Editorial: Why Prices Increase Index

Sep 18 2013, 03:30 IST
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SummaryHoarding by government, not low interest rates

While monetarists will argue, a la Friedman, that inflation is always and everywhere a monetary phenomenon, this may need some revision in the light of peculiar Indian circumstances, something RBI would do well to keep in mind while examining policy options on Friday. It is also something finance minister P Chidambaram needs to keep an eye on, since this could cost him not just his budget, but even the current account. Much of the attention in the current hike in WPI inflation, not surprisingly, has been focused on the sharp hike in prices of onions and other vegetables. While vegetables as a group had a WPI inflation of just under 78% in August and 47% in July, the numbers were an even higher 244% and 145% for onions—based on their relative weights,vegetables contributed 1.4 percentage points and onions 0.4 percentage points to August’s 6.1% increase in WPI. But while there is little the government can do about vegetable prices given there could be supply constraints, there is no rational explanation as to why the government continues to stores 2-3 times the foodgrains it requires—as on October 1, buffer stocks should be 21 million tonnes based on the old norms and 34 million tonnes based on the new norms suggested by the Commission for Agricultural Costs and Prices. Between wheat and rice, the prices of which have risen on average 17%over the past year, this alone means a contribution of 0.5 percentage points to the WPI index—that is, were the government to dump enough wheat/rice stocks in the market to keep price rise to zero, August’s WPI would be 5.6%, not 6.1%; if more stocks were dumped to make the prices fall, the impact on overall WPI would be even higher.

The fiscal and trade costs of this are even higher. Assuming a R25,000 per tonne economic cost for rice and wheat—it is higher for rice and lower for wheat—34 million tonnes of extra foodgrain means a cost of R85,000 crore. Assuming an 8.37% 10-year bond yield, that’s an additional cost of R7,100 crore per annum. Take the argument a bit further and assume that the foodgrains had been exported—wheat is $250 per tonne today and rice is $360 for the cheapest variety—this could have yielded $10.4 billion. Slice it any way you like, and it is obvious, the RBI, the finance ministry and the commerce ministry need to be paying

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