Government at the crossroads again!

Mon, 23 Apr Pre-Open

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Feeling relieved that the apex bank of our country, Reserve Bank of India (RBI) has started easing the key rates and overall inflation numbers are coming down for the past three months? Well, we have news for you! All of these good things may start disappearing soon. At least this is what the recommendation made by the Commission on Agricultural Costs and Prices (CACP) suggests. CACP primarily advises the Indian government on price policy of major agricultural commodities (kharif and rabi crops) such as paddy, jowar, Bajra and cotton, keeping the interests of both the producer as well as the consumer in mind.

This panel of experts has given a recommendation to increase the minimum support prices (MSPs) of agricultural commodities in the range of 16%-40%. True, this is just a recommendation as of now. However, generally the government of India accepts the recommendations given by CAPC. Therefore, sooner or later, consumers are going to pay substantially higher prices for food items.

True, inflation is moderating for the past few months. However, prices of some food items remained stubborn. Not in India, but all over the world, food prices are on the rise. With the higher support prices for food items, the inflation would again start pushing higher. Then, RBI would be left with no choice but to stop easing monetary policies. In the worst case scenario, it may again resort to increasing the rates to ease out inflation. And it would hamper the growth rate of the Indian economy which is already not in a very good shape.

Well, it is a known fact that inflation is primarily due to supply side issues. And the government needs to address that. However, that will take time. But what action the government would take on the recommendations given by CACP?

We have a government which looks very keen on spending more on social programmes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). They do not even bother to measuring the real benefit of running such expensive programmes. This kind of reckless spending is already hurting the fiscal deficit position.

With this CACP recommendation, the government would again be facing a great dilemma. Whether increase the prices of commodities and let the inflation go out of control again. That will in effect paralyze the economic growth of the country. Or risk the ire of the producers which are mainly farmers. And in the process risk a big vote bank.

Considering the track record of waiving huge loans and running several social welfare programmes, chances of another round of inflations look pretty bright.