INDIA'S SELF INFLICTED WOUND: FOOD INFLATION..( By S Ramamoorthy )
In his 6th Monetary Policy statement announced on 05.Aug.2014, RBI governor Raghuram Rajan has made his point clear that his target of CPI (Consumer Price Index) inflation rate is 8 % by Jan 2015 and 6 % by Jan 2016 which means that Industry cant expect Repo Rate Cut ( rate at which RBI lends to Bank) in near term. With out Repo Rate Cut, recovery of GDP growth ( Last FY GDP growth rate is4.6 %) is next to impossible.
Well, Let us look in detail about CPI Index....Question are as follows
A. What is CPI rate and how it affects common people like us ?
B. Whether Raghuram Rajan can tame the CPI by just playing with Repo rate or at the cost of compromising the GDP Growth?
C. What will be real danger of sacrificing the GDP growth for CPI Inflation?
A.WHAT IS CPI INFLATION?:
It is the inflation rate being released by "Ministry of Statics and Program Implemention (MOSPI) " on every second monday of the month..CPI inflation rate is believed to be the real inflation rate in the economy being faced by common people like us .CPI inflation rate of India in June 2014 was 7.31 %
Following are the major weightage given in the CPI Index
1. Food, Beverage & Tobacco : 49.71 %
2. Fuel & Light : 9.49 %
3. Housing : 9.77 %
4. Clothing & Foot Wear : 4.73%
5. Miscellaneous : 26.31%
It is clear from above that Food & Fuel are the major constituents ( 60 %) of the CPI inflation Index
Mr.Raguram rajan believes to control the price of Food & Fuel by just manipulating the Repo Rate or by killing the GDP growth rate which will increase the unemployment and social unrest.....Let us see below, why it is impossible for Mr.Rajan to tame the CPI inflation as he desires and How he will finally end up killing so called Indian Growth Story
B. WHETHER RAGURAM RAJAN CAN TAME THE CPI BY JUST MANIPULATING THE REPO RATE OR AT THE COST OF COMPROMISING GDP GROWTH?
Agriculture contributes only 13 % to the $ 2 Trillion Indian GDP. Rest are Services ( 65 %) and Manufacturing ( 22 %)..But worst part is that agriculture employs 50 % of indian population compared to service and Manufacturing which means that 60 billion people of India is sharing the 13 % revenue of India where as remaining 60 Billion people are sharing 88 % of Indian revenue...This is the real cause for social imbalance. Real solution to the social imbalance is to move out people from Agriculture to Service & Manufacturing which can only solve the social imbalances.
Now Big question is that why Food Prices are always high in India. Let us see....
We all know that inflation is nothing but supply, demand mismatch...When demand of a product surpasses the supply, it will result in inflation? Whether it means that India's agriculture production is very less compared to the demand of people.. BIG NO.........India;s Rice production in this year is 106 million MT and Wheat production is 95 million MT..India is second largest producer of Vegetables, Fruits & Milk item in the world.....This production rate is more than sufficient to feed 1.2 billion .....So Supply side, we are infact producing more goods than what we can consume......If it is the case, interesting question is that How Prices of Food items increases every year?......Who is the culprit?........Main culprit is UPA government led by Sonia gandhi........Let see in detail
1. Indian Agriculture market is controlled by Government which is procuring more than 40 % rice & Wheat production in the economy without having sufficient warehouse facilities resulting in rotten of Wheat & Rice....This over procurement limits the availability of grains in the open market resulting in inflation where middle class people like us buy that ....For example, Food Corporation of India has stock of 67 million MT of Rice & Grain well above the requirement for Public Distribution System which requires only 30 million MT.....Extra 37 million MT grains are getting rotten every year.
.jpg)
2. Poor Public Distribution System: Even though GOI spends Rs 1.25 Lakh Crore rupees for Food Subsidy out of which only 43 % of the food grain reaches the people who are in need. Remaining 57 % are being looted...
3. Common sense is that why government is unnecessary buying more Grains that also at higher Prices famously being called as Minimum Support Price which is being revised every year regularly....Reason is pure vote Bank Politics......India spends Rs 1.25 Lakhs crores as food Subsidy every year and Indian Governement is currently spending Rs 143 for every Rs 100 it earns which means that Government is raising Rs 4.5 Lakhs Crores Loans from open market every year to spend in unproductive assets like this because of Farmers Votes....
4.Since Minimum Support price is very attractive, getting revised every year and above the market price, farmers are more interested to produce Rice & Wheat rather than Vegetables, Cerals & Fruits resulting in less production of Vegetables, Cereals, Fruits
5. Another main culprit for Food inflation is that NREGA ( National Rural Employment Guarantee Act) famously being called us 100 Days employment scheme....GOI spends Rs 33000 Crores every year for this scheme which is pulling Labors from Agriculture to this since work load is nothing here...This increases labor shortage for the farming & construction resulting in higher cost of production for Agriculture goods...This Rs 33000 Crores money in the hand of poors further increase the demand for food items without increasing the supply.
6. Another worrying fact is that 18 % of indian agriculture production are getting rotten due to insufficient Cold Storage Facilities resulting in loss Rs 44000 Crores...India has cold Storage facilities just enough to store the 30 Million MT of Agriculture goods which is 50 % less than the required capacity.....It will cost Rs 55000 Crores rupees to create the cold storage faciltiy which GOI is not ready to invest.
7. Problem of Middle Men: Indian Agriculture market is mostly controlled by Middle Man Mafia..This is very unregulated and they are indulging in Hoarding of Goods just to create artificial demand...
So India's food inflation is self inflicted wound which can only be healed by taking following steps
1. Government should not interfere in the Agriculture Market. Government should immediately withdraw the subsidy being wasted here.Let Market Pressure determine the Price of the goods.
2. Allowing FDI in retail: Only FDI can make Investment Like Rs 55000 Crores to create sufficient Cold Storage Facility to prevent 18 % of Goods getting rotten every year. This entry of FDI will automatically curb the Middle Man role ending Hoarding Practices.
3. Allowing Corporate Farming: Small Farmers cant bring the best practices from the world..India's yield rate per Acre is very low compared to the International Standard.It is only corporate can bring theWorld Class practices to India resulting in higher production.
SO FOOD INFLATION SEEMS STRUCTURAL ISSUE THAT CAN'T BE CONTROLLED BY JUST MANIPULATING WITH REPO RATE
C. WHAT WILL BE THE REAL DANGER OF SACRIFICING THE GDP GROWTH FOR CPI INFLATION?
So far, we have seen that Food inflation ( 50 % of CPI) can't be tamed by controlling the Repo Rate as RBI thinks..As long as Repo Rate is high, substantial recovery in GDP growth is not possible....Let us see what are the side effect of Lower GDP growth?
1. 12 Million Graduates are entering into job market every year.To create employment for them, GDP should grow at the rate of 8 - 9 % every year or most of the 12 million will be job less and if it continues for 2-3 year, their future will be ruined
2. Lower GDP growth & Higher Unemployment growth will lead to social unrest and crime.....I correlate the support for Anna Hazare & Arvind Kejriwal with Lower Growth since when people lose faith in the system, they will seek change which may finally result in people springs as happened in Middle East.
SO IT IS VERY HIGH TIME TO CONCENTRATE ON HIGHER GDP GROWTH RATHER THAN DEFENDING THE INDEFENSIBLE.
In his 6th Monetary Policy statement announced on 05.Aug.2014, RBI governor Raghuram Rajan has made his point clear that his target of CPI (Consumer Price Index) inflation rate is 8 % by Jan 2015 and 6 % by Jan 2016 which means that Industry cant expect Repo Rate Cut ( rate at which RBI lends to Bank) in near term. With out Repo Rate Cut, recovery of GDP growth ( Last FY GDP growth rate is4.6 %) is next to impossible.
Well, Let us look in detail about CPI Index....Question are as follows
A. What is CPI rate and how it affects common people like us ?
B. Whether Raghuram Rajan can tame the CPI by just playing with Repo rate or at the cost of compromising the GDP Growth?
C. What will be real danger of sacrificing the GDP growth for CPI Inflation?
A.WHAT IS CPI INFLATION?:
It is the inflation rate being released by "Ministry of Statics and Program Implemention (MOSPI) " on every second monday of the month..CPI inflation rate is believed to be the real inflation rate in the economy being faced by common people like us .CPI inflation rate of India in June 2014 was 7.31 %
Following are the major weightage given in the CPI Index
1. Food, Beverage & Tobacco : 49.71 %
2. Fuel & Light : 9.49 %
3. Housing : 9.77 %
4. Clothing & Foot Wear : 4.73%
5. Miscellaneous : 26.31%
It is clear from above that Food & Fuel are the major constituents ( 60 %) of the CPI inflation Index
Mr.Raguram rajan believes to control the price of Food & Fuel by just manipulating the Repo Rate or by killing the GDP growth rate which will increase the unemployment and social unrest.....Let us see below, why it is impossible for Mr.Rajan to tame the CPI inflation as he desires and How he will finally end up killing so called Indian Growth Story
B. WHETHER RAGURAM RAJAN CAN TAME THE CPI BY JUST MANIPULATING THE REPO RATE OR AT THE COST OF COMPROMISING GDP GROWTH?
Agriculture contributes only 13 % to the $ 2 Trillion Indian GDP. Rest are Services ( 65 %) and Manufacturing ( 22 %)..But worst part is that agriculture employs 50 % of indian population compared to service and Manufacturing which means that 60 billion people of India is sharing the 13 % revenue of India where as remaining 60 Billion people are sharing 88 % of Indian revenue...This is the real cause for social imbalance. Real solution to the social imbalance is to move out people from Agriculture to Service & Manufacturing which can only solve the social imbalances.
Now Big question is that why Food Prices are always high in India. Let us see....
We all know that inflation is nothing but supply, demand mismatch...When demand of a product surpasses the supply, it will result in inflation? Whether it means that India's agriculture production is very less compared to the demand of people.. BIG NO.........India;s Rice production in this year is 106 million MT and Wheat production is 95 million MT..India is second largest producer of Vegetables, Fruits & Milk item in the world.....This production rate is more than sufficient to feed 1.2 billion .....So Supply side, we are infact producing more goods than what we can consume......If it is the case, interesting question is that How Prices of Food items increases every year?......Who is the culprit?........Main culprit is UPA government led by Sonia gandhi........Let see in detail
1. Indian Agriculture market is controlled by Government which is procuring more than 40 % rice & Wheat production in the economy without having sufficient warehouse facilities resulting in rotten of Wheat & Rice....This over procurement limits the availability of grains in the open market resulting in inflation where middle class people like us buy that ....For example, Food Corporation of India has stock of 67 million MT of Rice & Grain well above the requirement for Public Distribution System which requires only 30 million MT.....Extra 37 million MT grains are getting rotten every year.
2. Poor Public Distribution System: Even though GOI spends Rs 1.25 Lakh Crore rupees for Food Subsidy out of which only 43 % of the food grain reaches the people who are in need. Remaining 57 % are being looted...
3. Common sense is that why government is unnecessary buying more Grains that also at higher Prices famously being called as Minimum Support Price which is being revised every year regularly....Reason is pure vote Bank Politics......India spends Rs 1.25 Lakhs crores as food Subsidy every year and Indian Governement is currently spending Rs 143 for every Rs 100 it earns which means that Government is raising Rs 4.5 Lakhs Crores Loans from open market every year to spend in unproductive assets like this because of Farmers Votes....
4.Since Minimum Support price is very attractive, getting revised every year and above the market price, farmers are more interested to produce Rice & Wheat rather than Vegetables, Cerals & Fruits resulting in less production of Vegetables, Cereals, Fruits
5. Another main culprit for Food inflation is that NREGA ( National Rural Employment Guarantee Act) famously being called us 100 Days employment scheme....GOI spends Rs 33000 Crores every year for this scheme which is pulling Labors from Agriculture to this since work load is nothing here...This increases labor shortage for the farming & construction resulting in higher cost of production for Agriculture goods...This Rs 33000 Crores money in the hand of poors further increase the demand for food items without increasing the supply.
6. Another worrying fact is that 18 % of indian agriculture production are getting rotten due to insufficient Cold Storage Facilities resulting in loss Rs 44000 Crores...India has cold Storage facilities just enough to store the 30 Million MT of Agriculture goods which is 50 % less than the required capacity.....It will cost Rs 55000 Crores rupees to create the cold storage faciltiy which GOI is not ready to invest.
7. Problem of Middle Men: Indian Agriculture market is mostly controlled by Middle Man Mafia..This is very unregulated and they are indulging in Hoarding of Goods just to create artificial demand...
So India's food inflation is self inflicted wound which can only be healed by taking following steps
1. Government should not interfere in the Agriculture Market. Government should immediately withdraw the subsidy being wasted here.Let Market Pressure determine the Price of the goods.
2. Allowing FDI in retail: Only FDI can make Investment Like Rs 55000 Crores to create sufficient Cold Storage Facility to prevent 18 % of Goods getting rotten every year. This entry of FDI will automatically curb the Middle Man role ending Hoarding Practices.
3. Allowing Corporate Farming: Small Farmers cant bring the best practices from the world..India's yield rate per Acre is very low compared to the International Standard.It is only corporate can bring theWorld Class practices to India resulting in higher production.
SO FOOD INFLATION SEEMS STRUCTURAL ISSUE THAT CAN'T BE CONTROLLED BY JUST MANIPULATING WITH REPO RATE
C. WHAT WILL BE THE REAL DANGER OF SACRIFICING THE GDP GROWTH FOR CPI INFLATION?
So far, we have seen that Food inflation ( 50 % of CPI) can't be tamed by controlling the Repo Rate as RBI thinks..As long as Repo Rate is high, substantial recovery in GDP growth is not possible....Let us see what are the side effect of Lower GDP growth?
1. 12 Million Graduates are entering into job market every year.To create employment for them, GDP should grow at the rate of 8 - 9 % every year or most of the 12 million will be job less and if it continues for 2-3 year, their future will be ruined
2. Lower GDP growth & Higher Unemployment growth will lead to social unrest and crime.....I correlate the support for Anna Hazare & Arvind Kejriwal with Lower Growth since when people lose faith in the system, they will seek change which may finally result in people springs as happened in Middle East.
SO IT IS VERY HIGH TIME TO CONCENTRATE ON HIGHER GDP GROWTH RATHER THAN DEFENDING THE INDEFENSIBLE.
No comments:
Post a Comment