Two burning issues the budget must tackle

Last Updated: Thu, Feb 24, 2011 08:15 hrs

In tackling inflation, our top policy makers have seemed to be at best clueless and at worst complacent, writes Professor Jayati Ghosh

What you think of the state of the Indian economy depends on who you talk to.

There is one group for whom the Indian growth story is raging on in all its bullish glory, constrained only by the lurking threat of inflation.

Despite price rises, consumer demand is buoyant, especially for goods and services consumed by the rising middle classes. Their upward economic journey continues, while the elite has never had it so good.

The housing market is experiencing yet another boom, fed by increasingly dubious lending patterns of the major banks.

Services, especially the 'modern' services, continue to flourish with high growth rates despite all the recent evidence of widespread scams.

So most private investors, both local and foreign, are bullish about future prospects.

But the story is rather different if you step out of the confines of this minority of the population.

Despite the past decade of high GDP growth, there are no significant improvements in the indicators that matter for most people, like stable employment, better livelihoods, reduced hunger and more basic human development.

India continues to have the largest number of hungry people in the world, and our nutrition and education indicators are down there with sub-Saharan Africa.

Because economic growth has not generated enough productive jobs, the bulk of the workforce is in very fragile and precarious forms of self-employment.

Wages have barely risen as profits have exploded, and people have been displaced for projects that bring no improvement to their own lives.

All this leads to a growing number of disaffected youth whose frustrations make them more prone to violent or socially undesirable behaviour.

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And the extreme and growing inequality, along with material insecurity, makes it unsurprising that local people in depressed areas are increasingly receptive to 'extremist activity' designed to overthrow an economic system that is seen to be completely unjust.

The commonality across these two very different worlds is a concern with inflation (especially food inflation), which has emerged as the biggest immediate economic problem in the country today.

For most people in the country, the other big concern is productive and gainful employment.

So how concerned are our top policy makers with these two big issues, and what are the chances that something will emerge in the Budget to indicate such concern?

The signs so far are not that good.

In tackling inflation, our top economic policy makers have seemed to be at best clueless and at worst complacent.

Recently, increases in the prices of essential commodities have even been welcomed as indications of greater material prosperity in the country and of the success of 'pro-poor' schemes of the government, reflected in increased demand for food.

This Marie Antoinette-style position is problematic because it does not see the current demand-supply imbalance as a failure of supply brought about by inadequate agricultural policies.

If inflation is seen only as a sign of 'overheating', the tendency will be to try and bring demand down, by raising interest rates, and worst of all, by engaging in fiscal tightening by cutting public expenditure.

But this is not what is required, and in fact is likely to be counterproductive, because it may further damage the livelihood of small producers as well as general employment prospects.

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Because the current inflation is concentrated in food articles, proper management of supply and distribution, combined with measures against speculation, can have significant positive effects.

In the medium term, there has to be much more proactive intervention to ensure greater and more varied agricultural supply to meet what should be growing domestic demand.

On the question of food security and food prices, the immediate and pressing need then is to enhance the public distribution system to make it an effective alternative to private profiteering in food markets and ensure that people are able to access food at reasonable prices.

This Budget should therefore at the very least send out a strong message about the government's willingness to ensure food price stability by providing for a significant expansion and strengthening of the public distribution systems and agricultural marketing co-operatives.

It should also increase (not cut) allocations from schemes that affect people's lives and social conditions, such as the employment guarantee, health, sanitation, education and so on.

In addition, if the government is really serious about controlling inflation, it needs to address the cost-push element, which is currently being aggravated by its own policies.

One major aspect of this is with regard to fuel prices, which enter directly and indirectly into all other prices and have cascading effects.

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The decontrol of petroleum prices at a time of massive global volatility and spiralling prices was thoughtless and irresponsible.

It should be rolled back, and if not, at the very least the government must adjust its own excise duties, which are currently enabling it to increase its own revenues by bleeding the people through higher prices.

Renowned economist Jayati Ghosh is the Professor of Economics at the Jawaharlal Nehru University in New Delhi. She is also a member of the National Knowledge Commission set up by the Indian Prime Minister.

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