Sustained high inflation inflicts serious corollary damage on the ranks of the middle class. It whittles down its size. This creates a vacuum in the political structure of the state, as the number of supporters for a moderate liberal position get clipped in the process. No wonder a period of inflation creates a nice setting for political disturbances that become difficult to quell as long as the trigger of price rise keeps on inflaming opinion.
By any reckoning the current level of inflation in food prices has become almost comparable to the early 1970s, which was also a period of major political upheaval. Of course, the spell of price rise at present has not been around for as long as it was then, so the implications for permanent income levels are possibly quite some way off. But the current level of 19.05% for food inflation does not look like it will switch to more moderate levels anytime soon. The reason why inflation could remain sticky is that this is a supply side driven phenomenon. RBI governor D Subbarao, too, has acknowledged it. Whether the current monetary stance will exacerbate inflation later is a different question.
So this inflation has built up as a response to the rising income level of the country, including in the rural areas. It has been a gradual process. There has been a close association of the rising prices of late with rising income levels. Typically, therefore, the commodities where prices have risen the most are pulses and of course vegetables, while sparing rice and wheat. The country?s food consumption basket has irrevocably moved to a more diversified plate. The inflation in prices that now threatens to engulf other sectors, including consumer goods, is a continuation of the same trend.
The implication is that this is not a bout of inflation, but a challenge to improve the food supply chain. On Friday, finance minister Pranab Mukherjee told Parliament it was a combination of a 40-year low of monsoon rains and in some areas, floods that have precipitated the shortage and the consequent rise in prices. The failure of rain is just not the main reason for the current price rise.
For instance, vegetable cultivation, mostly concentrated around cities is not a rain dependent activity, though pulses are. But the shortfall in pulses production versus the total estimated demand is secular and is rising every year. This means the year 2010 will not see prices softening either. To bridge the shortfall the government cannot basically import from a very thin international market, year after year. Wheat crop on the other hand, is in abundance. As an example, in the same reply, Mukherjee said India will have a grain surplus of 7.7 million by April 1 next year.
So the prices of other commodities will not march southwards to a great extent. The cure for the bout of inflation is therefore bringing structural changes in the economy on the management of food supply. This newspaper has flagged those areas of reforms repeatedly, but the point is a spiralling inflation of this rate will ring in political disorder very soon.
In his latest column in Newsweek, Fareed Zakaria pointed out that the world economy has shown fundamental stability despite the current financial turmoil, stability built on the victory over inflation achieved in the 1970s. But in India, we are at the risk of cracking the base of this stability if inflation is not tamed again.
That sort of taming can only happen if the government shows the resolve to go ahead with the changes in the agricultural economy. There will, of course, be disturbances to the status quo as these changes are worked upon. But again, those disturbances will be relatively minor compared with the scale of problems that will spill out if the reforms are not made.
Why, despite all these signals, is the government not moving in the required direction? It is because the government for a long time was only bothered about, to use a power sector analogy, the generation problem. The distribution of power, or food, was a secondary problem.
But as the Indian economy now has a huge urban population, made up of every stratum of society, providing food for the urban plate has emerged as a major responsibility for the government. Food inflation means the government is not able to do that. Which means that as inflation chips away at the ranks of the middle class, the consequent unrest generated will be a hugely difficult mess confronting the government. The incendiary potential of the robbed middle class aligned with the poorest could be very destablising indeed. The poor in India are now located overwhelmingly in cities to where they have migrated en masse. They have no safety net to handle the sort of long-term inflationary spell that we are certain to face.
From any perspective one chooses to see, there is therefore a pretty short fuse available to the government to make the changes that will make the farm sector grow faster. This could be one hell of a blast.
?subhomoy.bhattacharjee@expressindia.com
