BJP'S Motion Cut..Inflation is Nobody's Baby

BJP’s Motion Cut… Inflation is Nobody’s Baby

BJP’s cut motion against UPA government on the vital issue of price rise and unbridled double digit inflation failed on April 27, 2010 in the parliament. This was due to walk out and abstentions from SP, RJD, and BSP. That is not surprising since the these elements were expected to bail out the government as they were part of the government led by UPA at some or the other point of time and supported the government from outside. What is shocking is the blatant use of CBI to soften stand on Mayawati in Supreme Court in ongoing case against her related to disproportionate assets. It was a quid pro quo for survival of the government.

In last one year the only major economic issue has been uncontrolled inflation. Since reorganization of BJP and appointment of Nitin Gadkari as president, the expectations have been that BJP will come out of its mess and stand up again as leader of the opposition. The issue of inflation should have been effectively used to initiate measures to bring down the prices by playing a constructive role of opposition. It is unfortunate that UPA government got reelected in spite of double digit inflation last year. Now for next five years that is a non issue for them.

Lost Opportunity: BJP needs to resurrect itself as strong opposition party and keep its flock of NDA together through demonstrated leadership. On the contrary, the opposition is in disarray. BJP has lost a major opportunity to make difference to quality of the debate on inflation and relating to people as party with concern for price rise and viable alternative approach to solve the problem. BJP has platforms of states to show the difference in approach to governance. While it is understandable that the handles for some of the monetary and fiscal controls on inflation are in the hands of the central government, BJP should have tackled the supply side distribution system to reduce the impact on common man in the states ruled by BJP. BJP should have presented a comprehensive approach to tackle inflation not just in the parliament but for public debate so that people understand that the

opposition is not just about walk outs, slogan shouting but about alternative solutions.

Food Inflation due to Poor Supply Chain Management: India’s problem has been poor management of food stocks in year when agricultural out put has taken hit due to poor monsoon. Our warehousing systems are outdated and food grains are rotting due to lack of storage space.

Approximately one million tons of food grains were wasted last year due to poor storage & transit facilities as per FCI. That can feed ten million people for whole year. It is easy to justify wastage in terms of small percentage of total output but that can not be acceptable in absolute terms. In last 15­20 years this picture has not changed and continues to be no body’s priority.

It is disturbing to read the views of leading economists that the high level of food inflation is here to stay since improved economic conditions and higher purchasing power has put pressure on demand for food items. The only way to meet this challenge is ensuring better supply chain management from farm to table. The center as well as states would do well to focus on this critical aspect of delivery mechanism which will ensure better price controls.

Monetary & Fiscal Policies: While monetary policy of RBI has been going by the book to control the inflation, it is the fiscal measures to control the deficit of the government and other measures to prevent release of massive purchasing power to the people, which seem to have gone out of hands.

The pay scale revision as per sixth pay commission saw payment of 32 months arrears to government employees with average increase of 21%.

Earlier the central government announced pay scale revision as per recommendations of the 6th pay commission involving 5 million government employees with a burden of Rs 178 billion every year with effect from 1.1.2006. The spin off of this is similar hikes in states and public sector undertakings also. The arrears to be paid for three years though in two installments amount to massive injection of cash in the urban markets. In addition, the monthly enhanced cash surplus in hands becomes the target for

the marketers. This is what has caused the inflation in first place. The timing of wage revision was politically ripe due to elections but economically wrong at a time when global output of commodities had reduced pushing up prices. Now we read that Banks have agreed to pay 17.5% salary hike to about 750,000 employees with effect from November 1, 2007. This will involve payment of three years arrears.

The extra cash in the market will push the price levels up and that is where they will stay as propensity to spend has increased due to sense of financial well being among these people who are flush with windfall of cash. Retired government employees and other pension drawing employees like banks, insurance etc are well compensated for inflation. It is the poor people and the private sector retired people who are not compensated for the high rate of inflation. Growing ageing population is a matter of concern as they have to bite the bullet of rising medical costs as well as food inflation.

The bureaucrats have ensured that their ilk is very well taken care leaving millions uncared for.

Periodic Flooding of Economy: We should avoid massive flooding of cash into economy every 5 years or so through big ticket pay scale revisions and delayed decision making process resulting in payment of arrears of 3­4 years of wage bills. This takes entire economy from one base to another higher base without real effective growth and any qualitative improvement in productivity. The government has virtually given up on inflation and is waiting for base effect to show up so that automatically inflation rate on higher base starts coming down. Nobody will then complain. And we will move on to catch up as a high cost economy with other developed nations which manage to grow at 2­3 %. We are losing our competitiveness and total factor productivity advantages of the nation.

It would be better if the government considers and evolves different approach to pay scale revisions on annual basis as a matter of routine without waiting for strikes, lockouts and pay commissions based on past 60 years of experience with pay commission approach. Possibly the inflation rates may be marginally higher year­on­year basis but in medium and

long term it would stabilize the economy without 5­years hiccups due to quantum leaps.

The opposition parties, particularly BJP, being single largest party among the lot and ruling in important states, should take a fresh look at the inflation issue and try to set an agenda which can make the difference in good and poor governance. And they have enough time as it seems high inflation is here to stay.

Vijay M. Deshpande Corporate Advisor, Strategic Management Initiative Pune May 1, 2010 Scroll down to see my other blogs Or visit www.strami.com