There is one question that is troubling me the most since my exams got over a couple of weeks back. Why are the prices hitting sky and beyond even though our economy is running under negative inflation? I am not an economist but still the curiosity to understand what is going on around us rings an alarming threat that we could witness in very near future. After a deep analysis I am convinced that it is nothing but a simple case of supply vs demand issue. Is the matter so simple? Not really! In the quest of showing up a dramatically sustainable growth by a developing country, we are heading in the worst possible direction.
Let me elaborate on what I mean. Our government is trying hard to give all possible kind of sops for certain class of people to ensure the vote bank and to woo people to stay in power for ever. Just to quote an example, consider the price of rice. A common man has to shell out atleast Rs 35/- per kg, where in through public distribution system majority of the Indian population is getting at a price of around Rs 2 to 5 in various states. Why do we have such a huge difference for the same commodity? Root cause may be affordability for them. Actually, it is not. The true root cause is middle man. A farmer in India gets around Rs 1000/- as the minimum support price per quintal(100 kgs). Given this price as the baseline, it can’t go beyond 100% increase from its actual value even if it reaches a common man through supply management chain. Ideally the price should have been around Rs 20/- per kilo including grain refinement, transport, taxes etc., To add to this, the nature hasn’t been the same as before. Irregular rainfalls, ever decreasing ground water levels, floods, chemical fertilizers, pesticides etc., adding their part of woes too! The major concern is with the middle men between the producer and consumer which is actually killing the economy. My strong argument is that, these middlemen are creating a non-existent demand supply imbalance and that is leading to unprecedented hike in the price of groceries. Shopping malls have become a symbol of developing nations. To take a name Big Bazaar has about 1000+ malls in the country. Each such mall will have at least 10 quintals of rice in stock. They are purchasing from various places as if there is no tomorrow. This is causing a pseudo shortage in market, in turn pushing the price by a bit more. Is this the kind of eco-system we want to live in? Since here exists such a huge gap between producer and consumer in the form of a middle man, the affordability has gone to extremes. To feed those below poverty line, government has to provide rice through PDS at a subsidized rate. This boils back to Tax Payer! So, where would you attack this problem? Can you solve this forever through PDS or you want to tackle the ‘middle men’? For our governments stock market is everything, corporate India is the face of the nation and they tweak all rules to protect the corporates.
Similarly, crude oil prices have gone up and related companies are bearing the burn out. So, increase the oil prices and keep the corporate India and stock market happy again. What is the ripple effect of such a steep hike in petrol and diesel? Does any concerned person care about such things? Our ministers want to be loyal to those companies because they give the funds to parties when they need the most, which is absolutely tax free! No wonder we have the prices going high and high even under negative inflation! Jai Ho India…
I have shared my thoughts on consumer side so far, the story on the producer side is even more devastating because of our great politicians policies. I will write about farmers woes in my next post. In the meanwhile, I have a question for you all… are we heading in the right direction? Think about it.
Elaya Kumar S says
Dear Mohan,
The concern expressed by you in the blog is good.
We are living as though there are no tomorrows. We have to leave a better legacy to the younger generation. Materialism and Consumerism have taken deep roots in our culture. The infrastructure grown with the money from public exchequer is being thrown open to the corporate sector at a pittance.
Previously when I used to travel between Vellore and Bangalore/Chennai I used to see a lot of green fields on both the sides. But now each and every piece of land is taken over and converted to SEZs. In my area the leather belt (Ambur, Vaniambadi, Tirupattur and Pernambut) has spoiled the entire soil nutrients by indiscriminately polluting the lands.
I think we are prioritising on the wrong side. Gandhi thought of the development of the common man whereas today’s politicans/rulers take decisions keeping winning the next elections as their priority.
Elaya Kumar S
Ray says
Mohan,
I fear the Indians have taken a page out of the U.S. playbook so to speak. The difference is at least your government is honest about the true level of inflation.
Shreeni says
Chitra: I don’t think petrol prices should come down – read this very well thought out article by Swaminomics – http://economictimes.indiatimes.com/Opinion/Columnists/Swaminathan_S_A_Aiyar/Case_against_cutting_oil_price/articleshow/3614848.cms – fluctuating the price with every Oil movement won’t allow us to make relatively permanent alterations in oil consumption.
Chitra says
My pocket money is all going for filling my bike. Increasing the petro prices close to 10% is no good for any Indian. Since crude oil price has come back to around $30 per barrel, can we expect a price cut Mr. Petro minister?
Mohan says
You mean $60 I suppose!
kishore says
Don’t worry about these things so much dude.. be cool. Thin of our Ex finance minister, who said – “Everything that goes up has to come down”. So chill out – forget not he is from Harvard University… so it must be true :-p
Sathya says
Hi Mohan,
What we have negative is called the WPI or Wholesale Price Inflation. This is measured at the production side and not near the consumption side.
There is another measure of inflation called CPI – Consumer Price Inflation which is currently hovering around the 10% (somewhere near) – This measures the inflation faced by the end consumer.
Cheers,
Sathya
Mohan says
Thanks for the info Satya. I wasn’t aware of existence of 2 indices when it comes to inflation! Now let me figure out what each one stands for and what it actually indicates 🙂
Shreeni says
Mohan: your post seems to be a lot of opinions and little data – examples:
1. How do you know that the Big Bazaars are stocking so much rice?
2. People using PDS are not a “majority”.
3. How did you decide that the difference between support price and retail price should only be 100%?
4. The Rs. 35 retail price you quote is for high quality rice that does not goes through the support price concept at all. The ones that go through PDS should be available at not more that Rs. 18-20.
5. In the case of rice or crop management, the Indian Govt has shown no bias towards corporates – so why mention that here? Seems like a out-of-context rant.
please find time to look through these and respond. 🙂
Mohan says
Shreeni, thanks for your inputs. Appreciate such challenging questions. Let me try to answer few of them as I don’t have concrete data 🙂 Like I have mentioned very initially in the post, I am not an economist, but trying to understand the system!
1. Big Bazaar had made a public announcement through print media sometime back where in they claim that they purchase 26,000 tonnes of rice annually! – I couldn’t find the english version of this ad. However here is kannada version if you want to refer to – http://2.bp.blogspot.com/_z_BPo98TPjs/Se2v3heIS2I/AAAAAAAAJlw/1eOQ0TwJp9w/s1600-h/Rice-Price-bigbazaar.jpg [Thanks to eNidhi]
2. Though our planning commission pegs BPL population at 28%, another commission [NC Saxena committee] constituted by rural development ministry wants to raise that to 50% – more info here : http://bit.ly/1aYS0p
3. We are talking about food grains here and not about some precious metals! Though I have taken some percentage number, I find no reason why it should be more than double the actual production cost when it reaches the consumer?
4. I am referring to moderate quality rice price in the current market. Things have changed drastically since you have moved… for example toor dal costs 96/- per kilo while it was around 50 a month back. Price story of other dal’s isn’t any different.
5. It isn’t out of context, seems like I have failed to put it properly in words. I was referring to the kind of attention corporate sector is getting over agriculture and the affordability levels of an end consumer. I will share more details in my next post on how the cascading effect exists due to the number of levels at which the supply chain system is operating.
I completely agree with you that I have been very lame is quoting my opinions without proper data. It was more of a collation of ideas from various sources I have been coming across media. I will ensure to be more practical with appropriate data going forward :). Thanks for your inputs!