential commodities is concerned, Left led West Bengal has a far better pro-people record than for example Congress ruled Andhra Pradesh and Maharashtra. A quick comparison made in a memorandum by the CPI (M)�s Andhra Pradesh state committee to the state government on the VAT rates on various food items prevailing in Andhra Pradesh, Maharashtra and West Bengal is revealing:











Green Gram




Chana Dal

















Thus, not only is the central government responsible but the Congress led state governments are also furthering the burden on the people through higher VAT on food items in contrast to the pro-people tax policies of the West Bengal Left Front government. It should also be added that in spite of the assurance by the central government to compensate the states for the revenue losses caused by the introduction of the VAT regime, the money is yet to be paid. Thus on the one hand while the resources of the state government get reduced, the central government continues to cut subsidies to the people, asking the state governments to pay.





The agenda note does not mention the Food Security legislation although this was a categorical assurance made in the first presidential address when the present UPA government took office. On the contrary, it quotes the dubious downplaying of poverty estimates by the Planning Commission from the present 6.52 crore families below the poverty line to 5.90 crore families, to make out a case that it has been generous in not cutting allocations according to the reduced BPL numbers. It does not even bother to mention that two official committees namely the Saxena Committee and the Tendulkar Committee, however inadequate and incomplete their reasoning may have been, have advised substantial increases in the numbers of BPL families.


Equally unfortunate, in spite of the resounding protest from almost all states to its policy of cuts in allocations to APL families to the extent of 75 per cent over the last few years, the note does not accept the demand for restoration of allocations. On the contrary it continues to push for sales to the state governments at almost double the issue price of APL foodgrains, in the name of additional allocations. The state governments refused to lift the high priced stocks as a result of which out of the additional allocation of 20 lakh tonnes only 1.71 lakh tonnes was lifted. If the central government allots such grain at the APL prices, the stocks would immediately be lifted by the state governments. At a time when the government is holding buffer stocks of around 20 million tonnes, well above the buffer stock norms, its refusal to provide foodgrains at cheap prices to strengthen the PDS is rooted in its strong ideological commitment to allow full free rein to the market forces regardless of the havoc caused.


Today over ten state governments, in some cases despite meager resources, are giving substantial subsidies to extend the benefits of the PDS at cheaper prices to more sections of the people. Some states, Kerala for example, have also strengthened a network of fair price or Maveli stores where other essential commodities are sold at prices which are one third of the market price. If not for these initiatives, the situation would have been much worse.


Resistance against government policies is growing. The campaign for the March 12 rally in Delhi against price rise and for food security will surely take the message to wide sections of the people, that relief from price rise requires a reversal of the policies of the Congress led government.