Financial Daily from THE HINDU group of publications
Saturday, Feb 02, 2002
Columns - Economy - A Perspective
Course of prices -- Dilemma before the Finance Minister
P. R. Brahmananda
WHERE the poor constitute a sizeable proportion of an economy, a good portion of workers are on casual employment, and a major portion of incomes are not compensated for by an increase in prices, the course of the general price level as well as of that of the wage-goods component in the general price level are important indicators of the state of well-being of the masses. Whatever the views of experts on the tolerable rate of inflation, in our conditions, the state of well-being is inversely related to the course of the price levels.
During 1999-2000, the average index of weekly wholesale prices was higher than that of the previous year by just 3.3 per cent; in 2000-2001, the average index of wholesale prices was higher than the average of the previous year by 7.2 per cent; and, in 2001-2002, so far, the average price level has been higher by 3.7 per cent over that in the previous year.
Probably for this entire year, the average may be higher by about 4 per cent or so. If we take the calendar years, the average wholesale price index 1999 was higher by 3.4 per cent over the previous year; in 2000, it was higher by 6.3 per cent; and in 2001, by 5.2 per cent.
Let us look at the course of the price level of the wage-goods components in the wholesale price index. The wage-goods included here are food articles; non-food articles consisting mostly of raw materials for manufactured food and textile products; food products; cotton textiles and kerosene. The aggregate weight of the wage-goods is about 38 per cent in the wholesale price index. In financial 1999-2000, the prices of wage-goods were higher by about 0.95 per cent, that is less than 1 per cent; in 2000-2001, wage-goods prices were higher by about 3 per cent; in 2001-2002, so far, the prices have been higher by 2.6 per cent.
In all the three financial years the wage-goods prices have risen at a lower rate than wholesale prices. This, probably, is the most important feature of the course of prices in recent years. Let us now take calendar year averages over several weeks. In 1999 the prices were higher by 2.3 per cent over the previous year; in 2000 the prices of wage-goods were higher by 2.5 per cent; and in 2001 they were .7 per cent higher. Even on a calendar year basis, the proposition that wage-goods prices are rising at a lower rate than wholesale prices holds true (see Graph).
Let us study the courses of prices of agricultural commodities and of manufactured commodities, shown in the second Graph.
On a financial year basis, the prices of agricultural commodities were higher by 1.1 per cent in 1999-2000 over 1998-99; in 2000-2001, they were higher by 2.9 per cent; in 2001-2002, till January 12, they were higher by 3.9 per cent over the previous year. On a calendar year basis, in 1999, the prices of agricultural commodities were higher by 2.3 per cent over the previous year. In 2000, they were higher by 2.8 per cent and, in 2001, they were higher by 3.4 per cent.
In the financial year 1999-2000, manufactured products' prices were higher over that in the previous year by 2.7 per cent; and in 2000-2001, they were higher by 3.2 per cent over the previous year. In 2001-2002, so far, they were higher by 1.9 per cent. On a calendar year basis, in 1999, they were higher by 3.4 per cent over the previous year; in 2000 they were higher by 2.7 per cent; and in 2001, by 2.9 per cent.
Since the index of agricultural prices, with 1998-99 as 100, has risen just 8.2 per cent over the three years, and the manufactured products prices have also risen just about 8 per cent; the level of the terms of trade from this general angle, has been about the same. But, if we take the course of agricultural input prices, there has been a sharp increase in electricity by more than 40 per cent and in diesel by more than 60 per cent. Fertiliser prices, too, have risen 17-18 per cent.
Thus, input prices for agriculture have risen substantially. So, the terms of trade should have worsened from an agricultural production angle. This is a serious problem, and the advice of fiscal experts who want agricultural input prices to keep rising steeply will hurt the agricultural growth rate.
This is a serious matter, which the Finance Ministry must address. If India's interests are in improving agricultural production and productivity, the terms of trade between output prices and input prices must get better and better for agricultural producers.
This may have fiscal repercussions. But the way out is through higher excise rates, higher sales taxes, and probably agricultural income taxes. It is better to offer higher and rising terms of trade to agriculture, and tax the incomes and purchases of agricultural producers.
The advice of the World Bank experts and domestic fiscal experts in a similar manner would not be in the best interests of agriculture and of the general economy.
The Economic Survey should present the terms of trade in terms of input prices and output prices, rather than only in terms of agricultural and manufactured products.
Anyway, whether it is intentional or not, the Government has been able to substantially moderate the course of wage- goods prices. This may partly explain the stability of the ruling coalition.
The wage-goods prices seem to have risen during 1998 to 2002 at a lower rate than in similar periods since the end of the First Plan period. And let us note that money magnitudes have been rising at a substantially higher rate than growth of production of wage-goods. There are three causes for this:
1) The import prices of wage-goods have been falling, both due to world conditions and to lower import duties and removal of quantitative controls.
The improved external reserve situation has emboldened the government to allow more imports which have helped keep the prices of wage-goods from moving up at a higher rate.
2) There has been a fall in income velocity and a consequent slowing down of growth of nominal incomes.
3) The rising prices of inputs, etc., have made farmers sell more and more of their crops and at potentially lower rates of increase in prices.
The pressure on the Finance Minister, Mr Yashwant Sinha, to enlarge the deficits and to augment public expenditure to cause a rise in the price level is neither good for the economy nor for the parties in power.
Mr Sinha should see that investment expenditure is undertaken through increased savings in the public and private sectors.
What should be a matter of concern to him is that manufacture prices are not falling in a context of slackened growth in money incomes.
Another matter he should worry about is that the growth of agricultural productivity and production has slowed down. Investments, subsidies, lower input prices, etc., should be the instruments to revive growth in agriculture.
But, unfortunately, the advice given to the Finance Minister might lead to higher and higher inflation, with lower and lower agricultural growth. In the process, the main undesigned achievement of low inflation may be sacrificed.
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