Inflation Can be Curtailed by FDI in Retailing

Vegetables, dairy items and poultry products are the main contributors of spiralling food inflation. Based on the annual wholesale price index rose 15.57% for the week ended January 15. But at the retail level, consumers will tell you a different story of price doubling and tripling in very short time. They are virtually at the mercy of the retail vendors who reap exorbitant profit. The price of staple food items is also increasing almost daily in the markets. Fuel index climbed by 10.87%. Primary articles price index went by 17.26%.

Onion price rise triggered the price rise of other commodities and items. Kharif production failed by around 40% in the onion belt around Nashik in Maharashtra and triggered the rise. Export of onion was banned and imports resorted to. Now the late Kharif crop has started arriving in the market and the price has melted. With this, the price of other food items and non-food items may also come down a little but the price may never touch the previous level. On an annual basis, vegetable price increased by 67% at the wholesale level but at the retail level it is much more. On a year to year basis, onion price increased by 112% at the wholesale level. But the price of egg, meat and fish went up by 14%. With the arrival of bumper wheat crop, wheat price may come down.

RBI’s increase in interest rate by 0.25% is too little and too late. Food and fuel price increase will increase general inflation level beyond 7%. RBI’s main concern was how to curb this inflationary pressure without sacrificing growth as industrial production is already at the rock bottom at 2.7%. Global commodity prices have also registered a sharp rise due to hedge funds cornering important commodities in the London and New York futures market. This makes their sport price for import very high and negates the import option for our government. Many countries in the world are deeply affected by inflation as global economy shows signs of recovery. A healing wound will give itch for some time and growth brings inflation to some extent which is unavoidable. But the itch should not be allowed to become a swelling.

We should not view the raising of repo and reverse repo rates by 0.25 basis points by the RBI alone. Since March 2010, RBI has raised the rates seven times. The action of RBI for the last one year aims to mitigating demand side pressures spiralling inflation. Regarding supply side pressure, RBI has virtually no control and only the Central government with the fiscal measures can take concrete action to mitigate the pressure. Deposit growth in the banking system is only 16.5% whereas credit growth is at a high 24.1%. Naturally the gap has to be narrowed. For this interest rate has to be raised. Now after the announcement of monetary policy of RBI, many banks have raised their deposit as well as lending rates. Some banks are offering their fixed deposits at even double digit interest rates – which was unthinkable even two months back.

From now on the RBI should focus on increasing deposits of the banking system while at the same time bringing down the credit growth from the present level. If this is not done, the banking system will become very hot and unstable and this may cause failure of some weak banks. Even a smell of a crisis is enough to send panic among the public and it may trigger a run on the deposits in the entire banking system. That would be worst than the present level of inflation.

Current account deficit and fiscal deficit are other challenges. Already current account deficit is causing concern at 3.5%. Our capital account surplus makes us sit pretty with a forex kitty of around $300 billion. But if FIIs withdraw their investment from the stock market and FDI slows down, then we are in for trouble though a serious crisis as happened in 1990 when Chandra Sekhar was the Prime Minister is unlikely now. But RBI cannot do anything about the fiscal deficit as the government policies decide about this matter. With electrons still three years away, the UPI government may go for serious measures to balance and rein in fiscal deficit to below 5% though some unpopular measures will have to be taken for this to come about. One time receipt of Rs.one lakh crore towards spectrum sales and Rs.40000 crore towards disinvestment may not recur every year. Therefore the government will have to raise tax rates and mobilise money to narrow down the fiscal deficit.

But raising tax rates will have to be done carefully. Overall the companies have reported a health unaudited financial results for the nine months period ended 31.12.10. But there are sectoral weaknesses. For example cement sector is experiencing negative growth in the Southern region though it is doing well in the eastern region. Policy framed for the entire industry may hurt some particular segment and bring in negative growth. Such factors will have to be carefully looked into while framing Budget. To ease supply chain bottlenecks, the government may permit FDI in organised retail shops which will make commodities and food items available to people easily. Already Cabinet Secretary K.M. Chandrasekhar has made this suggestion to the Prime Minister.

If this happens, we will soon see the entry of world big players like Wall Mart, Carrefour, Metro AG and Tesco in Indian cities and towns. Retail chain logistics will also see tremendous improvement with their entry. Nearly 30 to 40 per cent of fruits and vegetables produced are wasted due to lack of storage facilities. Like wise, 7% of food grains also rot. If storage and distribution is taken care of by welcoming foreign retail majors into our country, the availability and price will show improvement and affordable to the people, thereby bringing down inflation. At the same time FDI in retail will boost up our Forex kitty also. Food processing industry will also grow offering lot of employment opportunities. This step will also be favourable to farmers as the foreign companies will directly source their requirement from the farmers instead of from middlemen who pocket exorbitant profit. But the intermediaries and middle men have vast political influence and they grease the palm of the powers would be for their profiteering to go uninterrupted. Therefore it is doubtful whether this move will actually come from the government. Even China has permitted FDI in retail shops. This fact can be cited to shut down the mouth of the Left opposition.