Chidambaram has a dual personality when it comes to inflation

P-CHIDAMBARAMVivek Kaul 

It is interesting to follow the views of finance minister P Chidambaram on inflation.
While addressing 
a banking conference in Mumbai on November 15, 2013, he had this to say: “Monetary policy has no impact on food prices…The only way we can contain food inflation is to augment supplies, but supplies are not entirely elastic. Supplies won’t increase dramatically in a short period of time. For supplies to rise we need great investment, great production, better distribution and better logistics. So we have a challenge.”
Inflation as measured through the consumer price inflation number has ranged between 8.4-12.4% over the past six years. What Chidambaram was essentially saying here is that a major reason behind inflation was food inflation. And there was no way the Reserve Bank of India(RBI) could control food prices by raising the repo rate i.e. the rate at which it lends to banks (or what Chidabaram refers to as monetary policy in his statement).
Fair point. Take the case of vegetables where the demand has risen risen much faster than supply. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled 
Agri 101: Fruits & vegetables—Cost inflation dated October 7, 2013 “Supply did respond, as onion and tomato outputs grew the most. But demand rose faster, with prices supported by rising costs.”
That being the case, there is nothing that the RBI can do about food inflation. Since food inflation has been a major reason behind overall inflation, there is not much that the RBI can do about inflation as well.
Now here is another statement that 
Chidambaram made on inflation in Singapore on November 21, 2013. “Several steps, including increase in the policy rate, have been taken and we hope that the WPI-based inflation rate will moderate to a level below 5 per cent,” Chidambaram said while addressing the second South Asian Diaspora Convention.
On November 15, Chidambaram felt that increasing the repo rate had no impact on food inflation. But six days later on November 21, he says exactly the opposite thing i.e. the RBI raising the repo rate will help control inflation. The wholesale price inflation (WPI) for the month of October was at 7%, the highest in this financial year.
Food items constitute nearly one fourth of the WPI index. If the wholesale price inflation has to fall from 7% to 5%, there needs to be major drop in food prices, which as Chidambaram said cannot be controlled by the RBI raising the repo rate.
The point is that within a week Chidambaram has made two exactly opposite statements on inflation. On November 15, he felt that the RBI raising the repo rate, had no impact on inflation. But by November 21, he was saying exactly the opposite thing i.e. the RBI raising the repo rate would help control inflation.
So the question is what does Chidambaram really believe in? Or does he change his message as per the need of the audience he is addressing? Does he say one thing in India and another abroad?
It needs to be pointed out that high inflation has been a part of our lives for more or less six years now. And six years is a long period of time to tackle the challenges on the supply side, that Chidambaram feels are the major reason behind inflation. Also, it is worth asking, where did this food inflation suddenly come from?
Economist Surjit Bhalla tackles this issue 
in his latest column in The Indian Express. As he writes “The logic of Indian inflation is relatively simple…What happens when the government raises the minimum support price (MSP) of foodgrains, especially that of rice and wheat, two crops that account for almost half the value of all the crops for which the government sets the MSP? When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up. Is it any surprise that rural wages have gone up so fast as to cause labour shortages in an economy with relatively jobless growth for the last nine years? For the last six years, rural wages have gone up by an average of 16 per cent. We don’t have reliable data on rural land values, but anecdotal data suggest that the price of this factor of production has also been rising faster than most prices in the economy. ”
And this in turn has pushed up the price of food, leading to food inflation and in turn consumer price inflation. Initially, the rural wages rose much faster than inflation. But finally the inflation has started to catch up. As Sonal Varma of Nomura Securities points out in a note dated October 24, 2013 “After adjusting for inflation, the decline was even more stark: real rural wage growth moderated to -0.1% y-o-y in August from 9.3% y-o-y in 2012 and 13.4% in 2011.” (y-o-y = year on year).
What also hurts is the fact that rural India spends a larger portion of their income on food, and with food prices rising at an astonishing pace, the rise in rural wages hasn’t been good enough. As Bhalla puts it “a dominantly large share of the expenditure of the poor is on food, and food prices have risen much faster than the average CPI increase of 10 per cent, resulting in a real wage increase of less than 3 per cent per year at best.”
To conclude, this is the real reason behind the high inflation of the last five years. And the RBI cannot do anything about it. And as far as Chidambaram is concerned, the least he can do is stick to offering one reason for inflation.

The article originally appeared on http://www.firstpost.com on November 25, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: