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Column: Tame the killer inflation first

May 19 2014, 21:42 IST
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SummaryClearing the excess FCI stock is a low-hanging fruit for the new government in curbing food inflation

The expectations from the new Government are high. The challenge will be how soon, and how rationally, it can respond, laying down the ground for medium-term reforms in the sector. So, the best strategy would be to hit the ground running.

But what is it on which it should focus on in the first 100 days? First and foremost would be bringing down food inflation to below-5% levels, which is possible. It may be worth reminding that during the earlier NDA rule, 1998/99-2003/04, food inflation, on an average, hovered around 4%; went to 6% in the UPA-I rule (2004/05 to 2008-09), and then, got out of control in UPA-II (2009-10 to 2013-14) at above 10%. This has been a killer, and UPA has been punished for that badlyby the electorate. So, it would be important for the new government to learn from what went wrong with UPA-II’s management of food inflation, and avoid those mistakes.

While a substantial part of the food inflation during the UPA-II period was imported, after the eruption of global food price crisis in FY08, on which the government had little control, the biggest mistake was to let loose the fiscal policy under the ‘global fiscal stimulus’ plan of the G8 plus 5 countries. The fiscal deficit, which was hovering around 3% of GDP in FY08 shot up to almost 6% of GDP in FY09, and this had very adverse repercussions on food prices in the years to follow till date. Three items in particular drilled the hole in fiscal pockets of the finance minister: food subsidy, fertiliser subsidy and bloated expenditures under the MGNREGA. All these three together account for well above R2,00,000 crore in the interim budget for FY15. On top of this, there are additional pending bills (carry over) of food and fertiliser subsidies to the tune of at least R80,000 crore in FY15, as per the internal calculations of the concerned ministries. While the finance minister may have been right in his judgement in not signing on the blank cheques of these ministries, given their highly inefficient ways of doing business, along with the MGNREGA, the political leadership failed to usher in reforms in its operations for prudence. Out of a ‘true expenditure estimate’ of roughly R2,80,000 to R3,00,000 crore involved in food and fertiliser subsidy plus the MGNREGA, in FY15, there is a potential saving of at least R60,000 crore to

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