The strange and mysterious case of ouch! potatoes

 

 

In the early 1920s, the so-called “war guilt” clause of the Treaty of Versailles made Germany pay massive war reparations to the Allies. In 1921, the London Ultimatum made Germany pay 2 billion marks to UK in gold and foreign currency beginning a spiraling devaluation in the German currency. The Weimar Republic was plunged into the worst price rise in its history and the German mark crashed from a value of 60 marks to the US dollar in early 1921 to 8000 marks by December 1922. German debt and hyperinflation ruined its economy, an issue at the core of Hitler’s hatred as mentioned in Mein Kampf and eventually led to Nazi takeover. What followed was the darkest hour in all of human history. This was the first ever instance when the far-reaching effects of inflation were realised and recorded. Till date the mystic tale of love and hate between inflation and interest rate remains unsolved. And with India becoming a shining beacon of world economy, taming inflation remains the toughest nut to crack ever since its tryst with liberalisation began.

With the developed world just about standing up after falling flat from the worst recession since the Great Depression, India has already started running following big brother China. Prices of almost all consumer durables and property have remained cheap or risen only marginally in the last year. Halt! For the middle and upper classes buoyed by the wealth generated by a services-led economy and massive FDI completely forget that more than 70% of India’s population, which also forms nearly 90% of India’s electorate, spends more than 80% of its income on only feeding their stomachs. And with food price inflation reaching 20% in the last few days, there could not have been a more inflated New Year gift for the famished. There are a multitude of factors responsible for this renewed threat. Even rain god Indra turned its back to the poor and labour class already out of jobs due to dwindling exports with India registering its worst ever monsoon in 37 years. With food grain production sliding and tonnes of kharif crop wiped out by drought or untimely floods in some regions, there is a severe supply side constraint which has fuelled food prices. Simultaneously, with a huge chunk of the labour force out of jobs due to plummeting of fortunes of the textile, jewellery and leather industries, the millions of rural returning labourers are stretched to the hilt to afford two meals a day. Hence, despite the over hyped success of NREGA and the farm loan waiver put in place that brought UPA thumping back to power, Incredible India could face the same fate as ‘India Shining’.

The recent mass demonstration by sugar producers could just be the tip of the iceberg that is about to slam India’s economic ship. In fact, the current year’s Wholesale Price Inflation (WPI) is likely to end at 7 per cent or more. But the real yardstick to measure the affordability of the common man, the Consumer Price Inflation (CPI) might again reach the debilitating range of 12-13% as it did around two years ago. Not just this, with a sudden splurge in the capital markets by revived influx of foreign investors and the excessive overpricing of stocks and IPOs is leading to a scenario where an asset price bubble could form pushing the overall inflation further. In fact, according to Dr Mukesh Anand, Senior Economist, National Institute of Public Finance and Policy (NIPFP), “Especially at a time when per capita (disposable) incomes are also rising, over-capacity in key (core manufacturing) sectors has led to burgeoning costs pushing prices up.” And one factor that would definitely make the ground more slippery for UPA regime would be the global oil prices pushing hard to relive ‘glory days’ of early 2008. With crude already near the $80 mark, this is one slippery terrain which can derail the growth engine once again.

Although with government advisors and RBI experts claiming that there is no need for any monetary tightening as the prices will flatten out with the rabi crop about to hit markets, there is no denying the fact that this is yet another test on the tightrope for the UPA to balance credit availability to India Inc. thereby creating jobs and taming inflation. Unfortunately, as long as politicians continue to play ‘sugary’ politics and developmental issues remain on the backburner, high liquidity would continue to chase few assets and demand would continue to rise. As Dr Anand asserts that to put the leash on inflation especially with regards to food, “only long term solution lies in achieving rapid rise in productivity that can control or bring down costs per unit of production - vast possibilities remain in this regard.”

But with the trinity of abysmal infrastructure, rogue politicians and burgeoning population ruling the roost, no central banker, interest rate cut or monetary tightening can climb this stallion without hurting the backbone. For now, the only definition that can be given to inflation, as in the words of Milton Friedman, is “inflation is taxation without legislation”.