How to Contain Prices

How to contain prices

Poorest of the poor are the worst affected because of continuous increase in prices . The present inflation index which is primarily assessed based on movement of wholesale prices consisting of items unseen/unheard of by a section of people and to that extent change in inflation index does not mean anything as far as this section of people is concerned. Their consumption pattern is totally at variance with that of middle class and higher echelon of society. While it is essential to contain price levels through monitoring of Whole sale price index, the fact remains that price levels of items consumed by the so called lowest category of people need to be maintained as low as possible if The Govt is really worried about them. By and large these people require rice/wheat/ salt, sugar, tea, mirchi, one or two vegetables like onion or potato or leaf vegetables, oil (fuel, consumption). They are not worried about price of petrol, apple, dry fruits, manufactured items and things like that. Can the Govt do something for these categories of people without much of fanfare? Will it be possible to reach the very essential items to these people without loot, corruption and other malpractices? Controlling wholesale price index is something different from making available essentials at very reasonable prices to the poorest of poor. The real success of controlling inflation depends on the latter. From this angle, the following suggestions may be attempted.

Generally poor people and low class people are found concentrated in specified localities in Metropolitan, urban, semi-urban and rural areas. Supply of some of the very essential items referred to above in plenty to this segment of society at a subsidized cost without giving room for any mal practices under close supervision of agencies involved in social welfare and subjected to social audit by rotary clubs or identified groups of social workers can be attempted. If workable, coupons can be distributed through post offices, banks, self help groups, or farm clubs etc against proper identification to enable them to have these items from specified shops. Through this method of distribution of essential items to the segment of society worst affected because of spiraling prices and those really deserve support for day to day life, can be taken care of till such time general level of inflation is brought under control. The cost involved to take care of this segment of society has to be recovered through some special levies from the really wealthy segment of the society by way of surcharge on income tax, wealth tax etc. Persons owning several houses, cars, estates and having regular flow of income through different sources that do not generally get affected by any price increase can be made to bear part of the cost to meet essential supplies to the poor.

Strong measures need to be initiated against hoarding, black marketing and exploitation. Anti social elements engaged in such undesirable activities that include moneylenders, bankers who provide advances against sensitive commodities need to be identified through a separate monitoring system and need to be demonstrably punished.

Augmentation of production of essential commodities by encouraging utilization of waste lands is a sure way of increasing supply and controlling prices.. This may be a long-term solution and would prove to an endurable solution to contain inflation.

Composition of items to assess the inflation index and method of assessment keeping in view the pattern of consumption among people, income levels of people, availability of commodities from local and international sources, efficiency in distribution management etc need to be reviewed and made transparent. A little readjustment of the composition of items largely consumed by majority of people and specific measures to control prices of those items if necessary by subsidizing wherever required can also be thought of.

Cost of production, which reflects on inflation index, needs to be reexamined so as to exclude luxury spending incurred by the manufacturers for manufacturing. It is unfortunate to observe that luxury expenditure incurred by executives for their five star culture of stay, travel and life style are to be borne by the common man without any of these having known to him leave alone experienced. The fact that Food has to come to five star hotels from farms is being forgotten and farmers have to starve, are something astonishing and should serve as food for thought among all policy makers. It is desirable that any expenditure of extra -vaganza in nature should be taken out from cost of production and should figure only below the line of profit.

Farm subsidies presently incurred by the Government can be converted into Inflation subsidy to help the lowest strata of society instead of supporting the rich farmers Resistance need to be bravely fought and this measure alone would help to bring down inflation as the large farmers as it is, are in a position to dictate the Govt and the price levels. Consolidation of small land holdings need to be encouraged and if necessary Government should take initiative to consolidate the lands and lease them to those who are interested in cultivation of crops. Even lands owned by Government and other public sector undertakings and lying vacant can be leased out for cultivation of essential crops. Because of subdivision and possession of lands in small and uneconomical quantities the incentive to cultivate any crop is found missing and thousands of acres of lands remain uncultivated affecting the supply of food articles.

The tendency to speculate on land (rather than cultivate some crops) has of late been on the increase and farmers find it lucrative to sell the land at attractive prices to persons who are neither interested in cultivation or interested in some productive activities other than waiting for an opportunity to exploit the boom in prices. The law relating to purchase and sale of lands particularly agricultural lands need to be reset and it should encourage only genuine transactions. Keeping the land uncultivated for one crop period should attract heavy penalty. The funds so collected can go to the inflation subsidy.

No doubt fiscal and monetary measures which aim at macro level control of prices and have more of a signaling effect on a long term perspective need to be continued along with the other measures keeping in mind the plight of people who have absolutely no hedge against spiraling prices other than silently suffering . It is high time for those who exploit society and make money at any cost to restraint themselves and come to the rescue of those who unfortunately form majority of the same society and suffer for no fault of theirs by any reckoning.

FOREX INFLOWS

It is heartening that the economy attracts foreign funds and the flows continue to be increasing day by day although they disturb the sleep of many particularly the exporters and various policy making authorities. $7 billion are reported to have come in, during September alone upsetting the calculations of authorities in managing the exchange rate, sudden upsurge in money supply and liquidity, sharp movements in sensex and heavy build-up of reserves. While there cannot be any dispute on the need to have foreign funds to support the fast growing economy, the fact remains that absorption of huge funds without causing damage to the well controlled inflation, well managed financial system consisting of various types of markets, institutions and instruments and the international image meticulously developed over a period has been and continues to be a challenge. The forex reserves which stood at less than $1 billion in 1991 and induced introduction of liberalization measures, has crossed $250 billion as at end September 2007 and continue to accumulate further. Build-up of reserves adds money supply in the system and causes inflationary expectations. The need to contain money supply and at the same time maintaining adequate flow of funds to the productive sectors particularly agriculture and industry has always been the major concern of authorities. Availability of funds for speculative investments in capital market and real sector has to be curbed. Sufficient liquidity to take care of retail, consumption needs and payment and settlement system has to be well maintained. These multi- tasks have to be handled professionally and skillfully keeping the expectations of all stakeholders domestically and internationally in tact and satisfying them.

Is it an insurmountable problem? Taking into consideration the vastness of the country, huge population still living below the poverty lines, inadequate availability of physical, social and financial infrastructure, aspirations and ability of the people to attain any bench mark levels of growth envisaged and expectations of international community that this country would be the super economic power in future, the massive flow of funds should be viewed as a God –given opportunity to perform and deliver. No doubt, the present situation is slightly abnormal and as such naturally calls for an abnormal solution.
Apart from the normal measures like encouraging outflows through travels, remittances, imports of goods particularly those which can mitigate inflationary expectations, other measures to contain inflows through some incentives akin to those offered to attract inflows when the situation demanded during forex crisis during 1990s without impinching on the sentiments of investors can be considered. Other solution can be in the form of creating a Foreign Exchange Inflows Stabilisation Fund through a Special Purpose Vehicle exclusively instituted for this purpose. As it is, Reserve Bank intervenes in the forex market and effects purchases and sales of foreign exchange to moderate the exchange rate fluctuations. This necessarily involves injection and absorption of rupees to maintain /soften the liquidity. To neutralize the impact of purchase/sale of foreign exchange and consequent money supply and liquidity in the market, sterilization is done using government securities for sale / purchase. The whole exercise involves a cost and creates an element of uncertainty and speculation in different markets in the financial system. All these can be to a great extent minimized if surplus of foreign exchange or a portion of it can be surrendered to the Special Purpose Vehicle and made part of the Exchange Inflows Stabilisation Fund without involving rupee exchange. For the contributor towards this fund, this can facilitate as a deposit account withdrawable on demand. This fund can be utilized for exclusive development of infrastructure requiring foreign exchange. In case the fund accumulates, those who require foreign funds can be allowed as they raise External Commercial Borrowings at a specified exchange and interest rate. Main advantage of such a fund is that it eliminates rupee supply and consequent ripple effects. The cost involved creating such a fund and the disadvantages perhaps faced by those who contribute to this fund will more than offset the problems and costs now faced by the economy because of heavy inflows and adverse chain effects. The Government can consider compensating by way of suitable incentives to those who contribute towards this fund. This solution may initially appear to be irrational but may prove to be a boon in the long run for all stakeholders particularly the government and the economy.
To elaborate further on this fund, banks /parties receiving foreign funds and who can afford to contribute identified surplus without expecting in exchange rupee funds on the spot should be encouraged to deposit such surpluses with a special purpose vehicle exclusively set-up to manage the fund. This fund can be akin to India Develop Fund Where deposit was received for a specified period . The contributors to the fund now suggested can be compensated by way of interest or some incentive or both in rupee terms. Exchange rate risk at the time of return of the funds on demand or on maturity can be hedged through derivatives both at contributors’ and special purpose vehicle’s level. The funds accumulated can be made available to utilize exclusively in foex for development of infrastructure by way of import of technology, skilled manpower, materials research and development. The setting up of such a fund without involving rupee exchange though initially appears to be conceptually difficult, it cannot be ruled out as impossible. It is like Security Transaction Tax which was initially objected to but has come to stay fetching good revenue to the Government and without inflationary implications as the levies cannot be passed to general consumers as happens in the case of VAT and other levies. The costs /sacrifice involved to develop, maintain and manage such a fund may turn out to be highly beneficial when compared to the present costs and risks involved to maintain financial stability, favourable inflationary conditions and the credibility among the international community to continue to attract investments in India. The fact remains that economy needs billions of dollars for various developmental needs particularly heavy particularly heavy physical infrastructure of international standards to sustain and register further growth of GDP. The momentum now attained and the confidence level built-up both at national and international level have to be maintained at any cost to make the economy really a super power. It may call for some innovativeness and perhaps Foreign Exchange Inflows Stabilisation Fund may be the solution.