India's Inflation-Food for thought

India’s aam aadmi is reeling, this time more, due to inflated prices of most essential items. The food prices have skyrocketed, esp. the onion proving to be the jeweled condiment of food now for the people. But this was coming, for a long time, and as usual, the power wielders at the Center had turned a blind eye towards it.

See, economics is a wicked play, in essence, between supply and demand. Harmony between supply and demand is de rigueur for the effective functioning of the economy. Inflation and deflation both are delicate acts of it, and even a slight alteration in them puts the economy in topsy-turvy. An inflation of around 3% is considered good, if not ideal.

So, that brings us to the Indian situation then? Should India continue to be on its path of so-called economic proliferation, while also being negligent towards common man’s needs? While the optimists say, both economic and inclusive growths are possible and it is the government’s apathy that is not letting it happen. I concur with this, but I also feel economic growth has temporal component, and it can’t happen overnight. Like everything else, economy needs sound fundamentals. I would like to touch upon both the aspects: ideal economy’s path and government’s role to lay that.

India is the 2nd most populous country (1.2 billion), and despite government’s best efforts, pun intended, it will be home to around 1.7 billion by 2070 when the population is supposed to get stabilized (As per National Population Policy (NPP), 2000). By the way, this is revised estimate by NPP, as the original plan was to get population stabilized to 1.45 billion by 2045. So, considering the flagrant lack of target-meeting initiative and zeal of NPP, I assume that India’s population will only get stabilized after reaching 2 billion. So, we have to feed 1.2 billion now and sometime later, about 2 billion people. Not only feed, we will have to provide them clothes, houses, infrastructure and as their income grows, recreation, tourism, industries, power etc. So, you can gauge the demand that is in front of us.

How do we confront this demand? We can grow well in one sector, say services, as software is already showing its growth potential. After all, Japan, Singapore etc are manufacturing or services economies only and they have boomed on those sectors only. Here is where we make the basic mistake of not realising that India is much different from them. India is still an agricultural country; 66% people depend on it directly or indirectly. And food is what, as stated above, we need first. We need to augment our agricultural sector. Green Revolution, after 1966, did help in making us self-sufficient in foodgrains, esp. wheat and rice. But the other items, vegetables, fruits, pulses, edible oils etc remained untouched. Our demands are increasing though, so self-sufficiency in even food grains won’t remain for long. The demand is for 4% annual growth in agriculture, but it has sadly been around 1% only in the last 10 years. It is a damning record, and self-immolating effort. I acknowledge that the work is arduous, as we can’t increase our agriculture land (51% of our total land which is already the largest share in the world), but this also shows we have room for improvement. If we sow this land with the maximum productivity, as in US, China etc, we can achieve the target. But it needs big initiatives. I was heartened to see a plan for Second Green Revolution in Eastern India in this year’s budget but hardly any work has been done there; instead there has been the signed deal to buy Lockheed Martin’s C130 and GlobeMaster’s 17J aircrafts. Ah! The worse part is there is a similar story for all the priority sectors of India.

What can the Government do? First, the long-term plan, as blatantly made obvious by the inflation, should be to achieve self-sufficiency in maximum food items, and also be guarded against any natural impediments. We can’t be a food-exporting country, so efforts to raise certain agro sectors to cater to exports are futile and unwise. This is a strong statement, but all these policies, viz. National Horticulture Policy, Agro-Export Zones etc are wrongly dreamt on exporting theme. While the indigenous items like tea, coffee, spices should be exported, I fail to realize why cotton, which is not even of good quality as per world standards, is grown so much and exported, not fulfilling the home demands of textile industries even. We need to prioritize our crop diversification so that we are able to feed our people and supply our industries.

Second, the procurement, issue and distribution management should be given a total overhaul. The whole system is a shambles, even if put mildly. More on it in the next blog.

Third, the monetary policy, controlled by RBI, should be aligned more to control this inflation. This is not going to be a long-term and that effective solution, but it can at least put a break on the cascading effect. I am waiting for the mid-quarterly review to be done by RBI on 25th Jan. RBI should increase the interest rates; let the FIIs and big investors pull out their money, and let the Sensex fall. It is needed.

Finally, this economic growth story of India might sound fanciful to the foreigners and even the natives. But no country can override its own people. Let us not be in so much hurry to attract money and sector in every sector, even our basics our not good. In my earlier blog, I had highlighted the importance of money generation in general and Indian exports in particular. The idea still remains; only thing needed is a little re-jig of our focus and little show of patience.

Indian Trade-A Glance

A country which is not economically sound can’t be socially and politically sound. However much one might want to contend it, one can’t disprove it. A strong economy gives a country the chance to utilize money for social upliftment and political sagacity. While the reverse too is true, and for some, a far more correct theory, its practicality and efficacy to bring the results in an appreciable time is questionable.

For bringing economic prosperity, integration with the world is a must, especially in the current scenario. While I appreciate the ideals behind the closed-door socialist philosophy, I can’t help wondering that it tries to negate its own social emancipation motive by cutting off from the world, emphasizing on a fanciful all self-sustaining economy. No country has the means and capacity to produce everything, and is needed by and will need other countries for goods and services.

While India’s share in world trade was around 22% (the same as that of US now) during 1750s, it gradually decreased to less than 2% at the time of independence in 1947, much of which can be attributed to the economic decadence and exploitation perpetrated by the British regime. Even after independence though, India, drugged by the opiate of socialism, so-assiduously espoused by Pandit Nehru and his colleagues, never attempted to integrate with the world market. Our external trade continued to plummet and it reached its nadir of 0.53% world-share in 1991. With other factors also included, it necessitated a radical shift in our economic polity. The LPG - liberalisation, privatization and globalization concept was then adopted by the government. Since then our trade has increased and right now it stands at around 1.65%. While the absolute figure of around $165 billion of export and $291 billion of import in the financial year of 2009-10 might give a better factual information, I am more interested in the world-share figure, as it reflects our trading capability vis-à-vis other countries’.

Our Prime Minister, Dr Manmohan Singh, has rightly advocated that the country can’t be built on the butter-mountain of subsidies and ilk; it should be integrated better with the world to bring in not only money but also capital, technology, knowledge and interest from outside. National Trade Policy (2009-2014) states two main things, among several. The target of reaching $200 billion in exports by 2010 -11 is the first (Going by current trends, it should be achieved), and the second of doubling exports share by 2014 by having a CAGR of 15%. I would be keeping an eye on the latter.

The composition of trade also needs to be altered for the better returns to be achieved in exports. Right now, India is a big exporter of iron ore to steel making companies of China, Japan and Korea. Our steel making industries instead can utilize these and augment themselves in productivity, provided they are willing to expand their capacity. Similarly, there is a big scope of getting an even bigger market of cotton, jute and wool textiles, even though India doesn’t produce top-quality raw materials for these. There is a great demand for even not-so-good-quality fabric in many African nations. Also, pharmaceutical products exports could be given a bigger push, if the issues of generic drug making capability of India are sorted out with other countries, especially those of European Union. Engineering industries have been the biggest success story of Indian industry, as they have not only met the domestic demands, but also contributed a lot to the exports. I would like to see these industrial units, viz. BHEL, HMT etc, to expand their capacity, striving to reach the top positions in the world. Jems and Jewelleries industry of India has a unique story of its own. Not a substantial producer of raw or coarse jems & jewelleries itself, India imports these raw materials, and then works (polishing, integrating, finishing) on these to export them back to different markets. And this segment as such has become the top exported individual sector for India. Brilliant. Moving on to services, IT industry is the real success story of India. The total Indian exports in IT reached $50 billion, showing a stupendous annual growth of more than 20% over the last few years. It can, I am saying, reaching $200 billion in the next five. For that, TCS, Infosys, Wipro etc will have to aim at becoming a household global company like IBM, HP, Microsoft etc. But it is possible, fingers crossed.

Indian imports constitute chiefly of fuel (petroleum,oil and lubricants -POL), and fertilizers, paper, chemicals, edible oils, pulses etc. We can’t do much about POL products, as we really are deprived of significant oil deposits. Oil imports constitue 75% of our total oil demands, and hence oil imports have had a significantly high percentage (around 33%) in our imports sectoral distribution for a long time. We should continue our efforts though to explore potential on-shore and off-shore deposits . Also we need to pursue other options of power and electricity , which include New and Renewable Sources. While continuing to hold good and improving relations with our traditional oil exporters (Saudi Arabia, Iran, Kuwait, Russia etc), we need to expand our relations with other nations too, more so in the vicinity. So, the recently pursued talks with Myanmar and Central Asian countries are a huge welcome. Natural gas supply needs to be augmented. The TAPI pipeline deal, recently signed, is a wonderful example of how mutually beneficial deals can help everyone. In a nutshell, our whole energy supply question needs a separate broad and holistic view, which should include all the parameters and players involved. On the non-POL import items, I would like to see India making a sincere effort to establish new fertilizer plants. India, being an agro-based country, can’t afford to import fertilizers on throwaway prices.

The rising imports have been quite distressing for Indian trade figures. Already the Trade Deficit has topped $100 billion, and even the Current Account Deficit (which includes the invisibles and net investment) has become negative of late (around $10 billion or 3.5% of GDP). It is not alarming yet, as the investments from abroad (FDI, FII, loans, aids and grants etc) have kept the Balance of Payments (BoP) favourable. But sooner than later, we will have to address the rising Trade Deficit question. Both the approaches of checking import bills and increasing exports will have to be pursued.

India’s role in global economic bodies, viz WTO, World Bank, IMF etc too will play an important part in defining our trade growth. While WTO envisages an ideal free-for-all world, its vision is far away from reality. But still its role in bringing the countries to at least more than a semblance of common policies in world trade can’t be overlooked. Right now it regulates good, services and IPR related exchanges amongst the countries. While India have gained in Services sector, there is a simultaneous pressure on it to open its Agricultural and NAMA (Non-Agricultural Market Access) Sectors. Similarly there are issues with Drugs licenses, concerning IPR issues. It would be beneficial if things are sorted out without jeopardizing India’s interests. But prospects look bleak at least in near future. So, the recent bilateral trade deals signed by India with regional blocs and individual countries are a great step towards proliferating the trade dynamics. India-ASEAN FTA, India-Korea CEPA, India-Singapore CECA, the proposed India-EU FTA, India-Japan CECA, India-Thailand CECA, India-Malaysia CECA etc have potentials to do a world of good.

There have been apprehensions raised in some quarters about the damaging effects of these intrusions into the domestic market. For example, there was a grave concern raised by Kerala coconut and rubber industry people about their products viability against those of S-E Asian nations, once India-ASEAN FTA came into force. While concerns like these are not unfounded, the newly-brought competition has the potential to improve the product, service and delivery quality also. The issues need to be resolved, not rejected.

I fully back the world bandwagon on which India, esp. its economy, has ridden. The efforts should now indeed be to accelerate it to the requisite level.