With the Russia-Ukraine conflict flaring up into a war, global commodity prices, especially crude oil and gas, will likely see a strong surge. This poses a challenge not only for India in containing its inflationary risk but also for the world.

In India, consumer price index (CPI) inflation has already crossed the upper limit of RBI’s tolerance band (6%) in January 2022, and wholesale price index (WPI) inflation is surging at more than double that rate (12.96%). In the US, inflation is 7.5%, at a near 40-year high. Most economists believe that the Federal Reserve is way behind the curve on taming inflation. High inflation inflicts large ‘inflation tax’ on general public whose savings in banks earn less than 1% interest. This is robbing the general public in the name of fuelling growth. No wonder, the rich and wealthy entrepreneurs make hay and inequalities widen. India is not far behind. Most of the major Banks in India, led by State Bank of India, offer interest rates to depositors between 3% and 4%, and with CPI inflation at 6 percent and WPI inflation at 13%, Indian depositors are fast losing the real value of their money through this hidden ‘inflation tax’.

The Union finance ministry and RBI are betting on revving up growth, at least for now. This is perfectly fine so long as they can tame inflation within a reasonable bound. Even the upper limit of RBI’s tolerance band at 6 percent has an inbuilt bias against depositors and in favour of entrepreneurs, accelerating inequalities in the system. If we want to do justice to the masses on whose deposits the entire banking system hinges, one must ensure positive real rates of interest. And to do this, one must ensure lower rates of inflation, preferably below 3% per year.

How can one do that in a country like India? Given that food has a weight of more than 45% in CPI in India, understanding the dynamics of food inflation is critical. Within food inflation, oils and fat inflation is raging at roughly 18% largely due to imported oils. India imports roughly 60% of its consumption of edible oils, and global prices of edible oils over the last year have gone up by more than 50%. Indian edible oil inflation touched 35% only a few months back, before it came down to 18% after import duties on edible oils were lowered. The Union minister of commerce has also recently claimed that the government has brought down the inflation in pulses by imposing stock limits on traders, lowering import duties, and importing more pulses. The Centre has also imposed stocking limits on domestic oil/oilseed traders.

One wonders why the Centre doesn’t impose a stock limit on wheat and rice with Food Corporation of India (FCI). After all, that is the biggest hoarder of staples. In fact, by having open-ended procurement of paddy and wheat—at least in some selected states like Punjab, Haryana, Telangana, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, etc— FCI is saddled with vast stocks, almost four times the buffer stock norms as on January 1, 2022. If FCI decides to unload these excess stocks in the open market, it can bring down food inflation easily as rice and wheat have high weights in CPI. The problem, however, is that the economic cost of rice and wheat to FCI is way above their market prices. So, the unloading of excess stocks will have to be done at much lower prices than their economic cost, incurring huge losses hidden in the ‘food subsidy’. In the name of the poor, India runs one of the largest, but perhaps the most inefficient and corrupt, public distribution system (PDS) globally. It is crying for reforms, but no political party has the guts to take it head-on for fear of being branded as anti-poor.

Every political party promises freebies just before elections. These are basically ‘doles for votes’. Right now, as assembly elections are underway in some states, political parties are competing to promise everything from loan waiver to free power to farmers, unemployment allowance to youth, income support for women—and some are ready to give laptops, smartphones, and even electric scooters! This is nothing short of misusing taxpayers’ money to get into power. Unless the Election Commission comes down heavily on such promises, or a public litigation is filed in Supreme Court to stop this competitive populism, Indian policy-making cannot be growth-oriented.

It is in this context it may be noted that India’s food subsidy policy, covering 67% of population and distributing rice and wheat at more than 90% subsidy under the National Food Security Act of 2013, was the last ditch attempt by the UPA to win the 2014 parliamentary election. Alas, they still lost the election, but the policy remained stuck. And even the Modi government so far has not gathered courage to either raise the issue price under PDS or reduce the coverage of population to only those that are below the poverty line, be this defined as per the Rangarajan Committee formula or by the NITI Aayog recently, under the rubric of the multi-dimensional poverty index.

It is important to reform the grain management and food subsidy system to release precious resources for the growth of agriculture with giant strides in raising productivity and producing more nutritious food while protecting the environment. The paradox of Indian policy-making can be judged by looking at the Union Budget for FY23. It provides more than Rs 2 lakh crore for food subsidy while agri-research and development gets a paltry sum of Rs 8,500 crore! This is despite knowing that agri-R&D gives a much higher return in terms of promoting growth with competitiveness, and reducing poverty by making food cheaper, and controlling food inflation.

The author is Infosys chair professor for agriculture, ICRIER