Inflation

Inflation Nation – a huge problem not being addressed

Anyone who goes to his local grocery store in the corner of the street realizes that the cost of basic food and vegetables have gone up many folds in recent months. The story is similar in almost all commodities across the various segment of people. Unfortunately it affects the poor people more than the rich people. This is because the percentage of money allocated for food is higher in the lower income group than others. Any price rise will affect the BPL (Below Poverty Line) and lower middle class segment of the population directly. Since the majority of Indians fall in this category its not a pleasant environment. Vegetables are part of regular Indian meal and they are consumed in abundance compared to other western nations. Onions and tomatoes are basic ingredients in any Indian food preparation. When the price of these items go from Rs. 20 a kilogram to Rs. 80, the ordinary people have the reason to be upset. It affects their monthly budget. Prices rises are significantly gone up for dhaal, oil, sugar and you name it. Even construction material cost have gone up making land, housing cost go through the roof over years now. Bottom line, the price rise is across board through out the country. We have the economist Prime Minister in Dr. Manmohan Singh, and people are left wondering what does he think conceptually on this. The recent press conferences from him merely reflects his political face rather than his economic thoughts.
The government as usual has come out against the rising pricing prices with more words, than actions, and has blamed it on the term “inflation”. Inflation according to the government is the reason for price rises. Contrary to what the government says, inflation is NOT price rises. Price rise is the ‘consequence’ of Inflation. The Inflation itself is a concept of lose monetary policy (that is originally proposed by the government). The government completely hides this big elephant below the mat and propagates its version of story across the country. And in many ways succeeded. Inflation can be summed up as : too much money chasing too little commodities. People possess more money and are willing to pay more for the commodity that is in scarcity. lets take the example of onion price in reason days.
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Will demand for diesel cards reduce if price of diesel increases ?

The Government went in for a partial decontrol of the prices of fuels, with giving a full decontrol of the price of petrol (and promising that future prices will be linked to international prices of crude); the prices for diesel have not been fully decontrolled, and the prices for cooking gas and kerosene have been kept away from decontrol although the prices may have been increased. The Government has been able to do this since politically the opposition is not at a very high pitch with the BJP still in some amount of disarray and no other opposition of any note.
Now, the Government is making noises about moving away from price decontrol over diesel. This is something that is much more serious than the decontrol of petrol. Petrol is perceived as the fuel for individual vehicles (and thus increase in the budget for those who can afford private vehicles), while diesel is the fuel used for the transport sector, for trucks, smaller carrier vehicles, and even for a number of goods trains that are not hauled by electric engines. The normal impact of a hike in the price of diesel is an increase in the rate of inflation, which is why the Government seems to be speaking about price decontrol of diesel, in order to gauge whether it can ride out the impending political storm.
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Price Rise and the politics around it

A couple of years back, there was a sustained push in terms of liquidity in the global system, and as a result, the huge amounts of cash were pushing up the prices of all commodities, resulting in food inflation numbers being high. However, the recession for the past 2 years brought down this excess liquidity in the system to some degree, causing a reduction in the inflation numbers through 2008. But, to combat the poor economic condition and to ensure that the recession does not become stronger, Governments the world over had to open their purses and spend huge amounts in order to push weak companies (whose collapse could set off domino effects) to remain afloat. One problem with the spending of such huge amounts of money was that they also pushed in an excess of liquidity in the system, causing too money in the system.
This in turn resulted in an overall increase of prices of commodities, and since the Indian Government has been pushing up the prices that they give to farmers for the different crops, there was a push to food based inflation. The Government may well be arguing that they cannot stop international trends, but there are a number of steps, in terms of better monitoring, quick decisions on importing or procurement, letting more players into the retail business for pushing more efficiencies and reducing waste, and a number of other steps. For example, the productivity levels of Indian farmers is not very high, and yet there is no effort by the Government to push for more education to increase the growth levels per acre.
However, politically the increase in prices hurts the Government, and hurts the party in power (the Congress), and gives the opposition a stick to beat it with. Nobody wants to be associated with the political blame game that happens with an increase in prices, so State Government refuse to accept any part of the blame, even the agriculture minister (Sharad Pawar) would rather that all steps taken so far are actually Cabinet decisions (since he does not want the blame to stick to him), and so on. In such situations, the Government can only make statements such as assuring that the worst is over, and that prices will soon fall. It cannot do something else for the short term.