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).
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Muslims clogging Inclusive Growth of India
Muslims and Indian Civil Society:
The Economic development of the nation needs strategic utilization of natural, physical, human, financial and social resources. Unless we establish socio-economic justice through resource allocation among religious communities, it is meaningless to talk about civil society development and inclusive growth. Abandoned Indian Muslims (as 15% Indian population) definitely need more focused plans and strategies for inclusive growth of India.
Our Strength - Unity in Diversity:
The Sachar Committee Report revealed the facts that Muslims are not far better than Scheduled Castes and Scheduled Tribes of India and thus needs special attention in our national plans and policies framed for inclusive growth. We need to believe that the strength of India is ‘Unity in Diversity’. The religious communities may have diversity in believes and approaches, but are united for the nation. Indian Muslims are instinct part of the nation with diversified approach in believes and approach to practice.
Interest Free Banking for Inclusive Growth of India:
The Sachar Committee did not consider the constraint of ‘Interest’; the most important reason for financial exclusion of Indian Muslims, rather advocated financial inclusion of Indian Muslims through participation in Scheduled banks. Since majority of Indian Muslims are poor and orthodox, their financial exclusion is mainly due to prohibition of interest in Islam. We must not forget that Indian Muslims shares 18.35% Indian population living below poverty line. So unless Indian Muslims is allowed transacting interest free banking, their financial inclusion is not possible. Without financial inclusion of Indian Muslims, their economic development is not possible. And without economic development of Indian Muslims, it is not possible for India to achieve the much desired real inclusive growth of the nation.
Sachar Committee Report – Half work done!
The Sachar Committee Report reflects that Muslims are under financial loss over Rs. 23,766 crores per annum in terms of credit through Scheduled Commercial Banks; as their share in outstanding loans under PSA is just 4.7% compared to 12% share in PSA accounts. A community with more than 31% population living below poverty line and 39.4% as self employed workers, such credit loss pushes it towards more backwardness; ultimately making inclusive growth more difficult. The Sachar Committee not only denied the requirement of Interest free banking for Muslims; but also failed to suggest any suitable measure to make our financial system more interactive and attractive for Muslims.
Recommendations of Sachar Committee - Imperfect measures
After Sachar Committee Report, the government took some initiatives to follow the suggestions made by the committee, but none of the initiatives is ensuring financial inclusion of Indian Muslims. The Sachar Committee has reported that participation of Muslims in Micro Finance is very low and share of Muslims in credit through SIDBI and NABARD are also very low. Instead of analyzing the causes of financial exclusion of Muslims, the committee just advocated to increase number of Scheduled Banks in Muslim areas, promotion of Micro Finance and deployment of more funds to NMDFC, SIDBI and NABARD. This approach is irrational because the measures suggested by the Committee are against the orthodox approach and financial requirements of Indian Muslims.
Approach of RBI toward Indian Muslims:
RBI is not paying due attention on financial exclusion of Indian Muslims. It should have studied the impact of ‘Interest’ on Indian Muslim’s financial inclusion and suggested some measures to comply with religious and financial need of Indian Muslims. But RBI (might be with intention to avoid any additional procedural changes) has already declined the feasibility of interest free banking in India. RBI should have considered why Muslims are just 0.78% in its working force. Similarly it was not discussed about reasons that why Muslim’s share in credit through SIDBI is just 0.48% and through NABARD is under 4%.
Dr. C. Rangarajan Committee Report ignored Muslims:
Under such extreme financial exclusions, it was supposed that the high level committee for financial inclusion would focus on Muslims. It was not a surprise to see that there was no Muslim member in that committee, but unfortunately the committee did not pen a single word about financial exclusion of Indian Muslims. Generally it is not expected that such committees would make community wise study; but since the report worth mentioned specific plans for 100% financial inclusions of SCs and STs, it was duly expected to have some comments on Indian Muslims which is not far better than SCs and STs of India.
While the Terms of Reference assigned to the Committee on Financial Inclusion contained the task ‘to identify the barriers confronted by vulnerable groups in accessing credit and financial services, including supply, demand and institutional constraints’ The report submitted by Dr. C. Rangarajan Committee did not carry any personal intervention report with vulnerable group. Moreover it did not study the financial exclusion in urban areas. Thus the report did not serve the designated purpose. So it is not justify for the government implementing the suggestions of the report with no study of minority community and with any case of committee’s interference with vulnerable group. If this would be the approach of our high level committees, how financial inclusion mission could be a success?
Dr. Raghuram Rajan Committee Report - Missing Inclusive Growth potentials:
The Planning Commission of India set another high level committee to prepare a report on financial sector reforms. This committee is also 0% representation of Muslims. The committee prepared a draft report after interference with more than 82 persons. Unfortunately there was no Muslim among those 82 persons. Neither the committee considered the issue of financial exclusion of Indian Muslims, nor suggested any proposal to ensure financial inclusion of Muslims. How could we set financial sector reform, unless we consider factors responsible for financial exclusion of minorities? With such abandoned financial exclusion of Indian Muslims by committees after committees, we may not be able to develop a civil society nor succeed to achieve the desired real inclusive growth.
Government Schemes for Minorities:
In Muslim concentrated areas, the physical infrastructure is always found lacking behind the actual requirements; and the community based institutions constrained by regulations and closed after no support from government schemes. Moreover the schemes announced by government to empower Minorities are also not inclined with Muslim NGOs which could have utilized and help to develop the social resources of Muslims. Such practices of dethroning Muslim social and institutional resources will certainly snag development of civil society and inclusive growth process.
Policy initiatives are required for real inclusive growth:
In the interest of the nation it is wise to take due initiatives instigate Indian Muslims into mainstream section to help India realize the desired inclusive growth.
1. There should be a parliamentary committee to study abandoned financial exclusion of Indian Muslims and recommend measures to ensure financial inclusions of Muslims.
2. At least one Muslim should be incorporated as member of any committee constituted for study and analysis of national level issue, because it is not justify ignoring minority community while doing strategic study for the nation as a whole.
3. If any committee has no Muslim member, the committee must have physical interaction with Muslim NGOs or institutions to ensure inclusion of the Muslims in that study, recommendations and schemes framed after that.
4. Minority related schemes should ensure participation of Muslim NGOs so that Muslim social resources could grow in civil society manner otherwise the process of isolation may threat wastage of Muslim social resources or it may go against national interest.
5. RBI must consider ways and means to include Muslims as working staff and find means to attract Muslims involvement in monetary and financial service businesses. It may need to incorporate products suitable to shariah compliant.
6. There should be at least 12% working staff in special financial institutions like NMDFC, SIDBI and NABARD. Moreover such institutions should introduce interest free credit schemes for Muslims because interest is most important hurdle in financial inclusion of Indian Muslims.
7. Interest Free credit schemes is not only required by Indian Muslims but also by our vulnerable section associated to agriculture, rural, small and micro industries where due to financial sickness entrepreneurs are unable to take financial risk, thus need risk free credit scheme. It is possible that credit on profit loss sharing basis may be provided to these groups through inducing shariah bound investors to interact with these groups.
8. To allow inflow of capital on profit loss sharing basis for our vulnerable enterprises associated with unorganized sector, it is necessary that such investments should be exempted from all taxes and free from undue formalities.
9. If we succeed to mobilize capital on profit loss sharing basis (for unorganized sector) from Islamic countries, it may along with capital investment, generate resources for allied industries and also boost export potentials.
10. The introduction of Islamic Banking for unorganized sector may help our economy in dual manner. At one end it will boost capital investment in unorganized sector without cutting resources of organized sector; on the other end it will generate new sources of employment and income opportunities to shift load of labour from organized sector to unorganized sector.
Our policy makers and administrative forces need to study the prospects and feasibility of interest free banking and finance for unorganized sector to avoid possible need to loan waiving schemes in future. It depends on our own wisdom whether we take challenges as opportunities or threats. The issue of Interest free or Islamic Banking must be addressed before we frame our financial sector reform and it must be tackled with thorough and sincere study by our financial experts.
Hope the leader will use their wisdom to study and analyze the issue of Indian Muslim financial resources and adopt suitable policies. This sincere attention and due efforts in this regard will surely ameliorate India develop a true civil society and achieve the much desired real inclusive growth.
Syed Zahid Ahmad
Mobile - (091) 9869814113
E Mail - aicmeu@yahoo.com
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