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Inflation Vs Growth


Let me start by defining what Inflation is: the rate at which the general level of prices for goods & services soar which means the purchasing power of the country surges. Generally, a country tries to maintain single digit inflation rate, but perhaps a low inflation rate can also be a downside for a country. To control inflation, the central bank does tighten the monetary policy e.g. increase in the interest rate. An increase in the interest rate has a side effect of curtailing the investment & employment leading to a slump in growth. India saw a sharp downfall in growth for about 5 years after higher interest rates during 1995-96. The tussle always subsists between Inflation & Growth in any country, especially developing economies. There exists one school of thought which says that higher interest rates contain inflation & another school of thought says that lower interest rates lead to better growth. Bone of contention!! For instance, recently RBI went for 2 subsequent hikes of interest rate with a hike of 25 bps on repo & reverse repo rate on 2ndof July & another 25 bps on 27thof July to contain the inflation. But being a little pragmatic, as expressed earlier, higher interest rates can lead to unemployment, so a person would prefer a low paying job with 12% of inflation rather than no job. So I put myself in the second school of thought, higher growth with less interest rate & inflation. But is this possible?

India uses CPI (Consumer Price Index) for the calculation of Inflation rate. With over a billion of people, quality food for all seems to be a distant dream. This is predominantly because of higher food prices which a common man finds it difficult to pay. So containing food inflation is the first step towards curbing the inflation in our country. There are two strategies to curtail food inflation keeping the interest rates at bay. This will indeed check the sustainability of the agricultural sector as India is primarily dependent on agriculture. 1. Enhancing the productivity of farms 2. Improved Public Distribution System (PDS)

Enhancing the productivity of farms:

Our agriculture chiefly depends on monsoons: we are betting on a good monsoon this time which can indeed leave a positive impact on food inflation. But chasing the monsoon each year is simply unfeasible. So improving the productivity of our farms will give a better yield & thus lower the prices of food. A study predicts that there is 6% increase in water consumption by agriculture sector by 2025. So the sustainability question is how to yield better with less usage of water or resources in general?

Firstly, practice of effective use of resources like water, energy. Average farm size of India is 2.3; with 80% of the farms under 2 hectares. Predominantly Indian agricultural system uses flood irrigation which consumes three times more water than it should. So, low cost drip irrigation & use of treadle pump for irrigation is best for small plots. They are cost efficient & consume less energy & water.

Secondly, investment on R&D in the agriculture sector should be increased & made more effective. For instance, China along with researchers in Philippines has developed aerobic rice, a new way of growing rice in water shortage areas. So we should also concentrate on situation based innovation in this sector. For that the government should invest in effective R&D.

Third, agro business houses should take initiatives to enhance the production of the farms in our country & make it an attractive industry to work in by corporate tie-ups. There is an intimidation for shortage of skilled human resource base for farming as people are migrating to cities for better prospects or national acts such as NREGA which is attracting many farmers. For instance ITC’s agro business has joined hands with ICAR (Indian Council for Agricultural Research) to promote nutrition rich sorghum using e-choupal facilities. This kind of corporate bonding with agriculture would give confidence for the human resource to work & progress. So these 3 main conducts can better enhance the productivity of agricultural farms.

Improved Public Distribution System (PDS):

Despite India ranking 2nd in the farm output & 2nd largest producer of vegetables & fruits, food inflation is high. This calls for a better supply chain of food products, Public Distribution System. For instance, 17.8 MT of wheat are lying with Food Corp of India (FCI) in open plinths, prices have escalated despite the huge buffer stock. A fresh estimate from the ministry of food processing says a whopping Rs 58,000 crore (Rs 580 billion) worth of agriculture food items get wasted in the country every year. So India seems to be a largest producer of food products but not the largest supplier. There has to be a complete revamp in the current supply chain system. First, procurement should be done without intermediaries & with complete transparency. Second, Logistics & Warehousing in which the system calls for huge investment. This can be improved by having better cold storage units, silo system for different products, deployment of efficient manpower to take care of the same. Third, Distribution model in which the government has to revamp the way it worked by enabling technology in place. Proper deployment of technology like biometrics can improve on the system by reducing flaws like corruption & authoritative burglaries. So these 3 conducts can better reduce the wastage of food products which is directly proportional to food inflation.

These practices which are not insurmountable can bring about a positive change in growth of our country without having inflation as bane. For a better tomorrow, we ought to follow such sustainable practices to cater the growing population. If small potholes like this along the way are filled, we could easily build a smarter India.

Sharanarthy Jaswanth, BLP 2011