Address food inflation

Subir Roy

THE TRIBUNE DEBATE INDIAN ECONOMY

AS an election year lies ahead of us, we should be prepared to see economic policy being driven by political imperatives even more than usual. The government has already signalled that the coming Union Budget will not seek to cover new ground. It will be a holding operation in anticipation of new policy initiatives which will be announced by the government that comes to power.

Once a new government is in place, its focus would likely be on undoing the damage that the election campaign period has caused to popular expectations with the inevitable promises of freebies. So, a stocktaking, measures to mind the fiscal arithmetic and getting on with regular governance in a responsible manner are likely to define the post-election shape of economic policy. Hence, the mood will be of fun and games till April and one of ‘let’s get back to serious business’ June onwards.

As the year would progress, the ongoing conflicts in Ukraine and the West Asia are likely to continue and keep global trade destabilised. There is a temptation to hope that speculative reports of Russian President Vladimir Putin now being willing to engage is peace talks will bear some fruit. But it is quite likely that the Russian position will be to want to retain the parts of Ukraine that it has occupied — to which the Ukrainian response, led by President Volodymyr Zelenskyy, is likely to be ‘over our dead bodies’. So, the educated guess right now is that the war will continue. The outlook for the end of the other war between the Israelis and Hamas seems to be equally bleak right now.

So, we need to be prepared for the economic consequences of another year marked by continuing conflicts damaging world trade and globalisation. Besides, a new threat is rapidly emerging — Yemen’s Houthi rebels attacking ships passing through the Red Sea, causing carriers to reroute around Africa, thus adding enormously to logistical time and costs to international trade deliveries. So, expect the disruption of global shipping to impose a fresh cost on Indian imports (notably, essentials like oil) and exports. Under these conditions, the new government should plan to run a fairly closed economy, which is likely to put a damper on expectations of a high rate of economic growth.

Along with these, the economic policy for the year should plan to face extreme weather events brought about by climate change, which have now become a routine. Hence, it is high time the government created a special fund to promptly help states fight the consequences of extreme weather events, such as the floods witnessed in Chennai and Hyderabad. A huge amount of economic loss takes place when a state hit by a flood or a drought continually appeals to the Centre for funds, which the Centre takes time to evaluate and respond to. This fund will be like issuing a huge insurance policy on extreme weather events, laying down beforehand the terms and conditions under which payment will be made so that precious time and resources are not wasted in haggling.

Against all these negatives, it is fortunate that the year would begin with a positive economic legacy from 2023. India is set to achieve a growth rate of 6.5 per cent or more with inflation under overall control, high foreign exchange reserves and a stable exchange rate. Multilateral agencies and global analysts foresee India continuing to remain the fastest-growing major economy in the world. On the trade front, while goods exports are likely to continue to underperform, the deficit will be mostly made up by the surplus from services exports (notably software), remittances and foreign capital flows. At present, India’s foreign exchange reserves can cover approximately 18 months of imports, a stark contrast to the challenging situations faced by neighbouring countries such as Pakistan and Sri Lanka.

Now, let us look at the key issue of inflation. It is under control at 5.5 per cent, just under the tolerance level of 6 per cent, but there is a catch. Food inflation is running high at 8.7 per cent, which is bad news for the country’s poor and there are already too many of them with no cushion to accommodate more who may be affected by crop failure from droughts or floods. Almost half of the country’s population (47 per cent) is engaged in agriculture and spends over half of its income (54 per cent) on food. The ideal solution to this is to raise agricultural productivity so that the same crop can be raised by fewer hands, who thereby raise their earnings. There is also a need to raise the number of women who can get away from minding and raising children and get work for which they get paid, unlike rural women who work in small family holdings without getting formally paid. The male labour force participation rate for 2022 stood at 74 per cent, which was thrice that of 24 per cent for women.

If the country needs fewer hands in agriculture, more jobs will have to be found in manufacturing and services. Increased rural incomes, driven by higher agricultural productivity, enable people in rural areas to acquire more two-wheelers, TV sets, and mobile phones, creating a demand for associated services. Thus, we can see a somewhat automatic increase in jobs offered by rural services.

As for manufacturing jobs, their numbers should also increase with fairly rapid economic growth, but the process should be aided by increasing the ease of doing business for all sizes of businesses from MSMEs to corporates. Also, capital should be available to business at reasonable cost so that businesses see it fit to expand operations (this requires more working capital) and make fresh capital investments. To ensure the accessibility of finance at affordable rates, it is essential to maintain a low real interest rate (nominal rate minus inflation). Achieving this goal hinges on keeping inflation at bay, and the challenge for the current year lies in curbing the food inflation rate.

Raising agricultural productivity and enhancing opportunities for women to engage in gainful employment are two clear economic tasks laid out for the new government that comes to power. While these are part of the country’s long-term agenda, the immediate focus for the current year should be to initiate these tasks with proper planning.

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