Sunday 16 November 2014

Modi effect, not RBI, tames food inflation (Sunday Guardian)

MADHAV NALAPAT  New Delhi | 15th Nov 2014
Senior officials say that food inflation has been moderated not by the high interest rate policy of the Reserve Bank of India (which in practice has boosted inflation and slowed growth), but by changes in policy carried out by Prime Minister Narendra Modi.
These include changes in procurement policy, as well as in the harnessing of technology for empowerment of genuine producers rather than financial and other middlemen. Even as RBI Governor Raghuram Rajan continued to effectively downsize the manufacturing base of India by a policy of super-high interest rates, Prime Minister Modi quietly used the interregnum between his Washington meeting with President Barack Obama and the G-20 summit in Australia to implement reforms in food procurement designed to reduce waste and increase market supplies, thereby lowering consumer prices. It was because of these reforms, officials say, that it was possible for India to agree to the WTO Trade Facilitation Agreement without any threat to the interests of genuine farmers, as distinct from food commodity speculators who are estimated to have collectively made windfall profits of $8 billion during just the second term of the UPA. The ten years when Manmohan Singh was Prime Minister, have been days of darkness for the common man, but "bahut acche din" for speculators and the international financial institutions assisting them. It needs repeating that where the UK and the US have collectively imposed fines of nearly $20 billion on such institutions for doing precisely the sort of trades and transactions commonplace in India, thus far the only response of the RBI has been to give such entities privileged access to its highest levels.
Modi has restricted MSP increases for wheat and paddy to an economically bearable Rs 50/qtl, which is a third lower than the UPA's 10-year average of Rs 75/qtl. He has also restricted the powers of state governments to announce bonuses for MSP, a step which has affected BJP-ruled states as well. Chhattisgarh, for example, added Rs 300/qtl for paddy, as did Kerala, while Rajasthan and Madhya Pradesh added Rs 150/qtl as bonus for wheat, all during the 2013-14 season. All this when these states had no need of the excess procurement, and "succeeded" only in driving up market prices for food grains because of reduced availability, even while buffer grain stocks rose to 49 million tonnes in FY 2014-15, or 133% higher than the required stock of 21 million tonnes. The wastage this has led to is regarded by a senior official as "criminal and incalculable".
Prime Minister Modi went further, by ignoring pressure from powerful agriculture mafias comprising commodity speculators and "mock" farmers (i.e. those who stay in the city, but operate giant agricultural operations for profit and for tax purposes). He limited the levy ratio on rice mills to 25%, thereby freeing more grain for the market. These steps have damaged the ability of hoarders and speculators to boost prices, and have led to a cooling off of rice and wheat prices in the market, which has nothing to do with the RBI's textbook reliance on monetary policy as a dampener to inflation, despite overwhelming empirical evidence to the contrary.
Senior officials say that there is "great chemistry" between Prime Minister Modi and US President Barack Obama, and that work on reconciling the positions of the US and India on the WTO standoff began immediately after the PM's meeting with Obama, subsequent to India's refusing to ratify the Trade Facilitation Agreement without ensuring food security safeguards for its poor. Officials said that "backroom negotiations in Geneva took place between the two sides", and that "Obama finally asked his team to agree to Prime Minister Modi's request for a permanent waiver rather than just a 4-year peace clause". This request had been conveyed by Modi to Obama in their September meeting in the White House. These officials say that the PM is keen to ensure that "other anomalies" get corrected, such as "outdated reference prices used to calculate subsidies". These prices have been arbitrarily fixed at 1986-87 levels that bear no relation to the speculator-boosted prices prevalent since Bill Clinton re-opened the doors to financial fraud in the 1990s that had been shut by President Franklin Roosevelt in the 1930s.
Senior officials say that they have been "energised by the innovative approach of Prime Minister Modi", which they compare to the "Can't Do Much" approach of his predecessor, and look towards success in other negotiations, such as crafting a stable and mutually beneficial relationship with China and winning India a permanent seat in the UN Security Council. They say that "Prime Minister Modi is looking at ways to ensure that India makes a significant contribution towards reducing climate damage, even while avoiding any damage to the country's growth prospects". The WTO deal, made possible by both the reforms initiated by Prime Minister Modi as well as the chemistry he shares with Barack Obama, is clearly only a first step in what these officials say will be "the long road to Middle Income status" for the people of India.

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