Let me give an example to show the contrast in the policy approaches of India and China for fighting inflation. Over the past six months, house prices in Mumbai have gone up 30 per cent. That translates into an annual inflation rate of more than 60 per cent for property prices. Yet, these soaring property prices do not benefit the city government at all, since taxes are minuscule as they are determined by the rent control measures of the 1940s. Soon Mumbai's Municipal Corporation (BMC) will switch over to taxes based on the market value of properties to actually benefit from the high prices. Despite this switch, the tax will still be barely 0.05 per cent of the value of a property.
At the same time, Shanghai is introducing a stiff property tax of close to one per cent (i.e., 20 times that of Mumbai) to curb speculation in property. So, while Shanghai has sought to fight the inflation battle, the BMC is hoping to cash in on the speculative boom. To be sure, it is not the BMC's job to rein in prices, but the cases show how China and India have adopted different policies in an inflationary environment. I will explain where we are going wrong in our war against inflation. Even excluding real estate or gold, the general inflation in India is raging, and it seems we are fighting a losing battle. Onion prices are soaring.
Food price inflation, which dominates the CPI measure, is currently running at 18 per cent. This high double-digit food inflation is neither a recent nor a temporary phenomenon. The average annual inflation rate over the past five years for food prices has been twice as high as the general inflation. It has been in double digits through most of this period. For milk and pulses, it has been closer to 20 per cent per annum (which the Reserve Bank of India, or RBI, calls the "protein problem"). Sugar prices have left a sour taste, and imports have not helped. Inflation pervades non-food crops as well. Cotton prices are at alltime highs, and exports are mostly banned despite a bumper crop.
True, high inflation is affecting most emerging market economies across Asia and Latin America. But India stands out, especially in food inflation. There is an equal contribution from non-food and non-agricultural components, too. Crude oil, internationally, is drifting higher than $90 a barrel. Metal prices have gone above their pre-crisis levels, with some touching all-time highs. Some of this "commodity inflation" is not due to supply-demand mismatch, but because hedge funds are "investing" in commodities much like gold or silver.
The extremely loose monetary policy and quantitative easing by the US Federal Reserve is aiding speculative flows into commodities. Against these internationallycreated odds of global commodity and food inflation, the domestic battle against inflation is not going anywhere. Despite five interest rate increases by the RBI, the inflation rate has not come any closer to its target. Maybe the RBI was not proactive enough. You cannot now cure the disease with a vaccine, which works only ex ante (before the event), not ex post (after the event). Bank depositors are now getting a negative return, and real interest rates are also negative.
The coexistence of food inflation along with overflowing granaries of the Food Corporation of India is very troubling. Why was not food released continuously in small dribbles, as suggested in last year's Economic Survey? Why are the annual increases in the minimum support prices of various crops always more than the general inflation? These support prices have become de facto procurement prices. Then, frequent increases in railway freight have outpaced inflation as well.
The huge gap between the farmgate and the food-plate price also points to inefficiencies and rigidities. The government says it is due to cartels. Or is it due to restrictive agricultural procurement laws? For several years crop productivity has stagnated, and extra-high yields remain isolated instances. Gujarat claims high productivity in cotton, but in Vidarbha cotton farmers are in distress.
What are the intra-country best practices that can be emulated? The fight against inflation requires monetary tightening, fiscal support (through lower duties and expenditure compression), currency strengthening and administrative smartness (in food management, for example). Just because we have limited room in these areas in the short term does not mean that we resort to CBI type raids on onion traders. In the medium term, we need to focus on supply side measures, too, including loosening the state's grip on food procurement. Finally, just like roti, kapda aur makaan, housing prices, too, will need a Shanghai kind of attention. Otherwise housing prices, too, will go through the roof.
The author is the Chief Economist, Aditya Birla Group
Views are personal