Inflation and common man

MOUNTING INFLATION AND THE COMMON MAN
Ruddar Datt

The wholesale price index (WPI) touched the high level of 226.0 by end March 2008 as against 210.4 end March 2007 (1993-94=100) signaling 7.4% rise in WPI during the year, highest witnessed during the last ten years. It crossed the limit of 5 percent comfort zone specified by RBI. Consequently, UPA government was upset due to the inflationary rise of prices.
Critics, however, raised issues about the flawed measurement of WPI. Parliamentary Standing Committee on Finance headed by BJP leader Ananth Kumar recommended revised price indices, but the Government has shown inordinate delay in adopting its recommendations. Similarly, in 2005, Taskforce headed by Dr. Abhijit Sen, member, Planning Commission recommended updating the base year, instead of continuing 1993-94 as the base year; increasing the number of commodities and making changes in weightage given to different commodities. Such changes would give a higher rate of inflation and thus, the Government is holding back its revision of WPI. The Committee had recommended 2004-05 as the base year.
However, there is a gap between the perception of the Government and that of ‘aam admi’ (Common man) who is experiencing a much higher retail inflation. The Government, was experiencing a sharp rise in prices of foodgrains, especially rice and wheat and pulses and besides that of vegetables and fruits. The Common man was experiencing double-digit inflation and according to one estimate, about another 10 crore people have been pushed below the poverty line due to the impact of recent price inflation.
The Government tried to take shelter behind the plea that inflation in India was part of global inflation. During the short span of 8 months between August 2007 and March 2008, global price of coconut oil has risen by 61%, groundnut oil by 71%, maize by 54% and Thai rice by 72%, US wheat by 74%, bananas by 76% and sugar by 35%. According to World Bank data, between August 2007 and Mrch 2008, low and middle income countries have witnessed 73% rise in the prices of agricultural products, 88% in foods; 71% in fats and oils and 105% in grains. But all this was cold comfort for the poor people and the plea of the Government did not cut much ice.
To douse the anger of the common man, Government adopted ‘Fire Fighting Approach’ to tackle inflation. The following measures were announced:
*Scrapped import duties on edible oils
*Banned export of basmati rice
*Reduced duty on maize imports from 15% to zero
*Extended ban on export of pulses for one year
*Banned export of edible oils
*Withdrew export incentives in steel and cement.
The principal objective of the Government was to make available supply of foodgrains, pulses, edible oils for domestic use and to facilitate the import of these commodities to reduce the impact of supply constraint. But these measures did not produce the desired effect.
Another problem is the wide gap in the prices of food items in the wholesale mandis as revealed by the figures of Agricultural Produce Marketing Committee and those charged by retailers. The Government should have set up distribution centres or used the PDS shops after making bulk purchases from wholesale markets and thus provided a competitive and countervailing structure to provide relief to the consumers which it has failed to do. Such a firefighting measure would have mitigated the hardship for the consumers and tamed the middlemen who are making huge profits taking advantage of the prevailing scarcity.
Failure to improve growth rate in agriculture
Basically, the present inflation, which is driven by the prices of foodgrains, pulses, vegetables and fruits is not a demand-driven inflation, but is the result of failure government policy on the agricultural front to raise output. It is the supply constraint that has fuelled inflation.
During the last 4 years of UPA government (2004-05 to 2007-08), production of foodgrains, especially rice, wheat, pulses, potato has shown stagnation, whereas the population has been growing at the rate of 1.5% per annum and reached a level of 1,130 million. Overwhelmed by the GDP growth rates during 2004-05 to 2006-07, driven by high growth in industry and services, the Government neglected agriculture. This is evidenced by the fact that public investment in agriculture, especially irrigation, stagnated to 0.4% of GDP during the 4-year period (2002-03 to 2005-06).
There is a dire need to raise productivity in states where yield levels are low in agriculture. For the extension of seed-fertilizer technology to secure better yields, irrigation is a basic necessity. But facts stare us in the face that during 2000-01 to 2005-06, there has been very little increase in irrigated area, specially in two major crops, viz., rice and wheat.
As data reveals that irrigated area under wheat ranged between 23 to 24 million hectares and that under rice oscillated within the narrow range of 24-25 million hectares and that of pulse ranged between 3 to 3.7 million hectares during 2000-01 and 2005-06. This was the result of a fall in public sector investment during the post-reform period. There is a concomitant need for better utilization of water, whether made available due to rains or melting of snow. This requires a major compaign for water-shed development so that the utilization of water is significantly stepped up. This is specially important for regions which have sufficient rainfall. The two measures extension of irrigation and watershed development can trigger a second green revolution in poor and backward states, and also save soil from the dangerous effects of water logging and soil depletion. Both will require substantial step up of public sector investment. Government seems to have realized its mistake and is making efforts to raise the level of investment in agriculture.
Minimum Support Price for Farmers
Another problem which has affected agriculture is the Minimum Support (MSP) for farmers. Since the cost of production in agriculture is increasing, there is a need to increase MSP for farmers. Till 2007-08 it was Rs. 850 per quintal in case of wheat and Rs. 745 per quintal for rice. It was alleged that the Government is paying more for imports in the international market, but is not paying a higher MSP to its own farmers so that it can have more foodgrains for its buffer stocks. Only recently, the Government has revised MSP for wheat to Rs. 1,000 per quintal, but has not done so for rice so far.
Fuels, Cement and Steel
Besides foodgrains, other commodities which are exercising an upward pressure on WPI, are fuels, cement and steel. The price of petrol in the international market has reached an unprecedented level of $ 114 per barrel. Via rise in transport cost, it pushes up the price level. But this is an exogenous factor on which the government has no control. Recently, there is a diversion of certain foodgrains towards the manufacture of bio-fuels. This has resulted in pushing up international prices of foodgrains by over 80 percent, thus raising the cost of imported foodgrains. In the domestic economy as well, the diversion of foodgrains to bio-fuels is aggravating the supply constraint. To mitigate the situation, the Government should impose severe restrictions on use of foodgrains for bio-fuels as a temporary measure till such period that foodgrains output growth is accelerated by the measures initiated to reach the target of agricultural growth by 4% per annum.
In case of controlling the prices of steel and cement, the Government has been dilly-dallying action against cartelization in these two industries. Experience the world over reveals that cartels are not tamed by issuing advisories. The tendency to exploit the market is so strong that industrial magnates refuse to listen. Grilled by the opposition, Finance Minister P. Chidambaram stated in the Lok Sabha on April 16, 2008: “I have no hesitation in repeating that cement manufacturers are behaving like a cartel.. There are signs that even steel manufactures are behaving like a cartel… If they do not understand the gravity of the situation and behave responsibly, Government will not hesitate to take tough administrative measures.” It is really strange that when the country has created Competitive Commission of India (CCI) in place of MRTPC, the Government should have asked the CCI to initiate action much earlier. It is bad policy first to allow much damage to be done, and take very belated action.
These appears to be divergence of views within the Government. As against the Finance Minister’s strong view warning tough measures against cartel-like behaviour by steel and cement manufacturers, the Minister of State for Steel Mr. Jitin Prasad in a written reply to a query in the Lok Sabha stated: “the steel prices are determined by market forces, such as demand and supply and international prices… However, no evidence on cartelization by steel companies in determining steel prices has been brought to the notice of the ministry of steel.” With such divergent views within the Government, chances of breaking cartels appear to be very poor. The Government following USA and European Union should have used ‘the leniency principle” – an application of the ‘approver principle’ in the economic domain to break cartels. There does not appear a strong resolve by the government to do it. Even if the CCI initiates action suo motto, it will not be effective in view of confusion within the Government.
Ban on Future Trading in essential items
The alliance partners in Congress-led coalition Government have been voicing strong views on future trading in essential commodities. CPM leader Sitaram Yechury pleaded for imposing a ban on future trading of 25 commodities, since the left maintains that large scale speculation in futures trading in grain has been the main factor responsible for rises of prices. To quote Mr. Yechury: “The only way to insulate ourselves from international speculation is to reverse the process of liberalization in commodity trade and prohibit future trading in essential commodities.” But Mr. Sharad Pawar, Minister for agriculture, food and civil supplies is not convinced about the correlation between future trading and increase in essential commodity prices. However, he conceded that ban on future trading in rice did help to stabilize prices, in urad and tur, it did not happen. The Minister would like to wait for the Abhijit Sen Committee to submit its report on the subject. It may be noted that in 2007, under pressure from its allies, the government had banned future trading in wheat, rice, urad and tur.
Abhijit Sen Committee has decided to take an escapist route and not provide an answer to the question of banning future trading. Dr. Abhijit Sen mentioned: “the evidence we have found is not unambiguous. Based on data that we have analysed, it is neither possible to say that future trading in agricultural commodities leads to price rise in the spot market, nor is it possible to say that there is no impact.” (Business Line, April 24, 2008) The Committee could have on balance, drawn some conclusion, but preferred to run with the hare and hunt with the hound.
The terms of reference of the Committee mentioned: “To study the impact of future trading on commodity prices and suggest measures to minimize such impact.” There is enough scope in this term of reference to express an opinion on the ban on future trading of essential commodities as a measure of minimizing the impact of future trading on commodity prices.
It is really strange that Ministers within the government voice divergent views on the question of controlling price rise in essential commodities. To be effective, the government should bring about a clear policy to control inflation after due deliberation within the cabinet. It should state the short-term measures to alleviate the suffering of the common man and also state the long term measures to increase supplies of essential commodities, more especially foodgrains. Among the short term measures to augment supply, the government announced the import of one million tonne of edible oils and subsidize it at the rate of Rs. 15 a litre for sale through the public distribution system. Also 15 lakh tonnes of pulses are being imported to mitigate the situation.
To sum up: it is vitally necessary to build a market information system which should reflect the changes in the prices of essential commodities accounting for 60 to 70 percent of the expenditure of low income groups. For this purpose, revision of price indices is essential after considering the recommendations of various committees. Secondly, there is a need to take timely action so that the hardship of the common man by way of erosion of his income with sharp increase in the prices of essential commodities, can be reduced. Thirdly, the government should give top priority to the development of agriculture. Fourthly, the government must take measures to reduce the use of multi-crop land for non-agricultural purposes, like Special Economic Zones. Last, but not the least, efforts should be made to undertake a second green revolution, with a special focus on agriculturally backward states. The country should follow a policy of self-sufficiency in food and essential commodities. That way lies hope for the common man and progress towards inclusive growth. In this connection Mr. Prashant Goel concludes: “The sustainable way out of the current mess is to increase food production and productivity and this cannot come without right prices. If the farmer does not get remunerative price for his produce, even the loan waiver package may not deliver. Given our large arable land and favourable climate, and rising global food prices, a proper policy framework could ensure that India becomes world’s food bowl.” (Food Inflation offers an opportunity, Economic Times, 18th April 2008).

Dismal Experience of NREGA: Lessons for future

-Ruddar Datt-

The National Rural Employment Guarantee Act came into force on February 2, 2006 and was implemented in 200 of India’s most backward districts. The Ministry of Rural Development described it as a revolutionary measure to transform the rural economy. In 2007, it was extended to another 130 districts and with effect from April 1, 2008, the Act is to cover all districts.
For its progress and the weaknesses during its implementation, two kinds of reviews are available – (i) the implementation of NREGA has been reviewed by the Controller & Asuditor General (2007) and (ii) Certain NGOs, especially the National Consortium of Civil Society Organisations (CSOs), have also undertaken several reviews.
The CAG Report underlines the fact that the guidelines indicated in the NREGA have not been followed. The Report specifically mentions lack of provision of professional staff to implement the scheme.
(1) Lack of professional staff – Every State government was required to appoint in each block, a full time Programme officer, exclusively responsible for the implementation of NREGA. The state Government, however, directed Block Development Officers (BDOs) to take “Additional charge” to implement NREGA. CAG report finds that 19 states had not appointed these officers in 70 percent of the blocks surveyed. The point which needs to be highlighted in that NREGA is not a programme that can work of on “additional charge”
Besides this, one employment guarantee assistant (ESA) was to be appointed in each gram panchayat. According to CAG report, 52% of the 513 gram panchayats surveyed had not appointed ESA.
In addition, the state government was to create panels of accredited engineers at the district and block level. They were expected to undertake costing of works to be undertaken, to make measurements of the works done to release payments to labour as stipulated in NREGA. The CAG found that the panels were missing in 20 states it surveyed.
As a consequence of shortage of staff, there were delays in execution of works and payment of wages on account of lack of measurements; delays in wages payments of two to three months were noticed. Consequently, labour households preferred to undertake other jobs, even if the payments were relatively low, but prompt.
All this resulted in a situation where out of 20.1 million households employed in NREGA, only 2.2 million (i.e. 10.5%) received the full 100 days employment and wages as promised by the Act. The average employment per household was 43 days in 2006-07 and 35 days in 2007-08, as revealed by the Ministry of Rural Development.
(2) Lack of proper project planning – NREGA specifically mentions the creation of durable productive assets, in the form of roads, improving rural infrastructure, drought-proofing, watershed development, water conservation etc. The survey found that the focus is on rural connectivity and wells. Other meaningful projects for rural transformation were conspicuous by their absence.
(3) Bureaucratic resistance to NREGA – CSO found that whereas Panchayati Raj Institutions leaders are keen to implement NREGA, secretaries and executives officers of gram panchayats were seen to be working overtime to convince these leaders of the “Perils” of getting entangled in NREGA. On account of the detailed procedures and rules under NREGA, an impression has been created that it is much more difficult to make money under NREGA. Given relatively few chances of corruption, it is better to go in for other programmes that are relatively less strict. In Rajnandgaon district, Chhattisgarh, according to NGOs Reports “Sarpanches fear that getting work done under NREGA is tantamount to going to jail and that the unemployment allowance will have to be given out of the sarpanch’s pocket”.
(4) Lack of transparency and absence of social audit – Although NREGA has provisions for transparency in the process of implementation, in actual practice, data on work done and payments made for various kinds of jobs is kept as a closely guarded secret. As a consequence, there is a mockery of social audit. Even some of the fake NGOs are prepared to verify social audit by charging a ridiculously low fee per panchayat. As a consequence, the most radical provisions of NREGA are violated with impunity.
(5) Inappropriate Rates of Payment – NREGA stipulates that projects shall not be implemented by employment of contractors, because contractors do not pay labour statuary minimum wage and get most of the work done by machines. Muster rolls are faked, labour is underpaid, bogus workers are shown as paid workers while actual work is done by machines. The schedule of rates is not observed in practice. Studies by NGOs reveal that employment guarantee assistants (EGAs) employed by panchayats themselves work as contractors. Besides this, in Chattisgarh, the Study of 50 percent of NREGA works supposed to be implemented by rural labourers and other staff are invariably found using machinery.
CAG report (2007) has brought out glaring deficiencies of NREGA in the following words:
“The main deficiency was the lack of adequate administrative and technical manpower at the block and gram panchayat level. The lack of manpower adversely affected the preparation of plans, scrutiny, approval, monitoring and measurement of works, and maintenance of stipulated records at the block and gram panchayat level. Besides affecting the implementation of the scheme and provision of employment, this has also impacted adversely on transparency, and made it difficult to verify the provision of the legal guarantee of 100 days of employment on demand. Planning was inadequate and delayed, which resulted in poor progress of works. Systems for financial management and tracking were deficient, with numerous instances of diversion/ misutilisation, and delay in transfer of state share. … Maintenance of records at the block and gram panchayat level was extremely poor, and the status of monitoring, evaluation and social audit was also not up to the mark.” (CAG (2007), Draft performance audit of implementation of NREGA, p. 95)
Besides these deficiencies which require remedial action, the NGOs also found in their studies, wherever social mobilization of rural workers was successful, public pressure led to improved implementation of the scheme, reduction in the use of contractors and machines, reduced corruption in bureaucracy and also resulted in better payment of minimum wages. Obviously, continuous mobilization of rural poor is a basic necessity for securing the intended benefits of NREGA.
A study by the Centre for Environment and Food Security (CEFS) about the progress of the programme in Orissa revealed that the Government had claimed that out of a budgetary provision of Rs. 890 crores for 2006-07, the state government was able to utilize Rs. 733 crores (i.e. 82.4). As a result 57 days of wage employment was provided during the year. Not a single household was denied wage employment in 19 NREGs districts. The government also claimed that 1.54 lakh families in the State completed 100 days of wage employ during 2006-07.
However, the research team of CEFS revealed the hollowness of these claims. Out of Rs. 733 crores spent under NREGS, more than Rs. 500 crores was unaccounted for, probably siphoned off and misappropriated by government officials. The research team also found that not a single family in the 100 sample villages was able to secure 100 days of wage employment. Very few families got 20-40 days, the rest mostly between 5-20 days, if at all. Fake job cards and fabricated muster rolls exaggerated the benefits of the scheme. The social audit was non-existent. Thus, the ground reality was highly distressing despite tall claims of the government of the success about NREGS implementation.
At the same time, it also necessary to take the following measures to strengthen the support structure of the NREGA.
(i) Appointing full-time professionals for implementing NREGA at all levels which is vitally necessary to implement the scheme.
(ii) Provision of full-time employment guarantee assistants at the panchayat level to make rural people aware of the benefits of the scheme and induce them to take advantage of the scheme.
(iii) Specific efforts should be made to reduce the time gap between work done and payment received by rural lobourers in NREGA.
(iv) To use Management Information System (MIS) and improve the system of monitoring of the scheme as also to check leakages and misappropriation of funds.
(v) To undertake a massive programme of generating awareness about the scheme with the help of information technology.
(vi) To revise the schedule of rates periodically so that changes in statutory minimum rates of wages are made consistent with their revision.
(vii) To prepare a shelf of projects at the district levels with the help of programme officers and other technical staff as well as Panchayati Raj Institution leaders so that projects cleared at the district level can be implemented at the grassroots level.
(viii) To make a study of various states with a view to learning from their experience of implementing NREGA and thus develop a spirit of competition among the states to take advantage of the scheme.
(ix) NREGA payments should be made through post-office accounts. Andhra Pradesh Government has made use of this method. The state had 6 lakh accounts till 2005. By 2008, the number of accounts jumped to 70 lakhs and authorities are being forced to strengthen the postal infrastructure so that it can handle the new responsibilities. This can also limit to a large extent fake muster rolls and corruption in the scheme.
(x) NREGA is a comprehensive employment programme. This implies that other employment generation programmes should be merged with it so that the alternative of shifting to another attractive programme from the point of view of misappropriating funds is closed. This will also help to rationalise various employment generation programmes.
The report card of the UPA government towards the implementation of NREGA reveals that as against the budgetary provision of Rs. 10,800 crores for 2007-08, the actual utilization was of the order of Rs. 4,196 crores i.e. only 39 percent of budgetary provision. This is really a sad commentary on the implementation of a flagship programme of the UPA government.
There is no denying the fact that NREGA is conceptually a very important national programme initiated at the level of the Central Government, but its record of implementation reveals that there are widespread complaints of corruption and pilferage of funds and very low level of utilization of budgeted provision. It has not succeeded in creating sufficient productive assets for strengthening rural infrastructure. It has, therefore, failed to impact on the poor rural households and if deterioration is not checked, the programme will lose the enthusiasm and momentum generated for the programme in 2006, describing it as a revolutionary project to impact on the life of the poor.
(Posted by Vidyanand Acharya)