Hard times to come?
Rising food prices and flagging growth may make 2011 a much more difficult year than 2010. Not that last year was a particularly easy one for the ‘aam admi’. Food inflation was an average 15 per cent or higher. But in the first three quarters of this financial year (1 April to 31 December), food inflation in India has reached 17 per cent.
It is difficult for westerners, western-trained economists and even upper-middle class and rich Indian to appreciate exactly how badly high food prices affect the average Indian and Goan. For the former, an increase in the price of food is an inconvenience at most. For the latter, though, it can be a matter of life and death. There is a very simple reason for this. Higher income people spend a much lower proportion of their incomes on food. It varies from as little as around 8 per cent in the US to about 15 per cent in high-income individuals in India. But for lower middle class and poor people, it can vary from 47 per cent to as much as 60 per cent.
Exactly how (in)sensitive this government is to the impact of costly food on ordinary people is seen in the recent decision of the central government to stop selling subsidised onions in Delhi, because the price of onions had “come down”, to Rs30. Thirty-rupee onions are “cheap”? What kind of world do the ‘crorepatis’ in our parliament and cabinet live in?
Someone needs to remind them that once upon a time, Delhi was ruled by the opposition Bharatiya Janata Party (BJP); it considered India’s capital city to be its pocket borough. Then, one year, onion prices went up in New Delhi and stayed up for weeks, and the government, obviously, did not do enough to bring them down. For the BJP lost the very next election to the Delhi legislative assembly (the party top brass itself blamed the defeat on onion prices), and has lost every election since.
But it’s not just food.
The BRIC (Brazil, Russia, India, China) economies have shown extraordinary growth, despite the financial crisis of 2008. Let us assume the Gross Domestic Product (GDP) was 100 in 2005. At the end of 2010, it would have been 105 in the US, 104 in continental Europe, and 102 in Japan and the UK. But in Brazil it would have been 125, in India 147, and in China an amazing 169!
But now that dream is running out of steam. Global investors seem to be losing their appetite for the fast-developing world. Investors have pulled out more than $7 billion (Rs33,500 crore) from emerging market equity funds in the past week. These same markets had attracted Foreign Direct Investment (FDI) inflows of a record $95 billion (Rs455,000 crore) last year.
It is true that equity markets often do not reflect real trends in the wider markets. But in India there have been a range of red flags – declining manufacture, rising interest rates, indifferent indices and, as we noted earlier, inflation that seems to be spinning out of control.
The government has to find more effective ways to tackle inflation than just raising interest rates and making credit more and more difficult to obtain for businesses. Every economist has heard of the ‘Law of Diminishing Returns’. It cannot fail to apply to interest rates and monetary measures as well. In a country like India, which has a parallel economy nearly as large as the official one, these measures tend to be much less effective than they are in advanced countries like the United States.
So gird up your sleeves and grit your teeth, fellow Goans. There may be even more difficult times to come.
