Fighting inflation: A long-term view

The Reserve Bank’s decision raising the cash reserve ratio of the commercial banks by 0.5 per cent has to be welcomed as an essential measure in the ongoing fight against inflation. But, in itself, it is not adequate. The RBI also needs to make use of the statutory liquidity ratio, the other instrument available with it, with immediate effect. But the fight against inflation is a comprehensive process and every single element in the package is important. One has to recall the package of anti-inflationary measures applied by the government of India in 1974 with dramatic effect.
Interestingly, while most other areas of economics have undergone major changes in recent decades with sophisticated techniques and mathematically-oriented solutions, the area of inflation control has not changed beyond the days of the early economics classics. The basic principle that inflation occurs when too much of money chases fewer goods still remains the basis. This naturally means that money supply has to be strictly regulated and, second, the supply of goods has to be increased. The measures adopted by the RBI are surely the right steps in the direction of controlling the money supply. It will, no doubt, affect the liquidity of the banks, and through this the growth of some industries and the purchasing power of people at large. But these have to be accepted in the interest of the higher goal of bringing down inflation.
Some more steps also need to be taken. Interest rates must be given a second look. Then, the implementation of the government’s decision on the recommendations of the Sixth Pay Commission will imply the release of massive funds in the hands of the people. A part of it may be impounded through savings schemes and annuities. Once again, this will be unpopular with government employees, but should be accepted in the interest of reducing the cost of essential goods. Some restriction on dividend income may also be seriously considered, not on the lines of the ill-thought 1974 move of limiting dividend declarations, but by some other means by which part of the dividend income does not add to the purchasing power of the dividend receiver immediately.
But the real problem arises when we come to the supply side. There has been a global dimension of the increase of petroleum crude prices and many other essential commodities. Also, we have to give serious thought to bringing the rate of agricultural growth to the level it had reached several years ago and to give special importance to the growth of food crops. It is a matter of regret that a substantial number of farmers have, in recent years, given up foodgrains production and opted for growing cash crops which yield more money. There is no harm in paying farmers more for producing food crops. In fact, with our climate, where it is possible to produce some crops all the year round, India — unlike any Western country — has the potential to become a food grower for the entire world. But this option can only be explored after we have a second green revolution.
Attention should, therefore, be given to persuading farmers to grow good crops, to provide them with better seeds, better pesticides, and, above all, loans at easy rates of interest. Also, we need to give up our near-theological aversion to large-scale farming. Small farmers may be encouraged to join up for use of hired mechanical facilities such as tractors or harvesters. This will mean a considerable effort on the part of the administration, as well as those in politics and agricultural scientists. It is time for us to ask serious questions such as why India has been driven to the position of having to import pulses, an essential food crop and essential food for poorer sections, from overseas.
We have to evolve a strategy for reducing our dependence on petroleum. If global prices for crude petroleum have increased from less than $50 a barrel to nearly $120 per barrel in three years’ time and India has not been able to discover any domestic source of crude oil after the discovery of Bombay High during the early 1970s, common sense would indicate that we should have a strategy for reducing the use of imported petroleum. This would mean some very hard decisions like promoting inland waterways, the cheapest form of transport.
It was with this idea that we had promoted a new company — the Inland Water Navigation Corporation — years ago, but have now liquidated it because it was never tried seriously. We should return to that concept and try to promote inland water transportation in bulk in selected areas like, say, Kolkata to Allahabad, the waterways through Bangladesh to Assam and the northeastern states, the waterways that prevailed through the Buckingham Canal from Chennai to the South and perhaps improve the navigability of the Narmada and Tapti rivers. Also, we need to have more of hydel power and nuclear power, taking the emphasis away from petroleum-oriented thermal power.
This would also mean that we should not dismantle our traditional transportation systems in rural areas: cycle-rickshaw vans and bullock carts. They play a very important role in transportation in rural areas. These could be modernised. It will be foolish to replace them by motorised transportation which again means the use of imported oil.
While on the subject we should seriously think of demand management in sectors such as automobiles. India has today become one of the largest markets for automobiles in the world. This explains why nearly every automobile giant has constructed its own plant here. While the automobile industry is no doubt one of the biggest components of industrial growth, we should not shrink from some kind of demand management if only because we must in the long run aim at reducing the use of imported petroleum. These long-term measures will be of great importance in the ongoing fight against inflation. There are other short-term measures, such as banning futures trading in commodities and restricting the use of automobiles, as Singapore has done. Demand management and supply-side economics are both crucial in the war against inflation.
Dr Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India

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