Inflation riddle

How often have we heard our parents and grandparents complaining “mehngai toh aasman choo rahi hai” (Inflation is touching sky)…I am sure we would be using same quote very soon (some would have already started using it)…

So, when was the last time you wondered about rising prices? – wouldn’t have been long for sure; it could very well be the last time you bought vegetables and realised that prices quoted by the vendor are higher than the previous week (or even previous day).

So why are prices galloping towards the sky? The principal cause of inflation has been attributed to food products and oil. International crude oil prices have skyrocketed in last one year fuelling energy costs of industries and hence the product prices. Higher crude oil prices have also fed into prices of agricultural products due to higher fertilisers and irrigation costs.

So is oil the primary cause of all price rises? Not really, food prices have risen on account of other reasons as well – demand supply imbalance, indulgence in bio-fuels production, commodity hoarding and trading in commodity futures.

Agriculture in many parts of the world is almost on the verge of a crisis. Although green revolution has enabled higher production of some food commodities, the long term impact of modern agricultural practices on soil fertility, water conservation and ecological environment have long been debated. In many developing countries, many farmers have shifted from food crops to cash crops production in lure of better realisations. Basic food production has been rising year-on-year but number of mouths has been rising as well…and adding to the deficit is the massive intake of basic food products by food processing companies (this phenomenon has picked up pace in India in recent times).

Another phenomenon that has received thrashing from several corners is the government policies in Europe, Brazil and USA wherein bio-fuels are being actively promoted for energy generation as an alternative to petroleum. It may sound as an interesting idea but root problem of this technology innovation lies in the shift of food acreage into production of ethanol, thereby reducing the land for food production – a definite feeder to the food deficit in medium-long term.

Several politicians (yes, not economists) have displayed anguish on commodity futures citing their tendencies to cause inflation. The ban on commodity futures trading in several agricultural commodities (placed by government in May 2008 on soy oil, chickpea, potato and rubber) is a testament to that. The argument is that futures trading in agricultural products enable speculators in the market to manipulate prices (more often in an upward direction). In some people’s view, traders often purchase products at low costs through futures contracts and then raise the prices by creating artificial scarcity. (However, many experts have given counter-arguments to such viewpoints and several studies have found no correlation between inflation and ban on futures trading.)

This is the situation when Agricultural income is not even taxed in India – Are you wondering how much would the price rise be if the government one day decides to tax farmers’ income as well? – Well, I am not even contemplating that for the next 100 years because in our vote-driven political economy, a thought to directly tax rural farmers is forbidden…