Price rise or inflation, particularly in food items, was the single most important factor that led to the routing of the UPA-II Government in the just concluded general elections.
With wholesale price index (WPI) inflation at 5.25 per cent and consumer price index (CPI) inflation at 8.59 per cent, the new Government has its task cut out.
So what can it do to cool prices?
For a start, it can bring focus to the task. If knowing what the problem is can be considered half the battle won, then the new Government is on the right track. In the BJP manifesto, the very first chapter under the title – Attend to the imminent – is devoted to price rise.
It begins “Runaway food inflation has crippled household budgets…..”
The manifesto has outlined a range of solutions:
a) Strict measures and special courts to stop hoarding and black marketing
b) Price Stabilisation Fund
c) Unbundling Food Corporation of India (FCI) operations in procurement, distribution and storage
d) Leverage technology to disseminate real time data to farmers
e) Evolve a single national agricultural market
f) Promote, support area specific crops/vegetables) linked to food habits of the people.
While there is no quarrelling with the solutions outlined above, are they doable in the next few months? Not very likely is what many economists say.
Controlling inflation is a long drawn-out process, says Indranil Pan, Chief Economist, Kotak Mahindra Bank.
He points out that a lot of the rise in prices, especially those pertaining to food inflation, is due to supply side constraints. While controlling demand in the short term is possible, enhancing supply is harder.
Alleviating these constraints will require a re-look at agri policies (particularly those pertaining to minimum support prices (MSP), he says.
Policies relating to production, procurement of foodgrains and excess production have to be quickly set in place. There is no magic wand, he says.
A report by UBS analysts Gautam and Sanjena says the Government should immediately use the record foodgrain stock to dampen prices, proactively import more food items to counter the El Nino effect and allow muted increase of minimum support prices for crops.
Even if all this is done, the Government will also have to deal with the impact of the Food Security Act as well as the thorny issues of fertiliser and fuel subsidies.
The next stage, of course, is to address various other components that have seen price rise – medical expenses, education, household necessities, clothing, footwear, etc. And therein lies a bigger challenge.
“Do you see your kids’ school fees coming down or medical expenses dropping next year?” Kotak Mahindra’s Pan asks. That doesn’t seem likely. Reality is at hand.