In the past few months we have had different kinds of statements claiming that India’s inflation is being fuelled by speculations, international situation, oil prices, excess money, shortage of goods, subsidies, export bans and import restrictions. But what can we do to beat inflation? These are the few questions this brief would like to answer.

1. What is the relation between subsidies on fuel, fertilizers and food and inflation?

    

2. What can be done to curb inflation?

    

3. Is it just a regular, cyclical phenomenon or is it here to stay?

    

4. What are the short-term and long-term effects of our current actions?

Inflation in the current scenario

Though a lot has been written about inflation recently, it is worth our time to look at the reasons behind this phenomenon which is shaping the global landscape unprecedentedly.  Inflation  has never had such profound effect globally as it is having now. The inflation shocks during world war and 1970's still worry us but they owe their occurrence to the geopolitical situation at that time. It is quite different this time. The reasons are not difficult to find-:

1. Weakening of dollar: It goes without saying that the dollar has been the mainstay of world trade in the last century. The downslide of US economy, sub-prime crisis being the immediate cause, has lowered the investor's confidence. Apart from US geopolitical failures fuelling widespread resentment, the rise of BRIC (Brazil, Russia, India and China) on the model of Japan (as export oriented destinations) has changed the trade equations. The west is no longer unchallenged. And it is here to stay.

2. Price of oil: The current unthinkable spurt in oil prices can be attributed to the following short and long term events:

a) Less investment in oil infrastructure: There has not been any major discovery in the oil sector in the last decade. Oil companies have been more worried about their market shares and capturing new markets rather than investing in oil exploration.

b) Speculation in oil exchanges:mWith the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices. Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. And thus the usual speculation, which identifies with share prices, characterizes the oil price now.

c) Exaggeration of oil reserves: The OPEC has lon been overstating their oil treasure to boost their country's standing and image. The reality is demanding a price now.

d) weakening of dollar: Oil is traded in dollars world wide. Thus the rising price.

 3. Price of food: Negligence of agriculture is the only process which we can find common in poor and rich countries in the last half a century. Agriculture refers to producing eatables such as cereals and staple food, required for survival. Rich countries have been neglecting it for biocorn which fuel their cars. Poor countries have been neglecting it on the rich countries' behalf and for other globalisation opportunities.The land for food is shrinking day by day. Thus less food production, which has converted food surplus countries to food deficit ones. And hence the global mayhem unseen in the modern past.

Subsidies and Inflation

Government spends a huge amount in subsidies on fuel, fertilizers and food. Fuel prices in India have increased by a much lesser percentage compared to the global prices. Then why are the food prices increasing? It's more due to supply shortfalls in food production. Desired quality and quantity of fertilizers not reaching the farmers, lack of irrigation infrastructure and land mismanagement has led to decreased food productivity over the years. This has proved suicidal for the farmers and the agricultural health of the country has been badly affected. Subsidies are meant for the poorer sections of the society to make their living affordable. It works when the supply is there. Now when the supply itself is inadequate, the desired effect of subsidy is negated.

How to curb inflation

 The current surge in inflation is primarily due to supply side constraints. But a combination of monetary, fiscal and supply side measures can be put in place to tackle inflation. Following is a brief description of category wise steps which can be taken-:

1. Monetary: The Reserve Bank of India can increase short term interest rates to drain liquidity from the financial system and cool down fears of inflation in the near future. Global oil prices have

contributed the most to the inflationary pressures world wide. But the central bank is helpless in this case. Though another major worry for the central bank is the dollars brought in by the foreign institutions in truckloads. And it is because of the downside of the greenback that is forcing foreign investors to park their money elsewhere.  The RBI buys these dollars in exchange for the printed currency which increases money suplly in the domestic market and thus inflation. RBI buys US Treasury bills with these dollars to accumulate forex reserves. So the tendency to accumulate forex reserves should be curbed and sale of dollars can be encouraged which can be consumed for imports.

2. Fiscal: Custom duties must be reduced on the import items which are being consumed on gigantic scale. Melting scrap for iron and steel are some of them. Crude oil suffers from a highly irrational pricing mechanism in India. Bothe centre and states impose a duty on the crude to narrow their budget deficits.

3. Supply side: Supply side measures can only be long term and simple. Oil supply has more or less reached its peak with the current reserves. More exploration initiatives need to be taken by the GOI in foreign fields for e.g. in Venezuela which is still untouched by Indian oil majors. At the same time, it is better to increase the proportion of renewable sources of energy to power growth. To ease pressure on the food supply, agriculture should be given the top priority for the next ten years. Availabilty of fertilizers, fullstop on mindless transfer of land to SEZs, higher MSPs for staple food items and enlargement of irrigation facilities are some of the steps which require immediate attention, both at the centre and state level.