Yojana Inflation

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AUGUST 2010 A DEVELOPMENT MONTHLY RS 20

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C O N T E N T S


MANAGING INFLATION IN THE POST-CRISIS ENVIRONMENT .....................................................5 Subir Gokarn

INFLATION IN INDIA: TRENDS, CAUSES AND POLICY OPTIONS ...............................................................10 N R Bhanumurthy

FOOD INFLATION IN INDIA: CAUSES AND REMEDIES ......14 Ramesh Chand, P Shinoj

THE INFLATION CHALLENGE TO POLICIES .........................19 Shashanka Bhide

INFLATION EPISODES IN INDIA ...............................................22 Manas Bhattacharya

INFLATION: MYTHS, REALITIES AND A POLICY AGENDA .....................................................................25 V Shunmugam, Debojyoti Dey

INFLATION AND STATE OF THE ECONOMY ..........................30 K R Sudhaman

HOW MONETARY POLICY IMPACTS STOCK PRICES ..........33 Ajay Goyal

ANALYzING INFLATION............................................................37 Avanindra Nath Thakur

MEASURING INFLATION ...........................................................41 Shivkumar Biradar

NSS FOR SOCIAL ASSET CREATION .......................................47 P V Basheer Ahammed

LIVELIHOOD FOR THE MARGINALISED ...............................54 J Cyril Kanmony

BIODIVERSITY AND ITS CONSERVATION .............................57 Arvind Singh

SHODH YATRA RETROFITTED CAR FOR THE PHYSICALLY CHALLENGED............................................62

BEST PRACTICES EDUCATION FOR ALL : A LESSON FROM JAGJAGI KENDRAS.....................................64 Sujata Raghavan

DO YOu KNOw? ........................................................................66

J&K wINDOw ...........................................................................68

MACROECONOMIC AND MONETARY DEVELOPMENTS IN 2009-10 .....................................................69

NORTH EAST DIARY .................................................................71

2 YOJANA August 2010

The Union cabinet recently approved a symbol for the Indian Rupee. It was necessary considering

the fact that the Indian economy is integrating fast with the global economy and India is emerging

as a prime investment destination worldwide. The symbol will standardize the expression for Indian

Rupee in different languages, both within and outside the country, and serve to distinguish the Indian

currency from those countries whose currencies are also designated as Rupee or Rupiah, such as Pakistan,

Nepal, Sri Lanka and Indonesia.

Designed by Shri D. Uday Kumar, the symbol was selected through a public competition among resident

Indian citizens. The jury was headed by Deputy Governor, RBI.

The symbol will be included in the “Unicode Standard” for representation and processing of text, written

in major scripts of the world to ensure that it is easily displayed/printed in the electronic and print media

as all the software companies provide support for this Standard. Encoding in the Unicode Standard will

also ensure encoding in the International standard ISO/IEC 10646

The symbol will also be included in the Indian Standards, viz. 13194:1991 – Indian Script Code for

Information Interchange (ISCII) through an amendment to the existing list by the Bureau of Indian Standards

(BIS). The ISCII specifies various codes for Indian languages for processing on computers along with the key-board layouts. After encoding of the symbol in the Unicode Standard and National Standard,

NASSCOM will approach software development companies for incorporating the Rupee symbol in their

operative software, as a new programme or as an update, to enable the computer users worldwide to use

the symbol even if it is not embedded on the keyboards (in a similar manner, we use the Euro symbol,

which is not embedded in the keyboards in use in India).

The symbol will be used by all individuals/entities within and outside India after its incorporation in

`Unicode Standard’, ‘ISO/IEC 10646’ and ‘IS 13194’. q

A Symbol for the IndIAn rupee


Inflation episodes in India have been frequent during the pre-liberalisation period. A crushing combination of persisting shortage of practically all types

of goods allied with an expansionary monetary stand meant, in simple words,

too much money chasing too few goods. That phase fortunately came to an end as

India entered an era of fast growth and reduction in administrative controls on prices

of most goods since the early nineties. There have been periods of inflation since then, but those came with specific causes and responded fast to policy changes.

The inflation this time around that began towards early part of 2008-09 has proved tougher to eradicate. The causative factors at the initial stages were the

sudden boom in global commodity prices which transmitted to the Indian economy.

The simultaneous spike in real estate prices complicated the efforts to contain the

general price level in the economy. The RBI responded with a series of interest rate hikes but those came to

an abrupt end as the global economy went into a tailspin. Between chasing inflation and plummeting growth rates, the central bank chose to address the latter in the second half of 2008-09. This phase too came to an

end, sometime in May-June of 2009.

The gradual accumulation of steam in inflation was now again led by commodity prices, but this time the push came from domestic causes. The government to its credit over the last few years has pumped in

additional purchasing power in rural India through the NREGA and other better directed schemes. So the

impoverished ends of villages are now demanding a better life chance, meaning more food. This is one of

the reasons why food inflation refuses to go away. The supporting factor in the current episode is the steeling of prices in the manufacturing sector as demand

conditions have improved. Real estate prices especially in cities like Delhi, Mumbai, Pune and Jaipur are

already back to their pre-downturn level and threatening to rise further.

To finance the demand for credit from the corporate sector the RBI has got to expand the money supply at a faster clip. The expanding pace of growth of GDP, plus inflation is a shorthand calculation of how much credit needs to grow to feed an expanding economy. But that pace of credit growth is a recipe for further

inflation. So the combination of factors makes it extremely likely that inflation will persist for some more time.

Meanwhile finance minister Pranab Mukherjee has said inflation will ease soon and as early as August. The optimism is based on the prices prevailing in the economy at the same time last year. He is also pinning his

hopes on a bumper kharif harvest that will bring down prices.

The myriad phases of inflation will be explored in the various articles we have collated from the top experts

in the field. We hope you enjoy the same. q


About the Issue


InflAtIon bASIcS

Inflation may be caused due to several economic factors:

l When the government of a country prints money in excess, prices increase as there is too much money in circulation chasing too few goods.

l Increase in production and labor costs have a direct impact on the price of the final product, resulting in inflation.

l When countries borrow money they have to cope with the interest burden. This interest burden may result in inflation.

l High taxes on consumer products can also lead to inflation.

l Demand pull inflation is when the economy demands more goods and services than what is produced.

l Cost push inflation or supply shock inflation is when non availability of a commodity would lead to increase in prices.

The problems due to inflation would be:

lWhen the balance between supply and demand goes out of control, consumers could change their buying habits forcing manufacturers to cut down production.

lInflation can create major problems in the economy. Price increase can worsen poverty, affecting low income household,

lInflation creates economic uncertainty and is a dampener to the investment climate, slowing growth and finally reducing savings and thereby cutting consumption.

lThe producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.

lManufacturers would not have an incentive to invest in new equipment and new technology.

lUncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.


Management of current inflation

requires both supply-side and

demand-side approaches.

Monetary policy has addressed

the latter with a gradual, calibrated

set of actions on both interest

rates and liquidity management

Managing Inflation in the Post-Crisis Environment

INflATION

The Growth Backdrop

The Indian economy weathered

the global crisis of 2008-09

quite well. Even as much of the developed world is still quite some distance from its pre-crisis

growth rate, several emerging

market economies (EMEs) have

made up the lost ground relatively

quickly. As indicated in Chart 1, India saw its growth rate decline

from 9.4 per cent in 2007-08 to a

trough of 6.7 per cent in 2008-09.

There was a modest recovery in

2009-10 to 7.4 per cent, with the

second half of the year showing a

slight improvement over the first. The outlook for the current year

is generally more positive, with

several forecasters projecting

growth to be around 8.5 per cent.

While this is still somewhat short

of the pre-crisis performance,

The author is Deputy Governor, RBI.

there is a widespread perception

that, with the several capacity

constraints that the economy

faces, more rapid growth than

this would quickly trigger strong inflationary pressures.

Inflationary Pressures

R e g r e t t a b l y , t h o u g h ,

inflationary pressures have been visible in the economy even in the

early stages of the recovery. Chart

2 indicates that the turnaround in

headline inflation, as measured by the overall Wholesale Price

Index (WPI) began in June 2009.

This was clearly a period in which

the recovery was in its very early

stages, with the economy growing

at an annual rate of around 7.5

per cent, significantly below the pre-crisis rate. It was logical to

attribute the rise in the inflation rate to supply-side factors.

Subir Gokarn

POlICy STANCE


The validity of this inference

is evident from the same chart.

The prices of primary articles

began to rise in March 2009 but

the rate of increase accelerated

s h a r p l y a r o u n d A u g u s t . A

significant contributor to this

was the rapid escalation in food

prices as a consequence of a weak monsoon. Later in the year, as

prospects of a global recovery

looked brighter, commodity

prices continued to rise. The

combination of rising global

commodity prices and domestic

food prices contributed to

a sustained increase in the

inflation rate for primary

articles until April 2010.

There has been a plateauing

since then. This is partly

attributable to a global

softening of commodity

prices, as uncertainties

about the sustainability of

the recovery have arisen.

If this continues, it will

help to reverse the trend in this

component of the index. But, the

most significant cause of reversal

is likely to be a moderation

in food prices over the next

few months in response to a

reasonably good monsoon.

The other supply-side driver

of inflation in recent months has been energy. The inflation rate for the fuel component of the

WPI began rising in June 2009.

Though it remained in negative

territory until October 2009, the

rise itself contributed to a rise

in the overall inflation

rate. From October 2009

onwards, fuel inflation has been positive and

rising quite rapidly.

In short, the Indian

economy has clearly

seen a spurt of inflation, significantly driven by

supply-side factors in

a period during which

growth was relatively

s l o w . P r e v a i l i n g

wisdom on mone ta ry

policy suggests that supply-

side pressures, particularly if

they are temporary in nature,

are not effectively tackled by

conventional monetary measures,

which are more directly aimed at

reining in demand. Apart from the

temporariness of these supply-

side factors, the overall state

of the economy should also be

considered. The same wisdom

argues that, if the economy is at or

close to full capacity utilization,

monetary actions in response

-15

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Chart 2: WPI Inflation and its Major Components

Overall WPI Primary articlesFuel group Manufactured products

9.2

7.6

5.9

7.3 7.6

0123456789

10

2007-08 2008-09: H1 2008-09: H2 2009-10: H1 2009-10: H2

Perc

ent

Chart 1 GDP Growth

Source: Central Statistical Organisation.


to supply-driven inflationary

pressures may be appropriate.

While they will not directly

address the cause of the inflation, by signaling a willingness to

compress demand, they will

rein in expectations of inflation spiraling out of control.

The fact that the economy was

still growing at a relatively slow

pace in the second half of 2009-10

implied that there was some slack

still available in capacities across

sectors and that the threshold

for strong monetary actions had

not yet been reached. However,

monetary assessments at that time

could not be made independently

of the very drastic measures that

had been taken when the global

crisis precipitated in September

2008. Those actions took the

monetary position, as reflected in the repo and reverse repo rates and

the cash reserve ratio (CRR) quite some distance from what would

be considered normal levels. Even

in the early stages of recovery,

therefore, every opportunity to

revert these instruments to normal

needed to be exploited. I shall

return to this point a little later in

the article.

The Rising Significance of Demand

Coming back to the inflationary situation, while a significant

proportion of the rise in the

inflation rate over the past year can be attributed to supply-

side factors, demand pressures

became visible in early 2010.

While it is difficult to identify a perfect measure of demand-side

inflation - what is conventionally referred to as “core” inflation - a practical measure that reflects the underlying forces to an extent

is the sub-component of the

manufacturing component of

the WPI, which excludes food

products. Chart 3 displays the

pattern of this sub-component

“ N o n - f o o d M a n u f a c t u r i n g

Inflation”

As growth slowed in 2008-

09, this indicator also moved

downwards. It actually went

into negative territory for a few

months, before turning marginally

positive in December 2009. While

this turnaround was clearly not

indicative of any rapid build-up of

demand pressures, the fact that it

had happened was a signal that the

business cycle had bottomed out

and growth was on its way back

up. However, after that rather

sedate start, this indicator began

to accelerate rather rapidly in the

early months of 2010. At the time

that this article was written, the

numbers for June 2010 had just

been released; this indicator had

risen to 7.3 per cent.

The inflation rates that the

economy is now experiencing,

both from the supply and the

demand sides, are clearly a

matter of great concern. It is

incumbent on the government

and the central bank to use all

the means at their disposal to rein

inflation in. In this effort,

monetary policy has two

specific objectives: (i)

to prevent the spillover

of supply-side pressures

into a more broad-based

inflationary process and

(ii) to moderate demand to

levels consistent with the

capacity of the economy to

meet it without provoking

price increases.-4

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9

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Chart 3: Non-food Manufactured Products Inflation


Monetary Policy: Thought and Action

Let us look at the thinking

and actions on the monetary

front against the backdrop laid

out above. As already indicated,

drastic monetary actions were

taken during the last quarter of 2008, sharply bringing down both

the policy rates and the CRR.

Looking back on this period, it

can be reasonably argued that

these measures contributed to

the stabilization of the economy

and the relatively small impact

of the crisis by infusing massive

amounts of liquidity into the system. The fiscal stimulus, which came in various forms during the

same period, helped by directly

creating demand in a situation

in which private demand was

sluggish. Without these combined

interventions, the outcome would

almost certainly have been far

worse. The monetary stance

remained in a critically supportive

mode until October 2009, when

the first steps to move towards a normal position were taken.

Table 1 lists all the monetary

actions taken from then until July

2, 2010.

Four key concerns have

influenced the sequence and magni tude of the monetary

actions listed in the table. First,

even while the Indian economy

has recovered quite rapidly from the slowdown, there is persistent

global uncertainty. Emerging

market economies (EMEs) have

generally done quite well in coming out of the crisis, but a

major part of the global economy

- the US, the UK, the Eurozone

- is not only showing only very

modest signs of recovery, it is

also manifesting new stresses,

partly as a result of the huge

build-up of sovereign debt, which

governments used to support their

various fiscal stimulus packages. Over the past few weeks, optimism

about a sustained, even if slow,

global recovery, has been giving

ground to concerns about another

imminent slowdown. One thing

that we learnt from the events

of 2008-09 was that India is not

immune to global turbulence. Be

it through trade, capital flows

or a general sense of confidence about economic prospects, a

global problem quickly becomes a domestic one. Given these

linkages, the risks from the global

economy need to be taken into

consideration while formulating

domestic policy.

Second, the reality is that

the policy instruments are far

Table 1: Monetary Policy Measures Since October 2009

S. No.

Monetary Policy Instrument

Present Rate (%)

Change Since October 2009 (basis points)

Remarks

1 2 3 4 5

1 Reverse Repo Rate 4.0 +75 25basis points (bps) each in March, April and July 2010

2 Repo Rate 5.5 +75 25bps each in March, April and July 2010

3 Cash Reserve Ratio 6.0 +100 75 bps in January 2010 and 25 bps in April 2010

4 Statutory Liquidi ty Ratio

25.0 +100 October 2009


from being in a normal position.

As the economy recovers, it is

imperative that policy instruments

be brought as quickly as possible back to a position consistent with

the state of the economy. This

is essential for the management

of expectations as well as to re-

create the capacity to respond,

should another shock hit the

economy. But, as important as

it is to return to normal quickly, it is equally necessary to do so non-disruptively. The kind of

rapid and massive reductions

that were made to instruments

during the crisis simply cannot be

replicated in the reverse direction.

Growth i s p i ck ing up and

confidence gradually returning

to businesses and consumers,

but given the vividness of the

crisis, the process is still likely

to be vulnerable to both external

shocks and domestic ones. Rapid

transitions in the policy regime

might constitute one such shock.

In essence, on this consideration,

while rapid and drastic actions

are entirely warranted when

dealing with a crisis, managing

a return to normalcy requires a more gradualist and calibrated

approach.

Third, notwithstanding the

above two issues, the fact is that

inflation has taken hold, with both supply and demand pressures

contributing to it . Monetary

policy must respond. The table

indicates that it indeed has. Action

on rates and liquidity, through the CRR, began in January and has

continued at the measured pace

indicated earlier over the past six

months. One strong criticism of

the Reserve Bank’s approach has

been that it has been “too little,

too late”. I would submit that

the test of this is yet to come.

It is well-known that monetary

policy acts with a lag. It could

be anywhere between 6 and

12 months, even longer before

demand side pressures abate in

response to an action. Given this,

actions taken during January-July

2010 should start to show their

impact on inflation over the next 6 to 12 months.

The fact that the non-food

manufacturing inflation rate went up sharply during the first half of the year is in and of itself cannot

be attributed to the absence of

monetary actions during this year.

To address that, actions would

have had to be taken in the second

half of 2009. But, at that point

even the domestic recovery was

at best in its early stages and its

trajectory was quite uncertain. An anti-inflation stance in those

conditions would have been rather

risky.

Finally, as I have already

mentioned, an important lesson

from the crisis was the critical role

of liquidity in the financial system in maintaining economic stability.

The policy approach over the

past few months has been very

conscious of the need to balance

the exit from an abnormally high

liquidity situation, which the response to the crisis created with

the current liquidity requirements of both the public and private

sectors.

Conclusion

To conclude, the management

of current inflation requires both supply-side and demand-side

approaches. Monetary policy

has addressed the latter with a

gradual, calibrated set of actions

on both interest rates and liquidity management . The pace and

sequencing of the actions has been influenced by both persistent global uncertainties and the need

to support the domestic recovery.

This has required a balancing act between reining in inflationary expec ta t ions and adequa te liquidity in the domestic financial system. While the current rate of

inflation is a legitimate concern, the results of this policy stance should

become visible over the next few

months. q

(E-mail : [email protected])


As the choice is between high growth and high

inflation, one would suggest that even at the cost of India achieving slightly lower

growth, moderating inflation is crucial

Inflation in India: Trends, Causes and Policy Options

INflATION

S D E F I N E D i n economics text books, inflation is a sustained rise in the general level of prices of goods and

services over a period of one year. In other words, it indicates the percentage rise in the general prices today compared to a year ago. The rise (fall) in inflation means that purchasing power of money declines (increases). This measure is very useful in understanding the trends in cost of living and also in comparing the trends in major macroeconomic variables. From the policy point of view, particularly for the monetary authorities, tracking of inflation is quite essential in formulating necessary growth policies.

In the recent period, India has been witnessing very high inflation rates and this has become a serious policy concern as it could have adverse impact on both growth and welfare of the country. The recent data shows that the headline

A

The author is Professor, National Institute of Public Finance and Policy, New Delhi.

inflation in May 2010 is at 10.16%, against the RBI’s comfortable level of around 5%, as stated in the April 2010 Annual Credit Policy statement. In this context, here we look into the recent trends in the inflation rates (both headline and also the sub-components) and the main drivers of these high rates. In the end, some discussion on the policy options that might help in containing inflation would be specified.

Recent Trends

Before we look into the recent trends in the inflation rates, we need to understand the existing measures of inflation. As in any economy, India also has two broad estimates that cover the prices in wholesale market (which is called Wholesale Price Index (WPI)) and the retail market (Consumer Price Index (CPI)). Within CPI there are three sub indices that cover three groups namely industrial workers, urban non-manual employees and

N R Bhanumurthy

OVERVIEW


agricultural laborers. But there is no consolidated CPI for the whole economy. In the case of WPI, the index covers only the prices of goods and not the services, thus, making difficult for the policy makers and researchers in choosing the appropriate price index for target and also for research. However, WPI is the one that is tracked by the analysts and policy makers as the information flow is faster with WPI compared to CPI, which comes with a lag of two months. It is also generally assumed that any changes in the prices in wholesale market would eventually transmit (or pass-through) to the retail market. Hence, WPI might be a better indicator for tracking the general price level in the economy. However, a look at the graph below shows that the convergence between WPI and CPI inflation is quite weak, particularly during the high inflationary periods, and also takes a long lag. Thus, this divergence in price indices also results in divergences in the policy impacts as well.

The recent t rends in the inflation numbers show that India is experiencing high inflation situation since the end of 2009 and currently it is at an uncomfortable level of 10.16% in May 2010 and there are expectations that this would increase further. At the disaggregated level, one may note that the prices of both food and non-food and the fuel group are increasing sharply since the middle of 2009, while the inflation rate in the manufacturing sector was almost subdued at around 6% for a long time. As minimum rise in the inflation rate acts as an important incentive for the production activity,

this could have adverse impact

on the consumption and could

particularly affect the poor who are

largely not indexed in India. Based

on this, our own study in the past

have shown that the threshold (or

the optimal or tolerant) inflation for India is at around 4 to 4.5%. Policy makers (particularly the

monetary authorities) would try

to contain the inflation at around this range. Although India does

not follow the inflation targeting regime (where the inflation rate

should be controlled at a level fixed

by the legislation. For instance, UK

has fixed the inflation target at 2%), it is generally clear from the policy

statements (such as annual Credit

policy) that the Central Bank would

try to control the inflation once it crosses the ‘comfortable level’.

Causes for high inflation

As discussed above, currently,

in May 2010, the WPI inflation is above 10%. Monetarists, led by Nobel Laureate Milton Friedman

of Chicago School, across the

globe believe that ‘in the long-run,

Recent trends in inflation (in %, at disaggregated commodities level)Month All Primary

ArticlesFood Non-

foodFuel

groupManufacturing

Apr-08 8.04 8.85 5.54 10.99 7.02 8.07

Jun-08 11.82 10.56 5.93 17.09 16.27 10.60

Sep-08 12.27 11.59 7.72 16.97 16.59 10.93

Dec-08 6.15 11.15 9.95 9.35 -0.21 6.63

Mar-09 1.20 5.21 7.54 -0.88 -6.00 2.29

Jun-09 -1.01 6.52 10.89 0.12 -12.53 0.64

Sep-09 0.46 8.41 14.20 -3.56 -8.18 0.53

Dec-09 8.10 16.09 20.04 9.84 5.92 5.42

Jan-10 9.44 15.45 18.41 10.87 8.12 7.30

Feb-10 10.06 15.99 18.11 12.95 10.22 7.52

Mar-10 11.04 18.25 17.39 24.69 12.71 7.38

Apr-10 9.59 13.88 16.87 10.53 12.55 6.70

May-10 10.16 16.60 16.49 18.60 13.05 6.41

Source: Estimated from data available at RBI. All the data pertain to month-end information.


inflation is always and everywhere a monetary phenomenon’. This means that the money supply growth is the major determinant of inflation and in the long run higher inflation rate can be controlled only through tight monetary policy. But there are other competing schools, such as Keynesians, that say that money is not so important rather than the aggregate demand caused by private and government spending that determines inflation. Hence, Keynesians suggest that money is not the only one determinant of inflation. Money has a role only when its growth is higher than the economy’s capacity to absorb. There is also a view that explains ‘cost-push’ version of inflation, which is largely due to supply-shock that results in fall in aggregate supply. Overall, while there are many theories that explain the causes of inflation, based on enumerable empirical studies, relying on one school of thought might not be wise. In India also there were many studies on inflation determinants and their conclusions are quite diverse. As the behaviour of inflation is very dynamic the theoretical explanations of this behaviour could also be dynamic. Hence, this needs to be examined on a regular basis.

In the case of India, one may also need to note that within the WPI basket there are many commodities’ prices that are still administered by the government. For example, the prices of many of the food items, such are rice, wheat, pulses and edible oils, are still announced by the government through its Commission for Agrucultural Costs and Prices (CACP) that declares the Minimum Support Prices (MSP)

before the harvest session. In the fuel group also, until very recently the prices were administered and even now the prices of diesel and kerosene are regulated. In that sense, only two-thirds of the WPI consumption basket is determined by the market forces.

Looking at the table, one can derive that the current high inflation is caused by sharp rise in the prices of primary articles and the fuel group prices. The causes behind this rise are many. First, as we know, Indian agriculture still heavily depends on the monsoon, bad monsoon last year has crippled the agricultural output growth and, hence, resulted in rise in food prices. Secondly, the Government, to support the agricultural activities, has hiked the MSP on many important commodities atleast four times in the past three years. This has had a permanent shift upwards in the overall agricultural prices. Thirdly, there is also a rise in the overall cost of production due to rise in the labour costs, which has been attributed to labour shortages following the successful implementation of MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) in many of states. Fourthly, there is also a general rise in the world commodity prices (in particular, food and fuel prices) following the huge global stimulus packages that were warranted following global financial meltdown. These global prices appear to have passed on to domestic prices through commodity exchanges. Fifthly, the recent government’s decision to deregulate the fuel prices and do away with fuel subsidies has also resulted in inflationary

expectations. Lastly, in the post-Lehman collapse, the government, similar to other industrialized countries, has launched both fiscal and monetary stimulus programs. This has pushed the fiscal deficit (both centre and state) to nearly 10.8% of GDP in 2009-10. This could have also pushed the inflation from the demand side through rise in the aggregate demand with given output. Apart from all these factors, the current high inflation could also be due to very low base last year. For example, the headline inflation even upto September 2009 was close to zero with deflation in June 2009.

Overall, as the inflation numbers, similar to other macroeconomic var iables , have seen sharp volatility both at domestic and also at international level, the year 2010-11 could be a year of some macroeconomic stabilization.

Policy Options

High inflationary situation has created policy dilemma. As managing inflation is largely the responsibility of the monetary authorities, there were calls for the RBI to tighten the monetary policy. (RBI had followed accommodative policy by cutting the policy interest rates by 400 basis points, in the post-Lehman saga as part of stimulus program). But, as the economy was just recovering after the global slowdown, there were also apprehensions that any tightening at this juncture could restrain the economy from robust recovery. As India was experiencing increasing

inflationary expectations, the RBI

has decided to hike the interest rates

by 25 basis points in July 2010.

This is based on the judgment that

the demand side (or core) inflation is firming up within the headline inflation, which can be controlled only by monetary tightening.

As the inflation is not purely due to demand side reasons and

core inflation (estimated as non-food and non-fuel inflation) is

building up but only at around

6 to 7%, monetary tightening measure alone is not sufficient to contain this double-digit inflation. Fiscal and sectoral policies also

have vital roles. Reducing fiscal deficits is identified as one of the policy measures to achieve stable

inflation with growth. Towards

this, the Central Government has

already laid down the path for

fiscal stimulus reversal that could

contain aggregate demand-push

inflation. This year, the government has already shown its seriousness in

implementing other fiscal measures such as disinvestment to bring

down the deficits. But there are many other structural measures that

are needed. One such measure is

to bring in changes (or revamping)

in the current public distribution

system (PDS), which, given the

huge food stocks, could have been

a major channel through which

food inflation could have been

contained.

To sum, following both monetary

and fiscal stimulus packages, the Indian economy is strongly coming

out of the slow-down phase. But

the high inflation appears to create

dilemma for policy makers. As

the choice is between high growth

and high inflation, one would

suggest that even at the cost of India

achieving slightly lower growth,

moderating inflation is crucial as the cost of high inflation is much higher than the loss of growth.

This is particularly more so for a

country such as India, where the

people working in the unorganized

sector is very high and they are

not protected from the rising cost

of living. Further, as the trickle

down of prices is faster than the

trickle down of incomes for the

poor, controlling inflation could be prioritized. q


YE

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As area available for agriculture and

food production is going to shrink,

focus should be given on enhancing

the productivity of crops to keep

pace with growing demand for food

Food Inflation in India: Causes and Remedies

INflATION

NDIA HAD not faced double digit inflation in food during the last several years despite serious drought and

decline in food output in some years. The scene of food inflation has turned quite different after 2008. In most of the months year on year inflation remained close to or above 10 percent since mid 2008. This is causing a serious concern as expenditure on food accounts for more than 50 percent of total household expenditure in rural and 43 per cent in urban areas. Households in lower income categories spend much higher percentage of their budget on food compared to the higher income groups. This indicates that food inflation hurts more than any other commodity group and low income consumers are affected much more than high income consumers.

The reasons for food inflation can be grouped into two categories:

I

The authors are respectively Director and Scientist, National Centre for Agricultural Economics and Policy Research, Pusa, New Delhi

those which follow from changes in

global market and those which are

related to domestic economy. With

the increase in liberalization of trade

in agriculture since early 1990s

domestic food prices have been

strongly influenced by international prices. However, food prices in

India and international markets

have not behaved in the same way

after the year 2006. Global food

price increased by 26 per cent

during the year 2007 and reached

historical peak by middle of 2008.

In contrast to this, food prices in

India (refer to the whole sale price

index for food items that include

food articles plus food products,

with base 1993-94) increased by

less than 8 percent during 2007

and 2008. Further, monthly food

prices in global markets increased

by 20 percent between January and

June 2008 while India experienced

only 12 percent increase. This

difference in behavior of the

domestic and international prices

Ramesh Chand P Shinoj

ANAlySIS


has evoked serious concern because

of persistently high rate of food

inflation in the country and also raised several questions. Why food inflation in India is ruling

much higher than the inflation in international prices? Are Indian

prices lower than international

prices and closing the gap between

the two necessitates higher inflation in India? Has trade ceased to be

an important instrument for a

country like India in taming food

inflation?

In a count ry l ike Ind ia ,

which is largely food sufficient at aggregate level and where

trade to output ratio is not very

high, domestic factors matter

much more than global factors

in determining medium and long

term trend in prices. These factors

are numerous and they relate to

domestic demand, supply, food

administration, state intervention,

changes in market conditions.

Further, factors like demand

and supply depend upon many

variables like growth in income,

distribution of income, dietary

diversification, urbanization,

money supply, credit, technology,

and weather related variables, to

name a few.

Structure of Inflation

Dividing the commodities

included in WPI in two major

groups, viz. food and non food,

shows that rate of price increase

was higher in non food group

compared to food group during

January 2008 to October 2008.

After this food and non food

prices follow disparate trend.

There was a sharp fall in inflation in non food items whereas food

prices moved towards double rate

of increase. For about 9 months

from March - November 2009

WPI for non food prices was lower

than corresponding figures during 2008 which resulted in negative

inflation in non food prices. In contrast to this food price inflation in the same period increased

from 8 per cent to 20 per cent.

Because of negative growth in non

food inflation the overall rate of inflation remained close to zero in this period. After November

2009, prices of non food items

also started rising which pulled

up overall rate of inflation in

the country to double digit level

during February – March 2010.

There is some slowdown in food

inflation after December 2009, but food inflation still rules above 16 percent (May 2010).

Causes of Food inflation

Taking a closer look at food

inflation based on WPI over the last two years, it becomes apparent

that manufactured food products

have been contributing in a higher

proportion than primary food

articles towards rise in prices.

During May to July, 2008 when

the rate of overall inflation was at peak, the share of manufactured

food products in total food inflation was in the range of 55-60 per cent

(Figure 2). This higher share is not a

matter of surprise as manufactured

food products have a higher

weight in the overall index than

primary articles. However, it would

indeed attract interest if the case is

opposite as happening in the recent

months.

Lately, it is noticed that, primary

food articles are increasingly

outweighing manufactured food

products in terms of aggravating

food prices. Among the primary

articles, cereals, milk and meat

have higher share but rapid increase

in prices of pulses and fruits and

vegetables are also igniting food

inflation. To cite specific examples, the price of rice increased 12

per cent during January, 2008

to May, 2010 where as wheat

prices increased 7 per cent. Among

pulses, price of pegion pea rose

by 62 per cent and that of black

gram shot up by 105 per cent

during the same period. Price of

sugar, a manufactured food product Figure 1. Inflation in food and non-food commodities


increased steeply with an average

rate of inflation of 40 per cent

between January, 2009 and May,

2010. The fact that all these articles

are essential and irreplaceable

components of the daily diet of

an average Indian consumer adds

gravity to the situation.

Analyzing the causes

Supply side constraints and structural deficiencies

The steady increase in food

prices can be attributed to a variety

of long-term and short term causal

factors. The most important and

widely discussed is the demand–

supply imbalance in essential

food commodities. With a steady

growth in income of the people and

increasing urbanization, the demand

for food is rising consistently year

after year. The increase in earnings

of below poverty households from

programs like MGNREGA also

seems to be contributing favourably

to growth in food demand. On the

other hand, various supply side

constraints like stagnating area

under cultivation, and plateauing of

crop yields etc are posing limits to

production. The drought in the last

year caused by deficient south-west monsoon is an immediate reason for

supply shortfalls during later half of

year 2009 extended to 2010. The

country received around 25 per cent

less precipitation in the 2009 kharif

season in relation to long-term

average. As a result, production

of major food commodities got

affected leading to overall shortfall

in food grain production and other

major crops like oil seeds and

sugar cane. The shortfall in rice

production was around 20 per cent

with respect to the previous year

(Table 1). Wheat production was

less than targeted, but not lower than

that of previous year. Production of

oilseeds and sugarcane also suffered

a perceptible reduction.

At such instances of supply

shortfalls that lead to lower

accessibility of poor people to

food, the government often resorts

to enhanced delivery of essential

commodities from the buffer stock

through Public Distribution System

(PDS) and through open market

sales. However, in the present

situation, none of these mechanisms

seems to work efficiently. On

the one hand, the government is

grappling with high food inflation, on the other hand it grapples with

large volume of stocks much above

stipulated buffer stock norms. As

of 1st June, 2010 the stock of food

grains in the central pool rose as

high as 60 million tons whereas

the prescribed stock limit in July is

only 26.9 million tons. It is a matter

of double loss to retain such high

levels of stock, first due to excessive expenditure incurred on storage and

second, it remains inaccessible to

Figure 2. Contribution of various commodity groups to food inflation

Table 1. Production of major food crops and their shortfalls in recent years

Crop 2006-07 2007-08 2008-09 2009-10*

Rice 93.4 (1.7) 96.7 (3.5) 99.2 (2.6) 80 (-19.6)

Wheat 75.8 (9.2) 78.6 (3.7) 80.7 (2.7) 81.5 (1.0)

Cereals 203.1 (4.1) 216 (6.4) 219.9 (1.8) 197.6 (-10.1)

Pulses 14.2 (5.9) 14.8 (4.2) 14.6 (-1.4) 15.1 (3.4)

Total food grain 217.3 (4.2) 230.8 (6.2) 234.6 (1.7) 212.7 (-9.3)

Oilseeds 24.3 (-13.2) 29.8 (22.6) 27.7 (-7.1) 24 (-13.4)

Sugar cane 355.2 (26.3) 348.2 (-2.0) 285 (-18.2) 259 (-9.1)

Note: Figures in parentheses indicate per cent change from previous year; * Figures are provisional.


people thus contributing to rising

prices.

The International link

India almost insulated its food

sector from transmission of high

global food prices during 2007-08

through domestic intervention and

trade measures including export

bans. Such an effect is evident

from the price peaks witnessed in

global food prices in mid 2008.

The prices of most commodities in

majority of the countries remained

subdued in the first half of the year 2009 on account of contraction of

demand associated with recession

and financial downturn. Even

after a sharp fall in global prices

from the peak level during 2008,

the level of these prices in most

cases remained higher than prices

in India. This, when global prices

were falling, there was pressure

on food prices in India to rise to

come in a sort of equilibrium with global prices. This explains why

domestic food inflation remained high when global prices declined

after late 2008.

During 2009 -10 (June to

May), global food prices again

started showing up. FAO food

price index, which is a composite

of 5 major food groups, increased

by 17 percent since June 2009 till

May, 2010. The sharpest jump was

visible in sugar prices. FAO sugar

price index shot up from 233.1 in

June, 2009 to 375.5 in January,

2010 due to supply shocks in

Brazil. In the same period prices

of dairy products went up by 86

per cent and edible oils prices

increased by 11 per cent. All these

price changes are transmitted

in varying degrees from global

markets to the domestic markets

through various channels. Another

striking observation with long-

term implication is that the real

unit values of imports of major

agricultural commodities are

seen to be rising during the last

ten years. The unit value of pulse

imports at 1993-94 prices in the

year 2001-02 was Rs. 8833 per

ton which increased to Rs. 10781

per ton by 2008-09. Same trend

was observed for wheat, sugar and

vegetable oils too. This has long-

term implication in terms of taking

the domestic prices to higher

levels over a period of time and

reflects the supply side constraints at global level. It is observed

that some part of food inflation in India is due to integration of

domestic price trends with global

price trends. However, the current

crisis appears to be more due to

domestic factors than external

reasons

Forward trading

Forward trading and speculation

in food commodities is said to

be another factor fuelling food

inflation. A common notion is

that during shortages, the futures

prices of commodities remain

very high and the traders take cue

from these prices to decide on the

spot prices. Even though essential

food grains are out of the purview

of forward marketing, percolation

of price effect from other food

and non-food commodities in

the forward markets cannot be

ruled out. However, there is no

conclusive study so far to either

accept or refute the hypothesis

that futures trading leads to

inflation. Abhijit Sen committee appointed to look at the matter

maintained that “current evidence

available does not provide any

conclusive evidence whether there

is any casual relationship between

futures trading and rise in prices

of agricultural commodities”.

However, it is to be noted that

their report does not rule out

the possibility of futures trading

contributing to inflation either.

Managing food inflation

Several initiatives have been

taken by the government and the

central bank to contain general

inflation. The RBI has tightened

its monetary policy by making

upward revision in its key policy

rates several times in last one

year period. However, monetary

policy has very limited role

to counter inflat ion in food

commodities which is essentially

caused by supply side constraints

and the underlying deficiencies

are chronic in nature. Food

commodity driven inflation has

become a persistent phenomenon

and the corrective measures

involve concerted efforts over

an extended period of t ime.

With public investments already

hiked substantially in the recent

years, there is now a need to pay

attention to improve efficiency

of such investments. As area

available for agriculture and

food production is going to

shrink focus should be given on

enhancing the productivity of

crops to keep pace with growing

demand for food.


Overhauling the PDS is another corrective

measure which can be undertaken in the medium

term. Piling up of food grains in the granary beyond

the stipulated levels is an avoidable proposition.

Resorting to open market sales at specific intervals would help in both relieving the granary of excess

stocks and checking the build up of prices in the

domestic market simultaneously. It is also logical to

widen the scope of PDS by including more essential

commodities like pulses, edible oils and sugar, to

provide some protection to the poor against food

inflation. However, it is not clear whether expansion in PDS coverage to include more items is helping

in reducing food inflation or it is adding to food inflation because of rise in subsidies and leakages in our delivery system.

Resorting to food imports can help in checking

domestic prices to make up the supply shortfalls,

provided imports are planned on time. Our

past experiences with wheat imports give

ample evidence of imports turning costlier with

international prices moving up with India’s

decision to go for import. We need to develop a

system for getting advance information on demand

and supply imbalances and tune our trade policy

accordingly.

As an immediate remedy, all steps to prevent

hoarding and speculation in food commodities have

to be expedited. The states should be proactive to

forego some taxes on account of interstate transport

of commodities at least for the time being till the

prices reach normal levels. Downward revision of

state-specific customs and excise duties on diesel may also help bring down the prices of inputs used

in agriculture.

In essence, measures to control inflation

in general, and food inflation in particular, can be classified as immediate remedies and medium- and long-term remedies. Immediate remedies are

more like treating the symptom leaving aside the

causes which requires long-term visioning and

planning. q

(E-mail : [email protected] [email protected])

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The coincidence of food and fuel

led inflation episodes may be a matter of

chance but they draw attention to the need for a longer term perspective on

these key sectors

The Inflation Challenge to Policies

INflATION

H E H I G H r a t e o f

inflation is destabilizing f o r t h e i n d i v i d u a l

households, businesses

and the economy as a

whole. Double digit inflation brings down the purchasing power of

households at least in the short-

run as income levels do not rise so

quickly for most people. After a relatively long period of moderate

price inflation, we have experienced now two episodes of high inflation. We have had double digit annual

rate of inflation based on consumer price index (CPI) for industrial

workers since July 2009 until

May 2010. While inflation rate

has been unusually high in the last

five months, even when measured using the wholesale price index, it

is important to note that there has

been sharp volatility in the inflation rate over the last two and a half

years covering the period from

January 2008 to May 2010. The

price situation has changed from

T

The author is Senior Research Counsellor, NCAER.

high inflation to negative inflation and then back to high inflation

during this period. In both the cases,

international price shocks were

important determinants although

the domestic supply constraints in

the form of effects weak monsoon

were more prominent in the latter

half of 2009-10. The demand

side factors were an important

influence in the first episode of

recent inflation, prior to the global economic crisis: there were large

capital inflows requiring active interventions by the RBI to manage

exchange rate volatility.

An important feature of the

inflation episodes of 2007-08 and 2009-10 is that its bite was through

the increase in the prices of essential

commodities: fuel and food. The

impact, even when limited to

two segments of the consumption

basket, has been widespread. The

international markets also played

a positive role in keeping inflation limited to some sectors rather than

Shashanka Bhide

PERSPECTIVE


full blown transmission across

sectors. The drop in the prices of

commodities as the global economic

crisis intensified gave some time for Indian consumers to bear the food

inflation. The current inflation has also occurred at a time when the

markets have had much greater

role to even out the supply demand

mismatches. After all, the trade

policies are now relatively freer

than ever before, exchange rate is

more flexible, domestic markets

are more competitive and monetary

policy is more geared to deal with

inflation. Without these features the impact of inflation may well have been more intense.

It is not that there were no

demand side pull factors during this

period. There was a strong fiscal stimulus or an expansionary fiscal policy in the works to offset the

decline in private sector demand

during the period of global crisis.

The monetary policy was liberal

to provide enough liquidity to the system when there was increased

risk aversion among the lenders.

Some of this loose fiscal and

monetary policy positions may

have had some lagged inflationary impact.

Thus, both international and

domestic dimensions of the

economy were influencing the price scenario. The policy response has

had to address both these factors.

It was necessary to ensure that

the essential commodities were in

adequate supply but at the same time it was necessary to align demand to

the emerging medium term to long-

term supply potential.

In the period before the global

economic crisis of 2008-2009,

there was a sharp increase in the

prices of food commodities in the

international markets. The price

of petroleum crude rose from $70

per barrel in July 2007 to $140

in August 2008. These enormous

price increases were attributed to

the heightened pace of economic

growth, especially in China and

India. The high energy prices also

began to shift crop areas from

grain production for food to grain

for energy. However, as the global

financial markets crashed in 2008 and world trade slumped, the price

of petroleum crude dropped to

$40 per barrel by December 2008.

There were concerns of deflation at the time, which is no less a policy

challenge as inflation. The crude oil prices began to rise gradually

and by March 2010, they are at

$80 per barrel. The transmission

of international prices to domestic

prices in the petroleum sector is

controlled by the price policy of the

government with respect to petrol,

diesel, kerosense and LPG.

Commenting on the rising rate of

inflation in the second half of 2009-10, the economic survey for 2009-10

said, “Apprehensions of shortages

in agricultural production due to a

deficient south-west monsoon this year are mainly responsible for

increasing inflation”. The Survey expected overall food inflation to decline after its high level of 19.77

per cent in December 2009.

Between January 2010 and May

2010, the overall annual inflation rate measured by the Wholesale

Price Index (WPI) has remained

at about 10 per cent in each of the

five months. We may note that

between March and June 2009, the

WPI based annual inflation rate

was actually below 2 per cent. This

low rate of inflation had actually continued right upto November

2009 when the inflation rate rose to 5.5 per cent. The volatility is

evident from these numbers. The

role of specific drivers of inflation is evident when we consider sector

specific prices. As we noted earlier, food and fuel prices have remained

the drivers of both upward and

downward changes in the overall

price index during 2008-10. This

pattern points to greater role of

the supply demand imbalances in

these sectors rather than an overall

general demand led inflation. The rise in food and fuel prices would

transform into a more general price

rise especially if global markets are

not offsetting these changes.

The consumer price index (CPI

for Industrial Workers) has been

in double digit growth for an even

longer period, from July 2009 to

May 2010. The CPI assigns higher

weightage to food items than is the

case with WPI. Whichever way

one looks at the price scenario it

reflects sharp rise in the price level in the last 6-8 months. The rise in

the prices of pulses, vegetables

such as potatoes, food items such

as sugar, the group of eggs, meat

and fish and milk has been very steep. To the extent that some of this

increase is on account of temporary

setbacks to supplies due to the poor

monsoon of the last year, the policy

response has to focus on ensuring

that the markets are competitive and

safety nets such as the PDS operate

efficiently. Access to international

markets should remain freer.


It has been often said that

we need consistent and stable

trade policy regime so that trade

decisions are taken by the suppliers

and consumers on a longer

term perspective. In the case of

agricultural produce, particularly

food products, our approach

has been one of self-reliance.

Although it is necessary to expand

domestic production capacity, it is

also necessary to have access to

international supplies and provide

markets to domestic producers.

What is needed is improvement in

productivity so that our producers

remain competitive in international

markets.

The need for a longer term view is

also evident in the case of petroleum

products. The coincidence of food

and fuel led inflation episodes may be a matter of chance but they

draw attention to the need for a

longer term perspective on these

key sectors. An effective safety net

of PDS at affordable prices for the

poor is beyond doubt necessary.

But it is also necessary to avoid the

situation where grain in stock has to

be disposed of in the international

markets at unremunerative prices.

The bountiful stock of grain

when prices are rising steeply is

paradoxical. Resources such as

land need to shift to sectors where

there are supply failures and not

be tied down to specific sectors. More vegetables need to be grown

and they are presumably harder to

import.

The petroleum sector presents

an equally difficult challenge. Demand for energy will keep

rising sharply over the medium

to long term. We need policies

that incentivise more efficient

use of energy. Inability to target

subsidies effectively- as in the case

of kerosene and diesel- implies

inefficient use of these resources. Given the essential nature of these

energy sources, there is a need for

an effective safety net for the poor.

But subsidising consumption can

become unsustainable proposition

very quickly if the supplies do not improve quickly enough. Deregulation of fuel prices when

they are highly subsidised does

imply a steep increase in prices.

But this measure is more likely to

yield more sustainable outcomes.

There is also a need to be more

transparent about the need for

high taxes in the petroleum sector.

Without the measures to improve

efficiency in the use of energy high taxes would become a source of

revenue for the government.

The inflation episodes of the recent two years have highlighted

the delicate balance of supply and

demand in the two crucial sectors:

food and energy. Adequate stocks of foodgrain with the government

have proved important buffer

against insecurity. In the case of

energy the more secure balance

of payments position has been a

source of security. The short-term

policy measures have focused on

managing liquidity and reducing the scope for speculation and

hoarding. But we also need longer

term measures to improve supply

systems so that the economy

can respond quickly to resolve supply-demand mismatches and

minimize the vulnerability to

inflation. q


YOJANAForthcoming

IssuesSeptember 2010

Yojana will bring out an issue on Sports Development in India

October 2010 The October 2010 issue will focus on Food Security

September 2010&

October 2010


While India’s vulnerability to international

prices has evidently increased and it

can hurt the poor severely, a long

term strategy would need to be in place to modernise and strengthen India’s agriculture sector

Inflation Episodes in India

INflATION

R A D I T I O N A L LY,

INFLATION in India has

primarily been caused by

supply shocks; drought

and consequent increase in food prices, or (and) increase

in oil prices reflecting hikes in the international prices of crude oil.

Once in a while demand pressure

also manifests in inflation. The

most common example cited is that

of the increase in the pay of civil

servants in the wake of awards by

the Pay Commission; that of the

Fifth Pay Commission is stated to

have been felt in the escalation of

prices in 1998-99; and the impact

of the Sixth Pay Commission

was manifest in 2008 and 2009.

Inflationary situation may worsen if the domestic and external factors

that contribute to escalation of price

level overlap in the same period.

T

The author is Economic Advisor in the Ministry of Tourism, Govt of India

To recall, inflation in 1979-81 was caused by supply shocks created

mainly by a combination of the hike

in global oil prices and the drought,

affecting adversely the domestic

agricultural sector.

In the early years of the 90s, India

experienced double digit inflation. A major trigger of inflation around this period was a sharp rise in the

value of oil imports due to rise in

world oil prices in the wake of the

gulf crisis. This was the period

when agriculture performed poorly

for several years adding to the

supply shocks. The problem was

exacerbated by high fiscal deficit and increase in the money supply.

A steep devaluation in the wake of

economic reforms also made import

costlier.

The policy response to the

crisis took the shape of tightening

Manas Bhattacharya

lOOKINg BACK


of the monetary policy, capping

the issue of ad-hoc treasury bills

by the government restraining

thereby government borrowing

and liberalising imports to ease

shortages.

In the decade starting with 2000,

India did not experience double-

digit inflation. The peak inflation during this decade was between

8 to 9 per cent. Till 2007-08, the

highest annual average inflation

experienced was 7.2 per cent, and

this was in 2000-01. In that year

too it was driven by the ‘fuel,

power and lubricant’ group, which

experienced 28.5 per cent increase

in the average annual inflation.

The next high inflation year was 2008-09, when the average annual

inflation was 8.41 per cent. This was driven by a steep rise in the prices

of primary articles, which rose

by 10.06 per cent. There was also

unprecedented increase in the prices

of manufactured products; it rose by

8.10 per cent, a height, which was

never attained in this decade. Fuel

prices were high, but not very high.

It may be noted that 2008-09 was a

recession year. After experiencing

more than 9 per cent GDP growth in

three preceding consecutive years,

growth fell to 6.7 per cent in 2008-

09. Interestingly, several factors

coincided during this period. First,

primary sector growth slumped

from 4.6 per cent in 2007-08 to

1.6 per cent in 2008-09. Second,

the first instalment payment of the

Sixth Pay Commission was released

adding to the demand pressure; and

third, there was steep increase in the

volume of import combined with

increase in import prices. The unit

value index of import increased

from 210 in 2007-08 to 239 in

2008-09. The volume index of

import also increased from 218 to

262 (Base year 1999 -2000 = 100).

There was also steep increase in the

Minimum Support Price (MSP) of

Paddy, which increased from Rs.

645 per quintal in 2007-08 to Rs. 850 per quintal in 2008-09. As per the Economic Survey 2008-09 of

the Government of India, in 2008-

09, the MSP in almost every crop

had witnessed increases of about 30

per cent or more.

Within the primary articles,

food inflation was 8 per cent, the highest in the last five years, the inflation of non-food articles was also high at 11.2 per cent, the

second highest in the last five years and the inflation of minerals at 34.9 per cent was also the second highest

in the last five years. Within the manufactured product group, food

products have one of the highest

weights, which experienced steep

inflation of 10 per cent, the highest in the last five years. Similarly, the product group chemicals and

chemical products, which have the

highest weight in the manufactured

products group, had experienced

7.2 per cent inflation, the highest in the last five years. The basic metals alloys and products group

experienced 14.4 per cent inflation, the second highest in the last five years. A unique feature of this inflation is that so many product groups simultaneously experienced

pressure on their prices. Globally,

the spurt in the prices of crude

oil, minerals and metal related

products impacted domestic prices

in India significantly. Inflationary pressure in India reached its peak

at 12.8 per cent in August 2008 and

gradually eased thereafter and the

trend broadly corresponded with

the trend in global inflation.

The annual average inflation

for 2009-10 was a low 3.6 per

cent. However, this should not

camouflage the fact that inflation remained hardened in primary

articles. Average inflation in

primary articles was 10.62 per

cent. Overall inflation was low due to negative inflation in fuel, power and lubricant category and positive

but low inflation in manufactured products. Around this time the

domestic administered prices of

petrol and diesel were revised

upward and made effective from

July 2009.

In 2009 -10, year-on-year

inflation was the lowest (and

negative) in August 2009 and

started picking up thereafter.

Inflation gradually rose from 0.5 per cent in September 2009 to

9.9 per cent in March 2010. This

was primarily driven by inflation in primary articles. The second


instalment payment of the Sixth

Pay Commission was released in

October 2009 bringing in demand

pressure in the market. October

2009 was also the turning point

for the global food prices to start

rising. The period coincided with

deficient monsoon, floods in some of the southern states, decline

in agricultural production and

consequent expectation of shortage in the domestic market.

Year-on-year inflation in April 2010 was 9.59 per cent; inflation in primary group of articles was

13.88 per cent; 12.55 per cent

for the fuel and power group and

6.70 per cent for the manufactured

group. In the month of May 2010,

the overall year-on-year inflation was 10.16 per cent. The inflation of the primary articles was 16.60

per cent; fuel group exhibited

13.05 per cent and manufactured

products registered 6.41 per cent

inflation.

In India inflation is measured in terms of the Wholesale Price Index

(WPI) and it has tracked global

prices well. It may be noted that the

international practice of measuring

inflation is by the Consumer Price Index (CPI). In India, CPIs are

computed separately for industrial

workers (CPI-IW), urban non-

manual employees (CPI-UNME)

and agricultural (rural) labourers

(CPI-RL). The coverage in terms

of number of items included in

the basket for computation of the

CPIs is much less than that of

the WPIs. The base years for the

CPI are 1982 for the industrial

workers, 1984-85 for the urban

non-manual employees and 1986-

87 for the agricultural labourers.

In comparison, the base year

for the WPI is 1993-94. The

inflation, if measured by the CPIs is subject to the qualification that it has less number of items under

coverage and has older base years

and therefore may not capture

the changes in the production

and consumption patterns over

time adequately and therefore the impact of changes in prices on

consumer welfare. Nonetheless,

the Economic Survey, 2009-10 of

the Government of India shows

that the food inflation from April 2008 to December 2009 have been

tracked in a similar fashion by all

the three indices, WPI, CPI-IW and

CPI (rural labour).

It would be of interest to study

the most recent trends in food

prices as evident from the CPI-IW

since it has much higher weight on

food items than the WPI has on

primary articles. Food prices are

critically driving inflation these days and have significant impact on poverty. This index shows

that the food inflation reached its peak in December 2009 at 21.29

per cent and thereafter it started

declining gradually reaching 16.03

per cent in March 2010. This

might partly be a reflection of the

fact that international prices have

also started softening. One can

therefore look for a cooling off in

prices to stay if the forthcoming

monsoon does not betray.

The government generally

adopts a se t of regula tory,

administrative and economic

measures to combat inflation.

In 2009-10, the set of measures

included monetary tightening,

liberalising import, reducing import

duties on food items, removing

levy obligation of imported sugar,

imposing ban on export of non-

basmati rice, edible oils and pulses

(except kabuli chana), using

Minimum Export Price (MEP)

to regulate exports of onion,

suspending futures trading in rice,

urad and tur, imposing stock limit

orders in the case of paddy, rice,

pulses, sugar, edible oils and edible

oil seeds, distribution of imported

edible oils to states at a subside

prices, distribution of imported

pulses through Public Distribution

System (PDS) at a subsidised

prices and higher allocation for

distribution of wheat and rice to

states etc.

While India’s vulnerability to

international prices has evidently

increased and it can hurt the poor

severely, a long term strategy would

need to be in place to modernise

and strengthen India’s agriculture

sector. The reform in this sector has

so far been slow and sluggish. q



Commodity derivatives can

indeed emerge as the most effective hedging avenue for Indians, for

risks arising out of runaway inflation and price volatility

Inflation: Myths, Realities and a Policy Agenda

INflATION

FRONT-PAGE news

i tem on July 8 in a prominent business daily said it all: Maverick chef Sanjeev Kapoor is reportedly cooking up

recipes and modifying existing ones in his repertoire – to fight the food price inflation battle in the kitchen. Indeed, the current runaway inflation in India, while not historically unprecedented, is definitely unusual on at least two counts: one, despite the government trying all ammunitions up its sleeve, high inflation has been ruling the roost continuously for more than two years now. Second, the current persistent inflation is ironically coinciding with the greatest global recession and its (hopeful) recovery since the Great Depression; in other words, while most countries are looking to control deflation, India seeks to do just the opposite - reign in inflation.

what does not cause inflation

What explains the current runaway inflation? Reasons are

A

The author are Chief Economist and Economist, respectively, with the Multi Commodity Exchange of India Ltd., Mumbai.

galore – from drought-induced food grains supply shortage to increasing money supply and rising international prices of most commodities, spilling over to consumer prices. As is apparent and well-publicized, it is indeed a combination of all these factors that is contributing to inflation currently. We look at some of these factors in the next two sections. What is not so apparent and is actually the favorite whipping boy is the commodity futures market – its role in stoking the fire of inflation. As a result, banning futures trading is often the first knee-jerk reaction of these constituencies; though the expert committee that looked into any possible connection between commodity futures and inflation could not find any. In this section, we seek to bust the myth of causality between high commodity prices and futures trading, providing the following seven clinching evidences to the contrary:

Fact # 1: As shown in Table 1, the weight of futures-traded food

V Shunmugam Debojyoti Dey

VIEWPOINT


commodities in the Indian wholesale price index (WPI) is rather small, less than 5 percent, which is even less than the combined share of two commodities not traded on futures exchanges – sugar and rice. Hence, even if there were to be futures trading-induced price rise, its impact on general food price inflation would be negligible.

Fact # 2: As Table 1 shows, for the futures-traded commodities that are the most significant in the WPI (wheat, maize, cotton, groundnut oil, together account for almost 4 percent in WPI), the volume of futures trade is very small vis-à-vis that of physical trade. Hence, it is highly unlikely, even theoretically, for such small volumes to have a significant impact on physical market prices.

Fact # 3: The price rise in the futures-traded commodities has

been much less than that in the non-

traded commodities. For example,

the spot price of Chana (also traded

in the futures market) increased by

less than 12 percent from December

‘08 to December ‘09, while the

prices of other pulses not traded in

the futures market – Tur, Urad and

Moong – surged by 61, 70 and 148

percent, respectively, in the same

period.

Fact # 4: Let us focus on

the price behaviour of a food

commodity, Tur, which was banned

for futures trading – comparing

the spot price movement between

the period when future trading was

active and when it was delisted. As

may be seen in Table 2, contrary to

the perception that futures trading

drove up prices, the reality is that

such trading actually helped reign in the price of Tur.

Both Facts # 3 and 4 are manifestations of the beneficial effects of a well-functioning futures market, which not only enables risk-averse individuals to pass on their risks to other market participants, but also brings in transparency, thus making it difficult for reckless traders and unscrupulous entities to drive up commodity prices. The policy implication of this aspect is detailed in Sections 5 and 6

Fact #5: Exchange-disseminated (advance) price signals refer to wholesale market prices, while consumers pay retail prices. The margin between the two is determined by transaction costs, which include, among others, the risk premium added by traders on account of price volatility. To the extent that commodity exchanges provide transparency in transactions and help reduce price volatility, exchange-traded commodities typically lead to better prices for both producers and consumers by reducing the aforesaid margin at each level in the entire value chain. Indeed, the commodities that show the highest price volatility in India are typically not exchange-traded. For example, a comparison of average daily volatility of Tur, Urad, and Chana (see Table 3) clearly shows that the average daily volatility in Tur and Urad (not traded in futures) was much higher than that in Chana, which has a futures market. Their volatility got further magnified during the last kharif when the monsoon played truant, demonstrated by the price volatility in the monsoon period of mid-June to mid-October 2009.

This clearly shows that futures trading can contain ‘price volatility’ – the major cause behind ‘hoarding’. Stricter administration of anti-

Table 1: Share in wPI and ratio of futures to physical market volumes of select agricultural commodities

Commodities Share in wPI

Futures Volume Vs

Spot Volume

Commodities Share in wPI

Commodities traded on Commodity Futures

Exchanges

Commodities not traded

on Commodity Futures

Exchanges

Wheat 1.38408 2.9% Garlic 0.05905

Maize 0.18561 2.7% Moong 0.11225

Barley 0.02734 25.8% Urad 0.09619

Gram (Chana) 0.22365 639.7% Tur (Arhar) 0.13466

Coffee 0.08188 198.9% Sugar 3.61883

Raw Cotton 1.35674 7.8% Bajra 0.11044

Groundnut seed 1.02883 0.0% Jowar 0.22189

Rape & mustard

seed

0.58066 398.9% Tea 0.15739

Soyabean Oil 0.17838 298.0% Onions 0.09372

Rice 2.44907

Source: Ministry of Commerce of Industry; Exchanges’ websites; Directorate of Economics & Statistics: Department of Agriculture & Cooperation; NHRDF; CMIE India Harvest. Volume figures pertain to December, 2009


hoarding measures can only address the malaise i.e. ‘hoarding’ but does not attack the main cause for hoarding i.e. price volatility. Allowing the futures market to develop and mature will address the cause of hoarding through reduction in price volatility, as argued further on in the article.

Fact #6: India is a net importer of commodities such as soybean oil and crude palm oil and, thus, relies on international prices for these commodities. If futures prices in Indian commodity exchanges do show a spurt in these prices, which also gets reflected in spot prices, they merely mirror high international prices (Table 4). Besides, adverse currency movements also make imports costlier. If the Indian prices were higher, the arbitragers always had the opportunity of buying from low selling physical markets, carry over and then deliver on commodity exchanges.

Fact #7: A spurt in futures prices

can actually be used as a correct signal of impending shortages and administrative measures taken to augment supply, accordingly. For example, when (in 2009) sugar prices in the international markets jumped over 127 percent, the domestic price rose by only 79.6 percent (see Table 4), thanks largely to the measures taken by the Indian government to augment supply.

What caused inflation

If the futures market did not cause the recent bout of inflation, what did? Any attempt to analyze the reasons for price rise in India, especially in agricultural commodities, should follow an understanding of the fundamental supply-side dynamics of these commodities, much of which are specific and peculiar to India. Supply of most staple commodities is prone to large fluctuations owing to diversities in cultivation ecosystems, exposure to agro-climatic shocks such as moisture stress, major diseases

such as late blight. These affect production and lead to consequent volatility in prices, as explained below in two commodities – potato and sugar.

Potato prices slumped in the 2007-08 marketing season to as low as 2 Rs/Kg due to huge production of over 31 million tonnes, a record. Late blight in the next growing season across major growing areas critically affected production, delayed market arrivals and increased prices. Potato price inflation got a further shot in the arm with a huge price rise in other vegetables and the consequent consumer switch to potatoes.

Sugar price inflation, on the other hand, was largely attributed to the cyclical effect of commodity–price relationship. After two consecutive years of bumper production, huge inventory and consequent low prices, domestic sugar market in the 2008-09 marketing season witnessed shortages, thanks to a 44% decline in production, leading to price rise. The production decline, in turn, was owing to a shift in acreage away from cane to food crops, where farm gate prices saw better realization over the past two years and the Minimum Support Prices (MSP) of these crops were also supportive. Poor rainfall in this and subsequent season also contributed to diversion of land to less water-intensive crops.

As these instances show that extraneous factors causing supply-side shocks are primarily responsible for current inflation. Yet, one of the erroneous policy responses to inflation was banning of futures trading in several commodities. In fact, the prices of such commodities did not decline following the ban. On the contrary, prices of some of

Table 2: Tur – Percentage change in prices during different time periods

Duration Status % Increase in Prices

Oct 2001 to May 2004 (32 months) Pre futures trading 32.5%

Jun 2004 to Jan 2007 (31 months) During futures trading 6.5%

Feb 2007 to Dec 2009 (35 months) Post delisting 86.6%

Source: CMIE India Harvest, Data for Delhi market

Table 3: Average daily volatility in spot prices – traded vs not traded - on Indian Commodity Exchanges

CY 2009 June 16 to October 16, 2009Commodity traded on Commodity Futures Exchanges

Chana (Gram) 1.39% 1.54%Commodities not traded on Commodity Futures Exchanges

Tur 7.00% 11.60%Urad 6.40% 10.90%

Source: CMIE India Harvest; data for Delhi market


these commodities e.g. sugar and potato, afflicted with acute supply shortages, continued to rise at an increasing rate. The fact is: futures only help predict future prices and, therefore, act as a market signal for future availability. To that extent, they can aid in taking policy measures to respond to the impending supply situation well in time. Hence, there is actually a need to strengthen the institution of futures markets, if only to receive timely signals for future availability of commodities.

A demand-side interpretation of inflation

As the above analysis clearly proves, it is not only that there is no evidence of causal links between the future market and inflation, but prices in this market also tend to rise more moderately, which gets reflected in similar moderation in the price rise in the spot market as well. Independent observers, economists and even the Abhijit Sen Committee, appointed by the Indian government, corroborated the absence of any causal link. The reasons for inflation were multifarious, the supply-side issues of which have been briefly discussed above. Immediate policy response to inflation has been scarce little on the supply side, not just because the issues fall in the realm of structural bottlenecks inherent in the Indian economy, but also because in a

globalised economy as ours external shocks get quickly transmitted into the national economy. Therefore, an emphasis on demand management is critical, especially because it seems to contribute substantially to inflationary pressures and constitute the ‘doable dos’. Expansionary fiscal and monetary policies in the backdrop of the global recession of 2007-09 may have contributed to high inflation, but even the years preceding the recession witnessed significant accommodative fiscal and monetary conditions, leading to creation of the first principles of inflation: “too much money chasing too few goods”.

Truth be told, there was a loose monetary policy in tandem with expansionary policies of most nations during the boom years of 2003-2007. The US, for example, kept interest rates at just 1 percent for years after the 2001 recession. This made the already spendthrift Americans to spend much more than they earned, creating a huge US trade deficit and corresponding trade surpluses in emerging economies, including India. Besides, inflation in the US economy was kept down by outsourcing economic activities to low-wage nations like India. This created another set of conditions for high growth in India where prices assets such as stocks and housing increased at unprecedented rates. The Reserve Bank of India,

together with the public sector-dominated banking ecosystem, did take proactive steps to nip the formation of asset bubbles in the bud. Yet, money supply grew concomitantly, in part also because the RBI had to prevent the rupee’s appreciation coinciding with huge forex inflows during the boom period.

When money supply exceeded the absorptive capacity of the economy, aggregate spending outpaced aggregate production and, thus, prices surged to signal that growth needed to be tamed. But policy action to slow growth is a politically difficult decision in India which is struggling to attain rapid growth on a sustainable basis. Yet, growth in the aggregate measure of India’s broad money supply, or M3, was 12 percent in 2004-05, which increased to 21.7 percent in 2006-07, before moderating slightly at 18.6 percent in 2008-09 (Source: Economic Survey).

Ironically, in the aftermath of the Great Recession, the countries whose loose monetary policy was partially responsible for the financial crisis culminating in the recession had to continue with the same policy to thwart a full-fledged depression. Thus, while the US Federal Reserve maintained an interest rate of less than 2 percent for the greater part of the boom years, it is forced to keep it at near-zero levels currently to provide liquidity to an economy striving to come out of recession. In India, in addition to a loose monetary policy, we saw a slew of expansionary fiscal policies during the same time, the biggest of which (viz. Sixth Pay Commission Implementation and the National Rural Employment Guarantee Program) were not

Table 4: Percentage change in futures prices in international markets

Commodities Exchange CY 2009

Soybean Oil (CBOT) CBOT (CME) 20.2%

Sugar (Raw) NYBOT (ICE) 127.4%

CPO Bursa Malaysia 48.4%

Cotton NYBOT (ICE) 54.6%

Source: Bloomberg


even linked to the recession. What monetary authorities in these nations failed to note was that when the resultant inflation co-exists with policy-induced low interest rates, a regime of very low or negative real interest rate is created. This makes the real money supply much higher than the stock of nominal money supply, further stoking up the inflationary fire. A Merrill Lynch study found that a 1 percent fall in the real interest rate increases commodity prices by 17 percent over 10 months. Thus, expansionary monetary policy creates inflationary pressures even indirectly through negative interest rates.

Hence, authorities in India are currently fighting inflation through a monetary squeeze, even if it means slowing growth, Monetary tightening is deemed necessary now more than in the previous months, as inflation has spilled over from food to non-food items and industries are showing signs of growth at rates exceeding what current capacity permits.

Commodity derivatives: an effective inflation hedge

The above is a one-shot demand side view of the economy that is facing inflation in recent times. Characteristically, policies aimed at effective demand management have been employed to rein in this monster. However, monetary policies cannot address the supply-side of the market, which actually is the raison d’etre of the price rise that we are witnessing currently. Besides, monetary policies are more effective as policy ‘signals’ for setting expectations of market participants, rather than creating or controlling availability of real goods and services, and effect markets

only with a lag. Additionally, when commodity price increases are transmitted from markets overseas, or are caused by extraneous factors such as a monsoon failure, there is little that domestic monetary policy can do. Hence, it is a combination of monetary and fiscal tightening which can prevent inflation from attaining unmanageable proportions and avert its spill-over from one sector to another.

At the micro level, while inflation cannot be prevented by individuals and corporate entities, its effect on them can be minimised by a powerful inflation-hedging device that has received scant attention from all the stakeholders – the institution of commodity futures market. It has gained huge popularity in emerging economies like India and China where exchange-traded commodities are available to consumers and producers to hedge risks arising from a possible galloping inflation. As examined and proven in paras above, not only futures-traded commodities have suffered less from inflationary effects but their price volatility also has been muted compared to other commodities. Indeed, suitability of commodity derivative products and large requirements of numerous price hedgers have meant that commodity futures have proven to be an effective de-risking instrument for many market participants.

Yet, many risk-hedging products, such as options and indices, which can be appropriately tailored to meet the risk appetite of diverse corporates are currently not permitted in India. Similarly, participation by financial institutions and foreign entities is also not permitted in our markets, though their entry could provide

the much-needed depth, liquidity and popularity to the commodity derivatives market. This market in India is still guided by the Forward Contracts (Regulation) Act, 1952, which was enacted in the backdrop of wartime shortages, a context far-removed from the realities and demands of today’s economy. With a ‘strong regulator within a liberal policy environment’, which is the avowed objective of Indian economic liberalization agenda, commodity derivatives can indeed emerge as the most effective hedging avenue for Indians, for risks arising out of runaway inflation and price volatility.

Conclusion and outlook

Many observers opine that the persistent inflationary tendency in the Indian economy over the last several months is a long-term phenomenon, a result of rapid economic growth, rising incomes of a youthful population, stagnating agricultural production and supply capacity falling short of demand. Hence, it is imperative to take long-term visionary initiatives to moderate inflationary pressures and absorb the price shocks before they hit the real economy. Monetary management and fiscal policies such as price controls and quantitative restrictions can only prove to be effective as short-term solutions. An innovative policy regime must necessarily include items such as strengthening of institutions which absorb and prevent price shocks from impacting the real sector: the institution of exchange-traded commodity derivatives. It is time the opportunities thrown open by globalization are harnessed in designing an innovative policy

framework towards this end. q

(E-mail : [email protected] [email protected] )


With demand picking up there

will be inflationary pressure. But the

wearing out of low base effect and good farm output this year

will help in moderating it

Inflation and State of The Economy

INflATION

NFLATION IS something which nobody is happy about. It is like a tax and hits the poor the hardest. Inflation means the rate of

increase in prices over a period of time, say a week or a month. It is measured for food and other primary articles, fuel and manufacturing. If one says inflation is coming down it does not mean that prices are coming down. It means that the rate of increase in prices was less. In India Inflation is measured in terms of wholesale price index unlike in the developed nations where inflation is measured on the basis of consumer price index, which reflects the retail prices. There will always be some amount of inflation in a growing economy. Also as per classical economic theory a small dose of inflation is good for a growing economy as it has a multiplier effect on growth.

In India, high inflation in 2009 and the current year 2010 is mainly due to the fact that the country

I

The author is Economic Affairs Editor Ticker News

faced severe drought resulting in fall in summer Kharif food grain output. This pushed up inflation to an unprecedented level and food inflation touched nearly 20% in December 2009 after which it began to fall. Food Inflation was mainly due to supply constraints, which started easing with the arrival of winter Rabi crop and seasonal factors tapering off. But what was more problematic was food inflation spreading to other areas resulting in overall inflation going into double-digit. Inflation in May this year was at 10.16% and it is expected to be high in June as well because of the recent fuel price hike. The government decided to carry forward an unpleasant reform measure to decontrol pricing of petrol and move towards decontrolling diesel prices. The Government could no longer wait as state-owned oil companies were bleeding because of under-recovery due to subsidised fuel prices particularly, that of kerosene and cooking gas. So, government

K R Sudhaman

OVERVIEW


freed pricing of petrol due to which price of petrol went up by Rs 3.50 per litre. Diesel, whose pricing too would be eventually decontrolled, was increased by Rs 2.00 per litre. Kerosene was increased by Rs 3.00 a litre and LPG Rs 35 a cylinder. Despite the increase in fuel prices, under-recovery of state-owned oil marketing companies Indian Oil, Bharat Petrleum and Hindustan Petroleum is likely to be Rs 53,000 crore this financial year.

June Inflation is likely to be up by 0.9% because of the fuel price hike. But what is significant is that inflation which has been partly high because of the low base effect, is expected to fall with the wearing off of the base effect. Also fuel price hike may push up inflation in the short run but in the long run it will lead to demand contraction, thereby helping in moderating inflation. The low base effect is also likely to wear off from June as around this time last year inflation started rising. Inflation is measured year-on-year. Due to global recession in 2008-09, inflation was unusually low and at times negative during that period. As Inflation is compared with what it was in the previous year, the inflation this year has got magnified or exaggerated because of the low base effect.

With the low base effect wearing off from June this year inflation will begin to fall and as Reserve Bank and Government had projected, it is expected to be around 5-6% by the end of this financial year 2010-11. With good monsoon projected this year, food output is expected to be good. The Planning Commission Member incharge of agriculture, Abhjit Sen had indicated that farm output would grow by 5-6%.

India has one of the highest food grain stocks this year, estimated at around 60 million tonnes. So unlike last year, food inflation is not expected to be high this year. The high inflation from the middle of last year will bring into play the high base effect which will help further in inflation being lower than what it would have been otherwise. Significantly, last year, despite comfortable food grain stock of about 44 million tonnes, wheat and rice prices were high as the government could not take a decision to subsidise further to release these food grains in the public distribution system at lower prices. This is because of the fact that the government already had high food subsidy bill and was not in a position to give more subsidy to food with fiscal deficit mounting to 6.6% of GDP in 2009-10 due to the fiscal stimulus package provided to ward off the impact of global crisis on Indian economy. Strangely this resulted in food grain stock going up by 7 million tonne in a year when production fell due to poor monsoon.

Another factor for inflation has been that Minimum Support Price for various agricultural crops has been increased substantially in the last few years. This has no doubt put more income into the farmers’ hands, but at the same time it has pushed up the prices of agri-products. Indian wheat prices are much higher than global wheat prices, which are ruling around $170-200 per tonne. This means that landed price of imported wheat is around Rs 10-11 per kg whereas Indian wheat sent from Punjab to southern city like Chennai costs Rs 13-14 a kg. This has resulted

in a peculiar situation where flour mills in south India prefer to import wheat rather than buy wheat from Punjab or Haryana. Also carrying and storage cost of food grain is also contributing to higher price of Indian food grains.

Government has therefore embarked upon an ambitious plan to provide food security to over 50-70 million families below the poverty line. After Right to Education through Education for All and Right to Work through National Rural Employment Guarantee Programme, food security would be the third major initiative of the Government for the social uplift of the poor. The food security legislation is in process of formulation. Under the programme all below poverty line families will be provided 35 kg of food grain every month at Rs 3 a Kg.

A significant development is that nobody is complaining about inflation now. This is because the purchasing power of people has gone up, particularly in the rural areas because of the higher minimum support price and National Rural Employment Guarantee Programme.

But what is worrying now on the inflation front is that it has spread to manufacturing, particularly with growth picking up in the face of economic recovery. Last year Reserve Bank pursued an easy and accommodative monetary policy and the government came out with two or three rounds of fiscal stimulus package to minimise the impact of global crisis on the Indian economy. The easy monetary policy and the fiscal stimulus were together aimed at demand revival to


help the sagging growth. Lowering of Cash Reserve Ratio several times from 9% in 2008 to 5% by early 2009 had brought-in nearly Rs 4 lakh crore liquidity into the banking system. Cash Reserve Ratio is the percentage of the deposits that commercial banks park with the central bank. This is an instrument that is used to suck out or release liquidity into the banking system. This instrument is used to control money supply and thereby Inflation. Now the CRR is 6%. With the economic recovery and growth, inflation has surged to double-digit forcing Reserve Bank to tighten its monetary policy.

Reserve Bank would perhaps want to suck out more liquidity from the system with surging capital flows. It would be keen to move back to normal levels. But at the moment temporarily liquidity position is slightly tight because of a little over Rs one lakh crore payout on account of the 3G and broadband spectrum auction. This tight liquidity position will change shortly and Reserve Bank may then start hiking CRR, perhaps in its quarterly review of monetary policy in July end.

There will also be hardening of interest rates to ensure as Reserve Bank hikes key policy rates to contain inflation. With May inflation at 10.16% indicating non-food items have contributed higher prices, the central bank is of the opinion that inflation is now generalised and demand-side pressures are evident. Therefore, Reserve Bank on July one took yet another “baby step”, as RBI Governor D Subbarao calls, to tame inflation by rising repo and reverse repo rates by 0.25%. Repo is the interest rate at which

the central bank lends banks in the short term. Reverse repo rate is the one at which banks deploy surplus funds with RBI. Repo and Reverse Repo rates are also called key policy rates or overnight rates. After the July 1 hike, Repo rate is 5.50% and Reverse Repo rate is 4%. In the annual monetary policy in April, Reserve Bank hiked Repo and Reverse Repo rates by 0.25% to 5.25% and 3.75% respectively These are clear signals that the key policy rates have to brought back to pre-2008 normal levels. There could be further hike in key policy rates and CRR in July policy as well.

RBI kept CRR untouched now saying “easing liquidity and raising rates at the same time may seem inconsistent. However it should be noted that the liquidity easing measures have become necessary to manage what is essentially temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit (from accommodative monetary policy) which remains focused on containing inflation and anchoring inflationary expectations without hurting growth.”

Reserve Bank and the Finance Ministry have a tough task ahead in balancing inflation and growth as both are equally important. With the economic rebound, India’s GDP growth was 7.4% in 2009-10 as against 6.7% in the previous year, which witnessed sharp deceleration in growth from over 9% in the preceding year due to global financial crisis. Now growth is picking up and it is expected to be around 8.5% in the current financial year and would

go back to high growth of 9% next year (2011-12). There are surging capital inflows, FDI is expected to go up to 35 billion dollars this year. Infrastructure spending is increasing and it is expected to be over $1 trillion in the 12th five-year plan beginning 2012-13 from $500 billion in the 11th five-year plan ending 2011-12. Exports are picking up and are expected to touch $200 billion this year. These are signs of economy on rebound, which is the second fastest growing economy in the world after China. India is expected to overtake in growth in the next 2 or 3 years. Aware of these fast developments Government has already started withdrawing from the fiscal stimulus. Fiscal consolidation is crucial for containing inflation. The fiscal deficit, which shot up to 6.6% of GDP in 2009-10, is to be brought down to 5.5% of GDP in 2010-11 and to 4.1% of GDP in the subsequent years. With the Rs 1.06 lakh crore bonanza from 3G and broadband spectrum auction in May and June, containing fiscal deficit is not going to be a problem this year.

But Inflation is going to be an issue with growth picking up. The only dampner to growth could be the European debt crisis which may slowdown exports and capital inflows. With demand picking up there will be inflationary pressure. But the wearing out of low base effect and good farm output this year will help in moderating it. Reserve Bank is ever watchful and has been swift enough to take timely monetary action to contain inflation without hurting growth

momentum. q

(Email: [email protected])


According to the interest rate

channel, tightening of monetary policy

leads to higher interest payments and to lower net

profits. According to the bank lending channel, monetary tightening reduces

supply of bank loans

How Monetary Policy Impacts Stock Prices

MACROECONOMICS

ONETARY POLICY

is a much debated

i s s u e t h e s e d a y s .

Central banks around

the world appear to

have begun tightening monetary

policy. Tightening of monetary

policy evokes a shrill protest from

financial markets and financial

press. This article shows how

monetary policy influences share prices.

Changes in the official policy rate (bank rate) influence asset prices such as bonds and equities. Equity prices may adjust in response to changes in the rate

of interest. This may occur since

equity returns are discounted by a larger or smaller factor, depending

upon the rate of interest. This

factor is called the discount rate.

When interest rates rise, the

M

The author is Assistant Professor, Jindal Global University.

discount rate may rise. When

interest rates fall, the discount

rate may fall. Monetary policy

changes may also impact the

future stream of cash flows.

According to Ioannidis and

Kontonikas (2008), monetary

policy influences stock returns in two ways. First, it influences the discount rate which may be taken

to be the weighted average cost of

capital. Secondly, it influences the future stream of cash flows.

Impact of monetary policy on the discount rate

The capital structure of a firm may be assumed to include debt

and equity. Thus, the weighted average cost of capital or the

discount rate may be defined

as the weighted average of the

after tax cost of debt and equity

Ajay Goyal

RESEARCh


(Ross, Westerfield & Jordan,

2007, p488). Mathematically, the

weighted average cost of capital

may be expressed as:

Weighted Average Cost of capital (Wacc)

= Proportion of debt x After tax cost of debt

+Propor t ion of equity x Cost of Equity

Monetary t igh ten ing (an

increase in the policy interest

rate) may lead to an increase in

the after tax cost of debt while

monetary easing (a reduction

in the policy interest rate) may

lead to a decrease in the after

tax cost of debt. Thus, monetary

tightening should increase the


and monetary easing should

decrease the weighted average

cost of capital. The share price of

a given stock may be defined as the present value of future cash

flows discounted by the weighted average cost of capital. For a

given stream of cash flows, an increase in the weighted average

cost of capital would lower stock

returns and a decrease in the


would raise stock returns. The


may also be taken as a proxy for

the discount rate facing a firm. This is because the risks affecting

a firm which impact the discount

rate affect the cost of debt and

equity and hence the weighted

average cost of capital.

Monetary policy and the risk profile of a firm

Monetary tightening may

raise the risk facing a firm.

Consequently, equity owners and debt owners may raise cost of

supplying equity capital and debt capital. Loan capital becomes

m o r e e x p e n s i v e f o l l o w i n g

monetary tightening thus lenders

raise interest rates. Equity owners demand higher returns as the

required return rises following m o n e t a r y t i g h t e n i n g . T h e

required return or expected return is defined by the Capital Asset Pricing Model as follows:

Expected

Return

= Risk free rate

+ Beta x Market

Risk premium

Risk free rate is the rate of

return on riskless investment such

as treasury bills issued by the

Central bank. Beta of a security

is a measure of systematic risk.

It measures volatility of return

of a security in comparison to

volatility of market portfolio

such as FTSE 100 or S&P 500.

Systematic risk is the risk facing a

firm due to macroeconomic factors such as monetary policy changes,

exchange rate adjustments, oil

prices etc. Market risk premium

is the return required by financial investors over and above the risk

free rate.

The expected return is the

return required by shareholders to remain invested in the stock

and may also be expressed as the

required return. If investors do not receive the expected return

they may be tempted to sell the

stock, lowering the stock price.

The expected return is also known

as the cost of equity.

Monetary tightening raises the

risk free rate and beta which is the

systematic risk facing the firm.

The risk free rate rises because

the policy interest rate has risen.

The systematic risk may rise

because of increased riskiness

of firms. The riskiness refers

to the inability to meet fixed

and variable expenses. Hence,

monetary tightening raises the

cost of equity. Thus, monetary tightening may influence both

the cost of equity and the cost of debt. Similarly, monetary easing

may lower the risk facing a firm.

Consequently, equity owners and debt owners may lower the cost of

supplying equity capital and debt capital. Thus, monetary easing

lowers the weighted average cost

of capital.

Monetary transmission mechanism


This section highlights how

monetary policy is able to influence riskiness of stocks. This may also

help to explain heterogeneity in

industry and individual stock

returns. Two mechanisms have

been put forward to explain how

monetary policy influences the riskiness of stocks. These are the

interest rate channel and the credit

channel.

Interest rate channel

According to the interest rate

channel, tightening of monetary

policy leads to higher interest

payments and to lower net profits (obtained after subtracting interest

payments from gross profit) and cash flows of corporations. This is known as the cost of capital effect. If profits and cash flows are lower, then the expected share

price (present value of future

free cash flows discounted by

the relevant risk factor) would be

lower (Bean, Larsen and Nikolov,

2002 & Bernanke & Gertler,1995).

According to Mishkin (1995),

tightening of monetary policy

reduces the supply of money.

Since individuals have less money

to spend, they reduce spending

on equity. This lowers the price of equity and consequently stock returns.

Monetary t igh ten ing , by

raising interest costs, increases

the financial risks facing firms.

This is the risk of not being able

to meet interest and principal

payments on debt contracts

wi th f inanc ia l ins t i tu t ions .

Business risks may rise if firms are unable to meet operating

expenses. Monetary tightening

may induce a reduction in current

consumption and investment

expenditure. Households facing

higher borrowing costs reduce

c o n s u m p t i o n e x p e n d i t u r e .

Moreover, consumer confidence falls as lower expenditure in

the macro economy creates

recessionary fears. Reduced

investment expenditure may lead

to job losses. This contributes to

lower consumer confidence. If

both business and financial risks rise, total risk would increase.

In such a scenario, investors

would demand higher returns

for remaining invested in risky

stocks. Other things remaining

same, the required return can be obtained only if the current share

price falls. Share prices would fall

on expectations of lower future

corporate profitability (higher

wages and interest payments)

and reduced future consumer

spending.

A fall in the value of stock

indices may lower investor

wealth. This would in turn reduce

consumption expenditure. This

may, in the long run reduce share

prices even further. This is known

as the wealth effect.

Interest rate channel may help

to explain heterogeneity observed

in industry stock returns. Certain

industries involving huge capital

outlays on plant and machinery

rely on debt financing and are

more sensitive to interest rate

shocks. Further, industries such as

real estate and leisure experience

lower demand when monetary

tightening takes place. Thus, the

interest rate channel may help to

explain industry specific effects of interest rate shocks.

Broad Credit Channel

The broad credit channel

comprises of the bank lending

and balance sheet channel .

According to the bank lending channel, monetary tightening

reduces supply of bank loans.

This lowers investment spending

by firms and lowers total output

in the economy. The bank lending

channel affects small f i rms

adversely that would not be able

access other sources of credit.

However, companies listed on

the stock exchange may not

be affected. Listed companies

may be regarded as large sized

companies who may be able

to obtain credit on the best

terms and may not suffer from

credit rationing associated with

monetary tightening.


According to the balance

sheet channel, tight monetary

policy might adversely affect the

balance sheet of companies by

reducing cash flow net of interest

and reducing the availability of

collateral to obtain loans. Lower

cash flows reduce the net worth

of firms. Cash flows are lower

because interest burden is higher.

Secondly, tighter monetary policy

may reduce spending by the

banks downstream customers.

This would indirectly reduce

cash flows of firms even further.

Consumption spending fal ls

a s bo r rowing cos t s f a c ing

househo lds a re h igher and

consumer confidence is low.

Thus , households prefer to

substitute current consumption

for future consumption. The

credit channel does not operate

independent ly but works in

conjunction with the interest rate

channel. Weaker balance sheets

increase the external finance

premium (difference between the

cost of internal funds and external

funds) due to higher risks in

lending to f inancial ly weak

borrowers. Thus, the worsening

of borrower ’s balance sheet

worsens the availability of credit

and reduces investments. This

would further lower profits and

cash flows leading to a further

worsening of balance sheet. This

may not only lower equity returns

but also lower aggregate demand

and hence economic growth in the

long run. This would lower share

prices even further as share prices

may react to macroeconomic

fundamentals. This is known as

the financial accelerator principle

(Bernanke and Gilchrist, 1999).

The external finance premium

rises for all firms but the size

of the external finance premium

is higher for smaller firms. The

size of the external f inance

premium depends on the net

worth of firms. Thus smaller,

younger and more financially

constrained firms may face a

higher external finance premium.

This is due to higher information

asymmetry in case of such firms.

Firms face different discount

rates consequent to monetary policy changes depending on

their risk profile. As a result

some firms, depending on their

risk profile may not be able to

obtain credit even at a higher

rate of interest. This may help to

explain heterogeneity observed

in individual stock returns to

monetary policy changes.

Acco rd ing t o t he c r ed i t

channe l v i ew o f mone ta ry

policy, firms that are subject to

a higher degree of informational

asymmetry would suffer a greater

decline in share prices. Smaller

firms, younger firms and more

financially constrained firms face

risks that are increasing in the

degree of information asymmetry

(Fazzari, Hubbard and Petersen,

1988). The risks facing firms

are the ability to cover fixed

and variable costs. According

to Arnold (2005), information

asymmetry may be defined as

a situation where one party to a

transaction has more information

with respect to the risk and

return than the other party. Thus

borrowers and owners may have

superior knowledge regarding

risk and return as compared to

lenders and investors. Information

asymmetry creates a wedge

between the cost of internal

and external finance (external

finance premium) due to higher

risk perception. External finance

premium which is a proxy for

the individual firm risk profile

rises in the event of monetary

policy tightening. Thus stock

returns which are present value

of future cash flows adjusted for

risk falls for younger, smaller

and more financially constrained

firms. Even unconstrained firms

may face a certain degree of

information asymmetry and they

too may experience volatility

in stock returns. However, the

heterogeneity lies in the different

degrees of stock return volatility.

Investors may sell high risk

stocks and buy low risk stocks

contributing to market volatility

(Bernanke, Gertler and Gilchrist,

1996). q



Targeting food inflation should not be viewed only as a matter of price stability but also in terms of food security for all, particularly for

those who are still vulnerable despite a high and sustained

growth rate of national income

Analyzing Inflation

INflATION

N A country like India

where more than two

thirds of its population

doesn’t have adequate means to ensure minimum

prescribed level of calorie intake,

any further rise in the prices of

food grains will have a disastrous

impact on their living conditions.

The rise in the prices of food

items which can be termed as food

inflation therefore should be the

prime concern of policy makers

of any developing country like

India.

Except for certain incidences in 1996-97 and 1998-99, inflation remained not only more or less at the desired a level but also showed stability within a small range. However, since 2008 the situation has changed as inflation has started fluctuating at relatively higher scale. Despite several f iscal and monetary initiatives, the government has

I

The author is a research scholar at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi

got little success in controlling

inflation.

Broadly, inflation in India is

measured under two indices:-

The Wholesale Price Index

(WPI) and the Consumer Price

Index(CPI). CPI is calculated in

four different ways, which are

CPI for Industrial Workers and

CPI for (UNME) in urban areas

and CPI for Rural Labour and

CPI for Agricultural Labourers

in rural areas. Although the

consumer price index reflects

the prices realized at the final

consumption level and is inclusive

of all market distortions such as

indirect taxes etc, the Whole

sale Price Index is used more

frequently for measuring the overall inflation because of its

simplicity in calculation and

regularity in the measurement

process.

Avanindra Nath Thakur

ANAlySIS


During 2009 ( from April to

December) the inflation based on

Wholesale Price Index has shown

a remarkable deviation from its

past behaviour. The years 2000-

01, 2004-05 and 2008-09 have

shown higher than five percent

of average annual inflation.

During 2000-01 the basic factor

behind inflation was the rise in

the international prices of fuel.

In 2004-05 along with higher

international fuel prices, rise in

the prices of manufacturing items

because of higher growth and

consequent rise in demand in the sector was responsible for overall

inflation. In 2008-09 the situation

was different as the inflation was

primarily due to the rise in the

prices of all the three items ( viz.

Primary articles, fuel etc. and

manufacturing items) including

food products. This was mainly

because of greater integration of

Indian economy with the global

market. However, the situation

was completely different in

2009-10. During this period a

substantial deviation between

the WPI and CPI was found and

this was more pronounced till the

end of the year 2009. In June,

July and August, 2009 the WPI

remained negative while all the

variants of CPI were well above

ten percent. This difference

continued till the end of the year

with some decline in the gap

during the later period.

The reasons for the differences

are quite evident. The major

driver of inflation in the four

variants of CPIs (viz. Agricultural

labour, rural labour, UNME and

industrial worker) was the rise

in the price of food items. The

weightage of food items have

been much higher in CPIs than in

the WPI. The weightage of food

items including processed food is

25.43% in WPI while this share is 46.20%, 69.15%, and 66.77% in CPI for Industrial Workers, CPI

for Agricultural Workers and CPI

for Rural Labour respectively.

Therefore any increase in food

prices has affected CPI much

more intensely than the WPI. The

year of 2009 was characterized by

a significant rise in the food prices

along with the massive decline

in the prices of manufacturing

goods on an average. Since in

the WPI the food items get lower

weightage and manufacturing

goods have higher weightage

therefore despite a significant

rise in the food prices the WPI

has shown negative inflation

during June, July and August.

On the contrary the CPI in its all

variants have shown an inflation

of around double digit due to

higher weightage to food items

than the manufactured items.

In the last three months of 2009

the gap between the WPI and

the CPI declined because of

rise in the prices of some of the

manufactured goods. During

December 2009 the WPI reached

as high as 7.31%.

Despite several measures

by the government inflation

continues to be high during

first five months of 2010. The

average inflation from January

to May remained above 10%. Although there has been slight

lowering of food inflation from

18.4% in January to 16.5% in May, nonetheless, the rise in the

prices of food items remained the

basic factor for overall high and

persistent inflation during this

period also.

Some of the major contributers

of food inflat ion are sugar,

pulses, rice, vegetables, milk

and tea. These items have shown

a significant rise in prices over

the entire period of time. The

estimated areas under sugarcane

a n d s u g a r c a n e p r o d u c t i o n

declined significantly from 2007-

08 to 2009-10. According to

the provisional estimates, sugar

production fell from 263 lakh

tonnes in the 2007-08 sugar

season to 146 lakh tonnes in

the 2008-09 sugar season. The

sugar industry is expect ing

production of sugar of 160 lakh

tonnes in 2009-10 sugar season.

However, the demand of sugar

is estimated to be around 230

lakh tonnes during the same

year. Therefore one third of the

demand of the sugar shall not be

met with domestic production

and this happens to be the most

important factor behind rise in

the price of sugar. Moreover,

high international price of sugar

has been the other important

factor that puts pressure on sugar

price. Furthermore, high level of

divergence of sugar for other uses


such as production of gur etc. has

also contributed significantly in

the rise of sugar price.

Similarly, kharif pulses after

touching high level of production

of about 6.4 mil l ion tonnes

in 2007-08, declined to 4.78

million tonnes (fourth advance

estimate) in 2008-09 and again

to 4.42 million tonnes ( first

advance estimate) in 2009-10.

Therefore increasing demands

with declining production is the

major factor behind the rise in

the prices of pulses in the recent

period. In the same line, the

production of rice fell by 12.93

million tones during the period

2008-09 to 2009-10 with ever

increasing demands of rice across

the vast areas of the country.

This has resulted in the rise of

the price of rice in the recent

period. Among vegetables similar

pattern is visible in cases of

potatoes, onions, tomatoes, peas

and brinjal which contributed to

the significant rise in the food

inflation.

Moreover, segmentation of

agricultural markets has played a

very important role in making price

a poor reflector of demand and

supply conditions. The prices of

various food grains substantially

differ across regions. The price

of rice in local market in eastern

region has been much lower than

that of in the southern region.

And similarly, the prices of

various vegetables also differ in

a very significant manner across

regions. The prime factor behind

this segmentation of markets

has been the lack of storage and

transportation facilities across

the production areas. Indeed,

the role of poor infrastructural

facilities has remained central to

this problem.

The ro le o f gove rnmen t

procurement policies has also

played an important role in

distorting the prices of different

food grains. This is so because of

two reasons:- firstly, procurement

o f spec i f i c f ood g r a in s a t

minimum supporting price raises

the demand for food grains during

the procurement period and leads

to the rise in market prices after

the shortage of available grains in

the market. Short term squeezing of surplus food grains through

government procurement, and

frequent hoarding of food grains by many of the intermediate

businessman result in an artificial

rise in prices. Since the release

of food grains through Public

Distribution System takes place

on a regular basis with certain

interval of time , the artificial rise

in demand and prices continue

for a longer period of time till the

season of new harvest. Secondly,

since the procurement of food

grains under the government has

been quite unequal for different regions, it also contributes

in fu r the r segmenta t ion o f

agricultural market in India.

Even though farmers in backward

regions are ready to sell their

products at a lower rate and

sometimes much lower than the

prescribed MSP in absence of

government procurement, it is

not able to counter the problem

of artificial rise in prices due to

the entire benefits accrued by

the middleman. So, they hoard

substantial amounts in order to

get higher profit and therefore

an artificial rise in demands and

hence price can not be avoided in

this situation.

The p r eva l en ce o f f o od

inflation is a matter of major

concern for several reasons.

Firstly, the government’s ability

to control inflation has remained

limited in case of rise in food

price. This is because, the rise

in the food prices comes from

supply side bottlenecks of Indian

agriculture. With a given level of

infrastructure it is very difficult

to raise the production of food

grains in a short period of time.

Secondly, any monetary approach

such as tightening of money

supply through the raising of

the various reserve ratios have

very limited or even negligible

impact on the lowering of the

demand of the food items as they

face almost inelastic demand.

Thirdly, food inflation in almost

all circumstances affects poorer

section of the society the most

and i t is one of the biggest

obstacles in achieving food

security in the country or even

in making an attempt towards it.

Fourthly, it is a problem having

more implications for future than

the present. This is because of

the fact that there is very little


possibility of increasing the

area under cultivation, given

the pressues of urbanization that

recent years have witnessed.

Moreover, the demand for food

will continue to grow as income

levels rise.

In recent years, the government

o f Ind ia has t aken severa l

initiatives to overcome supply

bottlenecks like the initiation of

Rashtriya Krishi Vikash Yojana

with an allocation of Rs 25000

crores during the period of the

11th Plan for the purpose of

raising the level of infrastructure

in the agricultural sector as a

whole and the National Food

Security Mission which has the

targets to raise the production

of rice, wheat and pulses by 10,

8 and 2 million tonnes by the end

of 11th Five Year Plan. The merit

of the latter scheme is that it takes

area approach and measures

based on local conditions which

are essential for making effective

implementation of the scheme.

Several immediate measures

have been taken in order to

control food inflation. Some of

them are reduction in import

duties to zero for rice, wheat,

pulses, edible oils, and sugar,

reduction of import duty on many

processed foods, releasing foods

to a certain extent from the Food

Corporation of India, subsidy

on imported pulses, banning of

the export of several food items

such as non basmati rice, edible

oils and pulses, suspension of

future trading in rice, urad, and

sugar etc. However all these

efforts though necessary and

effective, lack completeness and

sufficiency.

A long term approach to

eliminate supply side bottlenecks

in agriculture along with certain

short term measures are needed

to be undertaken on a priority

basis. Several other crops such

as sugarcane, vegetables,etc

should be included under the

National Food Security Mission

in order to raise the production

of these i tems to match the

demand in near future. Other

crops such as coarse cereals

including jwar, bajra etc should

be given emphasis in order to

enhance the production so that a

substitute for main food grains

should be available in sufficient

amount.

Urgent steps are required fo r inc reas ing ag r i cu l tu ra l

productivity. A time bound and

extens ive i r r igat ion sys tem

needs to be built on a priority

basis. Techniques for dryland farming need to be developed.

Agricultural research needs an

urgent augmentation of funds.

I n o r d e r t o b r e a k

t h e s e g m e n t a t i o n o f t h e

agricultural market in India,

a massive investment in the

rural infrastructure such as

development of road, railways,

communicat ion system, and

provision of storage facilities

etc. should be undertaken on

a greater scale. This should

be accompanied with more

rationalization of government

food grain procurement policies

in terms of balanced regional

approach.

There is a need to develop skill

of farmers in such a way that they

can improve their techniques of production as they usually lack

the knowledge of appropriate

proportion of seed, fertilizer and

timing of various methods used

in the farming processes.

Further, as there is continuous

rise in the cost of production in

agriculture any curtailment of

subsidy given to them without

prior provision of enhancing the

productivity would further raise

the prices of the products. Hence

any policy in this regard needs

proper attention.

Finally, small scale agro-based

industries should be promoted

at localized levels so that with

vertical integration at the local

level there would be a check on

the prices of processed food with

simultaneous provision of higher

quality employment in the rural areas.

Targe t ing food in f la t ion

should not be viewed only as a

matter of price stability but also

in terms of food security for all,

particularly for those who are still

in vulnerable despite a high and

sustained growth rate of national

income. q



CPI inflation is more important from the point of

view of controlling inflation, especially

in a country like India, where the existence of the

unorganized sector and incidence of poverty is

reasonably high

Measuring Inflation

INflATION

NFLATION REFERS to

percentage change in the

price of a set of goods and

services over a period of

time; it represents change in

overall price level in the economy.

If the inflation for a particular week is say 8%, it means price level has increased by 8% against the same week during previous year. Inflation is basically of two types- Cost-push

inflation and demand-pull inflation. Demand- pull inflation refers to

increase in the price level due to

demand being in excess of supply

in the short run. Cost-push inflation is due to autonomous increase in

the cost of components, including

labour and material costs.

When overall price level rises,

it erodes the purchasing power of

income, causes rise in the cost of

living and lowers the values of

savings. Savers and investors closely

track the link between inflation

I

The author is on the Faculty of the ICFAI National College, Solapur.

and interest rate, because higher

rate of inflation leads to negative returns on saving. It has severe

impact on poor through unequal distribution of income & wealth.

Higher inflation increases the cost of money and makes it difficult to maintain the competitiveness of

domestic industry in a liberalized

trading era.

Measures of Inflation in India:

The issues of measurement of

inflation has got a lot of attention in India. Presently, there are

different primary measures of

inflation - the Wholesale Price

Index (WPI) and four measures of

the Consumer Price Index (CPI)

- the CPI for Industrial workers

(CPI-IW); CPI for agricultural

labourers (CPI-AL); CPI for rural

labourers (CPI- RL) and CPI for

urban non-manual employees (CPI-

UNME). In addition to this, Gross

Shivkumar Biradar

DEBATE


Domestic Product (GDP) deflator provides implicit economy-wide

inflation. Inflation based on WPI is considered as representative figure for the whole economy.

Inflation Rate = [(Pt - P

t-1) /

Pt-1

] * 100

Where Pt = price indices of

current year

Pt-1

= price indices of previous

year

Wholesale Price Index (WPI)

As its name suggests Wholesale

Price Index (WPI) tracks wholesale

prices in India. WPI is the weighted

price index of a basket of goods

consisting of 435 commodities,

which are categorized under

three major groups: i) Primary

Articles; (98 commodities) ii) Fuel

power, light and lubricants; (19

commodities) iii) Manufactured

products; (318 commodities).

These three are again divided

into smaller sub-groups. WPI

is compiled on a weekly basis.

The Indian government has taken

WPI as an indicator of the rate of

inflation in the economy.

Table – 2: shows inflation by on overall series of WIP and groups

of WPI series. More volatility is

found in fuel group based inflation followed by primary article group as

compared to manufacture products

group.

Consumer Price Index (CPI)

Consumer Price Index is

measured on the basis of the change

in retail prices of a specified set of goods and services on which

a particular group of consumers

spend their money. It reflects the cost of living index condition for a

homogenous group based on retail

price. It actually measures the

increase in price that a consumer

will ultimately have to pay for.

India is the only major country that

uses a wholesale index to measure

inflation. Most countries use the CPI as a measure of inflation.

CPI = (Price of basket in current

year) / (Price of basket in base year)

* 100

Table - 01: Relative importance of commodities in wPI basket

Commodity Name weight Commodity Name weight

I Primary Article 22.03 III Manufactured Products 63.75(A) Food Articles 15.40 (A) Food Products 11.54

a. Food Grains(Cereals+Pulses) 5.01 (B) Beverages Tobacco & Tobacco Products 1.34

b. Fruits & Vegetables 2.92 (C) Textiles 9.80

c. Milk 4.37 (D) Wood & Wood Products 0.17

d. Eggs,Meat & Fish 2.21 (E) Paper & Paper Products 2.04

(B) Non-Food Articles 6.14 (F) Leather & Leather Products 1.02

a. Fibres 1.52 (G) Rubber & Plastic Products 2.39

b. Oil Seeds 2.67 (H) Chemicals & Chemical Products 11.93

c. Other Non-Food Articles 1.95 (I) Non-Mettallic Mineral Products 2.52

(C) Minerals 0.48 (J) Basic Metals Alloys & Metals Products 8.34

a. Metallic Minerals 0.30 (K) Machinery & Machine Tools 8.36

b. Other Minerals 0.19 (L) Transport Equipment & Parts 4.29

II Fuel Power Light & Lubricants

14.23 All Commodities 100.00

(A) Coal Minning 1.75

(B) Minerals Oils 6.99

(C) Electricity 5.48

Source: http://www.mospi.gov.in/cso


Table-02: Inflation based on groups of WPI seriesYear INFLATION RATE

BASED ON wPI SERIES

INFLATION RATE BASED ON PRIMARY

ARTICLES (wPI)

INFLATION RATE BASED ON FuEL POwER LIGHT &

LuBRICANTS (wPI)

INFLATION RATE BASED ON MANuFACTuRED

PRODuCTS (wPI)

1995-96 8.0 8.2 5.1 8.5

1996-97 4.6 8.4 10.4 2.1

1997-98 4.4 2.7 13.8 2.9

1998-99 5.9 12.1 3.3 4.4

1999-00 3.3 1.2 9.1 2.7

2000-01 7.2 2.8 28.5 3.3

2001-02 3.6 3.6 8.9 1.8

2002-03 3.4 3.3 5.5 2.6

2003-04 5.5 4.3 6.4 5.7

2004-05 6.5 3.6 10.1 6.3

2005-06 4.4 2.9 9.5 3.1

2006-07 5.4 7.8 5.6 4.4

2007-08 4.6 7.5 1.0 4.9

2008-09 8.4 10.2 7.5 8.1


Table-03: Divergence between CPI and WPI Inflation

SR. PERIOD INFLATION RATE BASED

ON wPI SERIES

INFLATION RATE BASED ON CPI - Iw

SR. PERIOD INFLATION RATE BASED

ON wPI SERIES

INFLATION RATE BASED ON CPI - Iw

1 Jan-08 4.5 5.5 13 JAN-09 5.0 10.5

2 Feb-08 5.3 5.5 14 FEB-09 3.5 9.6

3 Mar-08 7.5 7.9 15 MAR-09 1.2 8.0

4 Apr-08 8.0 7.8 16 APR-09 1.3 8.7

5 May-08 8.9 7.8 17 MAY-09 1.4 8.6

6 Jun-08 11.8 7.7 18 JUN-09 -1.0 9.3

7 Jul-08 12.4 8.3 19 JUL-09 -0.5 11.9

8 Aug-08 12.8 9.1 20 AUG-09 -0.2 11.7

9 Sep-08 12.3 9.8 21 SEP-09 0.5 11.6

10 Oct-08 11.1 10.5 22 OCT-09 1.5 11.5

11 Nov-08 8.5 10.5 23 NOV-09 4.8 13.5

12 Dec-08 6.1 9.7 24 DEC-09 7.3 15.0

CPI inflation rate = [(CPIt– CPI

t-1) / CPI

t-1] *100

Where CPI t = consumer price

index of current year

CPI t-1

= consumer price index

of previous year


As mentioned earlier there are

four measures of CPI. Set of goods

and services for each CPI measure is

different based on the consumption

pattern of the particular group. For

example, for CPI for industrial

worker (CPI-IW), a basket of 260

commodities is tracked; for urban

non manual employees (CPI-

UNME), 180 commodities, for

agricultural labours (CPI-AL), just

60 commodities. Here again, each

commodity is given a different

weightage. For example, the CPI-

AL would give a greater weightage

to food grain than the CPI-UNME,

since a greater proportion of the

income of this group would go

towards the purchase of food grain.

CPI-IW has got a broader coverage

of set of goods and services than

others measures of CPI. That is

why CPI-IW is extensively used

as cost of living index in organized

sector. CPI is available on two -

monthly basis because of difficulty in data collection for various

categories of goods and services

from organized and unorganized

markets for the various measures

of CPIs.

Divergence between CPI and WPI Inflation • There is found to be divergence

between the CPI and WPI based

Inflation figures, as shown

in the Table 3 and Chart 1.

This divergence is due to the

following reasons :

• Food ar t ic les get larger weightage in CPI, varying

from 46% in CPI-IW to 69% in CPI-AL, but it has only

22.03 % weightage in WPI series. Hence, the CPIs are

more responsive / sensitive

to changes in prices of food

articles.

• Price of services - such as, educat ion, t ransport and

communication, medical care,

cable TV, house rent, recreation

and amusement services,

etc. has considerably higher

weightage in CPI-IW

• The fuel, power light and lubricants group has got a

significantly higher weightage

in the WPI (14.23%) than the CPIs (5.5 to 8.4%). Therefore, changes in international crude oil prices have a greater influence on WPI than on the CPIs.

• Base-year effect is also different for the two since base year for CPI-IW is 2001 where as for WPI series it is 1993-94.

• It is noted that, CPI-IW has recorded very similar trend as the food articles series of WPI despite the divergence of the overall series of WPI in the recent period (Table-4 and Chart 2).

Many economists today feel that WPI does not actually measure the exact price rise that a consumer has to bear, since it tracks wholesale prices. Further, the basket of commodities included for WPI computation were worked out in 1993- 94, and many items have become irrelevant since then since they are not used by consumers

any more. Revision of base year

is not being done as frequently as it should be done in an economy



Table-4: Co-movement of Inflation Based on WPI (Food Articles) and CPI-Iw

SR. PERIOD INFLATION RATE BASED ON CPI-Iw

INFLATION RATE BASED ON wPI FOOD

ARTICLES

INFLATION RATE BASED ON wPI PRIMARY

ARTICLE1 Jan-08 5.5 2.1 4.9

2 Feb-08 5.5 3.4 7.3

3 Mar-08 7.9 5.9 9.9

4 Apr-08 7.8 5.5 8.9

5 May-08 7.8 5.7 9.5

6 Jun-08 7.7 5.9 10.6

7 Jul-08 8.3 6.0 10.8

8 Aug-08 9.1 6.9 11.4

9 Sep-08 9.8 7.7 11.6

10 Oct-08 10.5 9.9 12.4

11 Nov-08 10.5 10.3 12.1

12 Dec-08 9.7 10.0 11.1

13 Jan-09 10.5 11.0 10.7

14 Feb-09 9.6 9.4 6.9

15 Mar-09 8.0 7.5 5.2

16 Apr-09 8.7 8.6 6.6

17 May-09 8.6 8.4 6.3

18 Jun-09 9.3 10.9 6.5

19 Jul-09 11.9 14.2 7.6

20 Aug-09 11.7 14.1 8.0

21 Sep-09 11.6 14.2 8.4

22 Oct-09 11.5 13.0 8.7

23 Nov-09 13.5 16.7 11.8

24 Dec-09 15.0 19.2 14.9



that is changing so fast. It also does not include services. In spite of this, India continues to use WPI for measuring inflation because there is only two week time lag in reporting WPI numbers whereas measuring the four kinds of CPI indices involves a huge time lag of about two months.

GDP Deflator:

The GDP deflator can be another means of measuring inflation. It is a measure of the level of prices of all new, domestically produced, final goods and services in an economy and is calculated as a ratio of Nominal GDP (GDP at current prices) to Real GDP (GDP at constant prices.) It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. It does not depend on a fixed basket of goods but covers the level of prices of an entire range of economic activities including domestically produced, final goods and services. The GDP deflator is calculated quarterly with a lag of two months since 1996. If the value of price deflator is 300 it means that the current-year price is three times the base year.

w P I I n f l a t i o n a n d G D P Deflator:

Table 5 shows the long term

relation between Inflation based

on CPI - IW, WPI and GDP Deflator

Suggestions

Reconstruct ion of wPI series: Series of goods which are used for WPI as representative should be revised . It should cover significantly higher number of commodities from both organised and unorganised sectors. There is also a need to supplement the new series of WPI with a service price index to improve its overall coverage. In addition to that, adoption of common base year for Gross Domestic Product (GDP) and WPI series would help to reduce gap of inflation data.

Comprehensive CPI:

A consumer pr ice index (CPI) is a measure estimating the cost of living conditions of different homogenous group of the population rather than the total population and is calculated on the basis of retail price changes of constant set of goods and services as per the spending pattern of the group of the population. However a wide based CPI for the country as a whole, including both goods & services, has greater relevance for monetary policy formulation.

It is advisable to implement the

suggestion given by the National

Statistical Commission in 2001

to form a single comprehensive

CPI by reshuffling the prevailing four CPIs. This would improve the

accuracy of computing inflation

data and help policy making and

track price movement. As per

IMF statistics only 24 countries

use WPI as measure of inflation, while 157 countries use CPI as a

measure of inflation as it catches the price change experienced by

the consumers. On this background

RBI had taken a step forward

and prepared a document on CPI

(Rural) and CPI (Urban) which

could be a representative CPI for

the country.

Conclusion:

The wholesale price index

provides an idea about the average

price level of goods traded in

wholesale market whereas the

consumer price index (CPI)

measures the final cost paid by

consumers. CPI inflation is more important from the point of view

of controlling inflation, especially in a country like India, where

the existence of the unorganized

sector and incidence of poverty is

reasonably high. Obviously, both

the indices have their own merits

and demerits. However, from the

conduct of monetary policy point

of view, right tracking of inflation for the country as a whole with

limited time lag is important. In

that sense CPI scores over WPI

that is why 157 countries out of

181 countries use CPI for tracking

inflation. Inflation figures quoted by government or RBI with regard to

WPI do not reflect the real picture - the real inflation as felt by the consumer would be significantly higher. q


Table-05: Long relationship of WPI Inflation, CPI-IW and GDP Deflator

Sr. No. Decades wPI GDP Deflator CPI-Iw

1 1981-82 to 1990-91 7.1 8.7 9.0

2 1991-92 to 2000-01 7.8 8.1 8.7

3 2000-01 to 2008-09 5.2 4.6 5.3

Source: http://www.rbi.in


Apart from personality

development of the volunteer, these projects seem to be economically

and socially viable, and can be encouraged as a

means for creating community assets

NSS for Social Asset Creation

COMMuNITy DEVElOPMENT

HE NATIONAL Service

Scheme was launched

b y t h e M i n i s t r y o f

Education and Youth

S e r v i c e s , G o v e r n m e n t o f

India in the year 1969-70 as a

student centered programme.

An associat ion of s tudents ,

irrespective of caste, creed,

colour, gender and politics, it

provides a common platform for

them to work with and among

people , to encounter socia l

realities, to develop a sense of

social and civic responsibility,

to acquire leadership qualities and democrat ic a t t i tude, to

develop competence required for group living and sharing of

responsibilities etc. It fosters

a creative interaction between

T

The author is Lecturer, P G Department of Commerce, P S M O College, Tirurangadi, Kerala.

institutions of higher learning

and the community.

As part of its activities, NSS

conducts a special camping

programme of about seven to ten

days in some adopted villages or

other areas. During this period

the programme officer and about

fifty senior volunteers camp

in the selected site and carry

on projects like construction,

repair and renovation of roads,

canals, dams, houses, water

reservoirs, play grounds, gardens,

etc. They also engage the local

people in discussions on topics

of current relevance, organize

talks, street plays and workshops

on issues relating to life style

diseases, yoga, palliative care,

entrepreneurial programmes,

AIDS awareness , and other

P V Basheer Ahammed

A STuDy


Table 1 : Profile of the sample unitsDistrict Name of College No. of NSS units unit Code

Kozhikode

Providence Women’s College 2 15, 116

zamorin’s Guruvayurappan College 2 18, 108

Govt. Arts & Science College 3 17, 107, 155

Farook College 3 21, 109, 140

Wayanad St. Mary’s College, S. Bathery 3 14, 159, 160

Malappuram

PSMO College, Tirurangadi 4 26, 74, 99, 131

MES College, Valancherry 3 91, 105,114

NSS College, Manjeri 2 29, 78

MEASS College, Areacode 2 73, 174

PalakkadNSS College, Ottappalam 1 36

Mercy College, Palakkad 2 6, 34

ThrissurChrist College, Irinjalakkuda 4 20, 49, 70, 147

MES Asmabi College, Vemballore 2 53, 95

Total 33

Table 2: Major Activities

Construction Projects

Items2004-05 2005-06 2006-07

kms. units engaged kms. units

engaged Kms. units engaged

Road 11 16 16 24 11.5 16

Check Dam 1 1 1

Water Reservoir (No.) 1 3

House (No.) 1 1 2 3

School Playground 2 5

Veg. Flower garden 2

Renovation Projects

ItemsNo. of units engaged

2004-05 2005-06 2006-07Canals 2 4 2

Roads 4 -- 4

Water tank, ponds, etc. 2 8 3

Premises of:

School 4

IPM 2 --

Juvenile Homes -- 2

Hospital (PHC) 2 2 2

Colonies 2

Panchayath Office 2


relevant issues. The programme

thus leads to creation of some

form of social asset .

A special camping programme

by one NSS unit costs the public

exchequer Rs.15000. With more than two million volunteers and

20,000 units in the country, the

total expenditure on this account

wi l l come to a round Rs .30

crores. The present paper tries

to assess the worth of the social

assets created by some of the

major projects (construction,

renovat ion and reclamat ion

works) done by selected NSS

units during their special camps

for three years in terms of cost

involved and benefit derived.

The study covers the special

camping projects of the NSS

un i t s under the Unive r s i ty

of Calicut, spread over five

districts – Kozhikode, Wayanad,

Malappuram, Pa lakkad and

Thrissur during the years 2004-

05, 2005-06 and 2006-07.

Table-1 shows the distribution

of sample units drawn from the

colleges in the five districts under

the jurisdiction of the University

of Calicut. Table-2 shows the

major projects undertaken by

these units.

In order to estimate the worth

of the assets generated, these

assets are presented in their

equivalent rupee terms, valued

on the basis of PWD schedule

of rates prevailing then. In the

case of construction of roads, the

earth work in hard soil is valued

under three segments – i .e. ,

Earth cutting @ Rs.756/10m3,

Earth filling @ Rs.1028/10m3

and Sectioning and consolidating

@ Rs.60.50/10m2. In the case of

renovation of old defunct roads,

they are valued at the rate of

sectioning and consolidation rate

only, i.e., @ Rs.60.50/10m2 (m3 =

length x width x height in metres,

m2 = length x width in metre).

In the case of water reservoir,

Table 3: Major Project – Construction of Road – 2004-05

Name of Colleges No. of units

No. of volun-teers

Length of roads in

kms

Estimated worth (Rs)

Cost involved15000pu

Benefit/ cost ratio

Incremental benefit/head

(Rs)

Farook College 3 120 2 2,95,740 45,000 6.57 2165(722%)

Govt. Arts & Science

3 131 2 3,07, 980 45,000 6.84 2051(684%)

NSS, Manjeri 2 100 2 2,91,660 30,000 9.72 2617(872%)

MES, Valanchery 3 150 1 1,56,030 45,000 3.47 740(247%)

PSMO, Tirurangadi 4 250 3.5 5,01,225 60,000 8.35 1705(568%)

NSS, Ottapalam 1 72 1 1,41,750 15,000 9.45 1669(556%)

Total 16 823 11.5 16,94,385 2,40,000 7.06 1759(586%)


Table 4 : Other Major Projects – 2004-05Name of College

No. of units

Nature of work Area Estimated worth of Asset

(Rs.)

Cost involved @ Rs.15000 pu

(Rs.)

Benefit/ cost ratio

Incre-mental

benefit (Rs.)

Providence

Women’s

College,

Calicut

2 Removal of weeds,

wastes and cleaning the

premises of Institute of

Palliative Medicine

10 Acres 60,000 30,000 2 : 1 129

(43)

Christ,

Irinjalakuda

4 Sectioning and

consolidation of surface

of old roads

4000

metres

72,600 60,000 1.21 : 1 63

(21)

St. Mary’s,

Sulthan

Bathery

3 Making water reservoir

for local people and

wild life

800 sq. metres

60,480 45,000 1.33 : 1 103

(34)

NSS,

Ottappalam

1 Construction of a tiled

house for a widow

500 sq.ft. 1,25,000 Nil* -- --

Cost of Asset created by

Volunteer input @ 40%50,000 -- -- --

MEASS,

Areacode

2 Renovation and

cleaning the surface of

canals

3000x1.5

metres

@ Rs.75/10m2

= 33,750

30,000 1.12 : 1 21

(7)

Total 12 2,76,830 1,65,000 1.68 : 1 115(38)

Figures in bracket indicate percentage incremental benefit per volunteer

Table 5 : Major Project – Construction of Road – 2005-06Name of College No. of units

engaged Length of

road in kms

Total Estimated worth (Rs.)

Govt. Expenditure @ 15000 per unit

(Rs.)

Benefit/ Cost ratio

Incremental benefit (Rs.)

Farook College, Calicut 3 2 2,87,580 45,000 6.39 : 1 1912(637)

Govt. Arts & Science, 3 1.5 2,13,645 45,000 4.75 : 1 1511(504)

St. Mary’s, Sultan Bathery 3 3.5 5,11,425 45,000 11.36 : 1 3110(1034)

NSS Manjeri 2 2.5 3,59,475 30,000 11.98 : 1 3295(1098)

MES Valanchery 3 1.2 1,95,038 45, 000 4.33 : 1 1000(333)

PSMO Tirurangadi 4 3 4,31,370 60,000 7.19 : 1 1857(619)

MEASS Areacode 2 .75 1,10,903 30,000 3.70 : 1 640(213)

Christ Irinjalakuda 4 1.5 2,21,805 60,000 3.70 : 1 809(270)

Total 24 16.00 23,31,241 3,60,000 6.48 : 1 1699(566)



Table 6 : Other Major Projects – 2005-06

College No. of units

Nature of work Area Estimated worth of Asset

(Rs.)

Cost @ Rs.15000

per unit (Rs.)

Benefit/ Cost ratio

Incremental benefit (Rs.)

Providence

Womens

2 Removal of weeds,

wastes and cleaning

the premises of

Juvenile Home,

Vellimadukunnu

28 Acres 1,68,000 30,000 5.6 1749

(583)

zamorin’s

Guruvayura-

ppan

2 Renovation and

clearing the surface

of canal, Wyanad

3000 x

1.5 mtr.

33,750 30,000 1.13 63

(21)

Total 4 2,01,750 60,000 3.36 853(284)


Table 7 : Major Project – Construction of Road – 2006-07

Name of College No. of units engaged

Length of road in

kms

Estimated worth (Rs.)

Govt. Expenditure @ Rs.15000

pu (Rs.)

Benefit / Cost Ratio

Incremental Benefit (Rs.)

Providence Women’s

College2 1 1,35,630 30,000 4.52

1224

(408)

Govt. Arts & Science

College3 2 2,79,420 45,000 6.21

2361

(787)

NSS Manjeri 2 2.5 3,61,515 30,000 12.05 3315

(1105)

MES Valanchery 3 1.5 2,34,045 45,000 5.201260

(420)

PSMO, Tirurangadi 4 2.5 4,02,315 60,000 6.71 1712

(571)

MEASS, Areacode 2 2 2,87,580 30,000 9.58 2117

(706)

16 11.5 17,00,505 2,40,000 7.09 1929

(643)

Christ, Irinjalakuda 4 4 72,600 60,000 1.21 63

(21)

Total 20 15.5 17,73,105 3,00,000 5.91 1541(514)



it is valued at the hard soil

cutting rate, i.e., @ Rs.756/10m3.

Removal of weeds, wastes and

cleaning the premises, valued

at the rate of Rs.1.50 per square metre. Construction of tiled

house is valued at Rs.250 per sq. ft. and the volunteer contribution

in the form of labour is estimated

@ 40% of the estimated cost. Construction of concrete houses

are valued @ Rs.350 per sq.ft. and the volunteer contribution

@ 40% of the estimated cost. Renovation and cleaning the

surface of canals are valued at a

rate slightly higher than the rate

of sectioning and consolidation

of roads. i .e. , at the rate of

Rs.75/10m2.

Tables 3, 5 and 7 shows the

detail in case of road construction

for the years 2004-05, 2005-

06 and 2006-07 respectively

and Tables 4, 6 and 8 show the

same for other projects in these

respective years.

FINDINGS

The major findings of the

study are:

• In 2004-05, 16 units engaged in construction of village

roads with a total length

o f 11 . 5 k m s . T h e t o t a l

estimated worth of the asset

is Rs.16,94,385, leading to

a per unit contribution of

Rs.1,05,274. The benefit/

cost ratio is 7.06:1 and the

percentage increase in the

inc remen ta l bene f i t pe r

volunteer is 586%. 12 units were involved in other major

projects for 2004-05, the

total worth of assets created

was Rs.2,76,830, leading to

a per unit contribution of

Rs.23,069. Benefit / cost

ra t io 1 .68:1 , percentage

Table 8 : Other Major Projects – 2006-07

College No. of

units

Nature of work Estimated worth (Rs.)

Cost @ Rs.15000

pu

Benefit/ cost ratio

Incre-mental benefit

St. Mary’s, Sulthan Bathery

3 Construction of playground 4000 sq.m. cutting soil : 1000 sq.mts. @ Rs.756/10m3 + Sectioning 4000 sq.m. @ Rs.60.50/10m2 = 37800 + 24200

62,000/- 45,000 1.38 113(38)

Farook 3 Construction of two concrete houses @ 500 sq.ft. plinth area each, estimated cost Rs.350000, NSS input

1,50,000/- 45,000 3.33 771(257)

zamorin’s Guruvayurappan

2 Construction of a pond for water conservation 12m x 4m x 4m @ Rs.756/10m3

14,515/- 30,000 0.48 -163(-54)

Total 8 2,26,515/- 1,20,000 1.80 272(91)



increase in the incremental

benefit is 38%.

• I n 2 0 0 5 - 0 6 , 2 4 u n i t s c o n s t r u c t e d n e w r o a d s

with a total length of 16

kms with estimated worth

of around Rs.23,31,241,

contributing Rs.97,135 per

unit. Benefit / cost ratio

6.48: 1, percentage increase

in the incremental benefit

per volunteer is 566%. For other major projects four

units contributed to an asset

creat ion of Rs.2 ,01,750,

r e s u l t i n g i n a p e r u n i t

contribution of Rs.50,438.

The benefi t /cost ra t io is

3.36:1 and the percentage

increase in the incremental

benef i t per vo lunteer i s

284%.

• I n 2 0 0 6 - 0 7 1 6 u n i t s c o n s t r u c t e d n e w r o a d s

of a total length of 11.5

kms, worth Rs.17,00,505,

contributing Rs.1,06,750 per

unit. 8 units created assets

worth Rs 2,26,515/-

• The government expenditure for sixteen special camps

comes to Rs.2,40,000 only

and hence, the overall benefit

/ cost ratio is 7.09:1. NSS

College, Manjeri has the

highest benefit/cost ratio

12 .05 :1 and Prov idence

Womens College, Calicut has

the lowest 4.52:1. The Christ

College, Irinjalakuda which

renovated old roads, has a

benefit / cost ratio of 1.21:1

as its valuation is at low rates,

compared to construction

works.

• The incrementa l benef i t per volunteer on an overall

basis is Rs.1,929 and the

p e r c e n t a g e i n c r e a s e o f

incremental benefi t over

cost per volunteer (Rs.300)

i s 6 4 3 % . T h e h i g h e s t incremental benefit is Rs.3315

(1105%) and lowest Rs.1224 (408%) for NSS College, Manjer i and Prov idence

Women’s College, Calicut,

respectively.

• The overall benefit / cost ratio of these projects is 1.80:1,

the highest being that of

Farook College 3.33:1 who

constructed two concrete

houses of 500 sq.ft. each and the lowest 0.48 : 1, that of

zamorin’s Guruvayurappan

College who constructed a

pond for water conservation

where the apparent worth of

the asset is calculated at low

rates when compared to other

construction works.

• T h e r e m a i n i n g u n i t s engaged in the renovation

and reclamation of ponds,

c o n s t r u c t i o n o f c h e c k

dams, cleaning of colonies,

workshop on jam and squash p r e p a r a t i o n , a w a r e n e s s

programmes, medical camps,

etc. These projects, due to

practical difficulties, are not

quantified in rupee terms.

Conclusion

National Service Scheme aims

at personality development of the

volunteer. Community service

is only a means by which the

volunteer acquires skills and expertise for the development

of his personality. Hence, it

is purely a student centered

programme where the major

focus is the student and his

personality and the benefits to

the society is only a by-product

of the process. Even so, the

study proves that the benefit

derived from the NSS projects

far outweigh the cost involved

in them. That is, apart from the

personality development of the

volunteer, these projects seem

to be economically and socially

viable, and can be encouraged as

a means for creating community

assets. q



The National Rural Employment Guarantee Scheme

has brought in a silent revolution in the rural areas

by providing stable employment to the

vulnerable and marginalised

Livelihood for the Marginalised

NREgS

HE MOST fundamental of all human rights is the right to life. Every person has the right to live a dignified life. A life of dignity cannot be ensured

by providing free food, clothes, medicine and other necessities but by providing a means of livelihood. The various employment generation programmes of the government, cu lminat ing in the present Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) is a recognition of this fact. The MNREG Scheme is the largest employment programme in the human history (Shah, 2008). Though the scheme was initially introduced in only 200 districts, it is now functioning in all the districts of the country. It has been introduced in a phased manner, phase-I, 200 districts (2006-07), phase-II, 130 districts (2007-08) and phase-III, all the remaining districts (April 2008).

I m p a c t o f N R E G S – A n Overview

The salient features of NERGS are livelihood security, right based

T

The author is Professor of Economics at Scott Christian College, Nagercoil

employment programme, demand driven, universal, participatory planning and implementation, good governance and more female oriented. The NREGS is providing livelihood security by providing 100 days of employment within 15 days of application to all people, who have applied for wage employment. If no work is provided within 15 days of application, the applicants will be eligible for unemployment allowance. The work should be given within 5 km radius from the applicant’s residence and the work site should have all basic facilities. The payment for the work must be made within 15 days. The workers are also eligible for medical aid.

The scheme has guaranteed wage employment to 4.47 rural households. During the past 3 ½ years 19.49 lakh works have been taken up under this scheme. The thrust areas of work under the scheme are water resource development and water conservation. It is, further, reported that 75 per cent of the works are irrigation related and so it will certainly enhance the productivity in agriculture.

J Cyril Kanmony

RESEARCh


The increase in productivity will eventually increase the dependency of people on agriculture and reduce the dependency on government sponsored employment schemes. It is also estimated that the additional flow of income is Rs.18,155 crore (Lakshman, 2009), (Prasad, 2009), (Roy, 2009), (Singh, 2009). Swaminathan (2009) points out that the employment generated is over 450 crore person days and the wage payment is over Rs. 35,000 crore while, Prasad, (2009) asserts that through this scheme, the government is pumping about Rs.30,000 crore every year into the rural economy Above all these, it is found that of these man days of employment generated, the major share is enjoyed by women and dalits and adivasis. The most benefited because of this scheme are the poorest and most marginalised communities particularly SC/ST or people below poverty line. The scheme has not only raised the scale of employment, but has also put an end to the exploitative practice of private contractors. India is experiencing employment growth after the phase of jobless growth during the 1990s only because of NREGS .Thanks to the programme, every week a huge purchasing power is being pumped into the rural economy. There an increase in the social capital as most of the work is directed towards assets creation It also increases saving of the people particularly the rural poor to a great extent.

According to Mathur (2007) 2.10 crore households were given employment to the extent of 90 crore person days in the year 2006. The total number of households sought employment was 2.16 crore. It means that 97 per cent of households which sought employment got wage employment on an average of 45 days in the year.

Khera and Nandini Nayak (2009) say 71 per cent of persons working under the NREG are SC/ST and 82 per cent are illiterate women against 52 per cent uneducated men. The minimum wages fixed in different states are different and so the wage payment under NREGS also differs from state to state. The highest wage, Rs.175 is paid in Mizoram. It is followed by Kerala, Rs.121, West Bengal Rs.104, Andhra Pradesh Rs.86 and Rs. 80 in Tamil Nadu .

Apart from these impacts the NREGS has also a strong positive impact on the social structure (Narayanan, 2008). High caste people are working along with dalits and tribals. They are working even in the lands of dalits as the land development works cannot be carried out in the lands of high caste people before the development works in the lands of dalits and tribes are exhausted. Thus, the National Rural Employment Guarantee Scheme not only provides livelihoods to the marginalised people but also

removes caste discrimination to a certain extent.

Performance of NREGS in Tamil Nadu and Kanyakumari District

In Tamil Nadu, 10 districts were covered with NREGS in the first phase and another 10 districts in the second phase. The remaining 20 districts including Kanyakumari district were covered in the third phase. The details regarding job cards issued, the person days of employment generated, total attendance, individuals employed and expenditure on water resources up to 01.03.2010 are given in Table No. 1

From the Table 1, it is seen that in Tamil Nadu, in total 1978.99 lakhs person days of employment were generated up to 01.03.2010. Of the total employment generated, 58.10 per cent is enjoyed by the SC/ST persons and women constitute 78.72 per cent. Certainly these are very encouraging aspects of the NREGS. However, only 7.68 per cent of the

Table 1:- Households, Individuals Registered and Individuals Employed in Tamil Nadu up to 01.03.2010

Category NumberHouseholds Demanded Employment 3616920

Households Provided Employment 3616920

Total Number of Households 10074512

Job Cards Issued 6212511(61.67%)SC/ST 2595065(41.77%)Person Days Generated 1978.99 lakhs

SC/ST 1149.77 lakhs (58.10%)Women 1557.91 lakhs (78.72%)Total Attendance (all) 1387.53 lakhs

Completed 100 Days 65.88 lakhs

Completed Above 100 Days 40.66 lakhs

Employment Completed 100 Days 132.79 lakhs

Total Availability of Fund 216824.88 lakhs

Total Cumulative Expenditure 138306.53 lakhs (63.79%) Expenditure on Water Resources 105958.21 lakhs (77.61%)

Figures in brackets are percentages to total.Source: www.nrega.nic.in, Tamil Nadu & Report, NREGS, Tamil Nadu – 2008


households have completed 100 days/above 100 days of work and only 63.79 per cent of the fund available is spent. Further, it is also estimated that 76.67 per cent of the total expenditure incurred is on water resources development and water conservation programmes. As a whole, the performance of the NREGS is good in providing employment and livelihood.

In Kanyakumari District NREGS has been implemented from April 2009 and very successfully so. The details regarding the expenditure made and households applied up to 01.03.2010 are given in Table 2.

Table No.2 shows that the job cards have been given to all those who registered for the wage employment. The share of persons

registered constitutes 20.71 per cent of the total population. It is a welcoming fact that 11,727 SC/ST persons and 46,792 minority persons have registered themselves under the NREGS. The respective percentage is 9.76 and 38.95. The percentage of SC/ST persons registered (9.76%) is more than the percentage of SC/ST persons to the total population (4.36%) while the percentage is less for minorities (44.47%). The number of women registered is 77,333. It constitutes 64.38 per cent of the total persons registered. The share of SC/ST women to total SC/ST persons registered constitutes 61.75, in absolute term it is 7,241.

T h e d e t a i l s r e g a r d i n g expenditure, works approved and completed, person days generated

and average wage paid are given in Table 3.

Table 3 clearly depicts that only 45.59 per cent of the total amount released is spent and only 30.74 per cent of the works sanctioned is completed so far. It is very important to indicate that the person days of employment generated in the district within one year and eleven months are 13,42,633. The average wage paid daily is Rs. 76 for the whole period. However, the average wage paid daily is only Rs. 73/- for the year 2009 and for the year 2010 (January 2010 to February 2010) it is Rs.88/-. From the facts and figures discussed above it is very clear that the National Rural Employment Guarantee Scheme has brought in a silent revolution in the rural areas by providing stable employment to the vulnerable and marginalised. In Kanyakumari District, it generated wage employment to the extent of 13,42,633 person days and on an average the number of days of works given in a year is 76 and the average wage paid is also Rs. 76/-. Thus, a person who works under NREGS is able to earn an income of Rs. 5776/- per annum. Certainly, it increases the standard of living of the marginalised people.

Though there are some defects in the implementation of the Rural Employment Guarantee Scheme, it helps to remove poverty from the rural areas, provides stable income to those who are ready to do manual work, grants some relief during the period of unemployment and under employment, avoids migration of workers from rural areas to town areas. In short, it is easy to infer that, the NREGS provides not only food security but also financial security to the rural masses particularly the poor and the marginalised. q


Table 2:- Households Total and Registered, Individuals Total and Registered in Kanyakumari District up to 01.03.2010

Category Number Total No. of Households 158889

No. of Households Registered 90053 (57%)Total Population 580021

No. of Persons Registered 120128 (20.71%)SC/ST Persons Registered 11727 (9.76%)Minorities Registered 46792 (38.95%)Women Registered 77333 (64.38%)SC/ST Women Registered 7241 (61.75%)Job Cards issued 120128 (100%)

Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010

Table 3:- Amount sanctioned and spent, works carried out, person days generated and average wage paid in

Kanyakumari District up to 01.03.2010Category Amount/Number

Released Rs.2225.81 lakh

Amount Spent Rs.1014.69 lakh (45.59%)Works Approved 462

Works Completed 142 (30.74%)No. of Persons days Generated 1342633

Average Wage Paid Rs. 76/-

Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010


Conservation of biodiversity is the

need of the hour for food, fodder, fuel,

timber and medicinal requirements

and also for the agricultural production,

ecological balance, and mitigation

of environmental pollution

Biodiversity and its Conservation

ENVIRONMENT

I O D I V E R S I T Y O R

Biological d ivers i ty

refers to the variety and

variability among genes,

species and ecosystems.

There are three levels of biodiversity

namely genetic diversity, species diversity and ecosystem diversity.

Genetic diversity is the genetic

variation within species, both

among geographically separated

populations and among individuals

within single population. This

genetic diversity is the result of

different modes of adaptation in

different habitats, which provides

organisms and ecosystems with

capacity to recuperate after change

has occurred. Species diversity

denotes the variety of species

on earth from acellular viruses

to single celled microorganisms

like bacteria, mycoplasmas,

actinomycetes etc. to multicellular

plants and animals. For proper

functioning of particular community

B

The author is an Ecologist associated with Department of Botany, Banaras Hindu University, Varanasi.

or ecosystem the species diversity

is very essential. In a community

the survival of all species are

interrelated to the existence of

other living organisms. Ecosystem diversity refers to variations in the

biological communities in which

species live, the ecosystem in which

communities exist and interactions

among these levels. Ecosystem

diversity is reflected in diverse

biogeographic zones such as lakes,

deserts, coasts, estuaries etc.

Significance of biodiversity

Biodiversity plays a crucial role

in the life of man. Biodiversity

fulfils the need of food, fodder,

fuel, timber and medicines. It is

estimated that more than 25 per cent

of all medicines available today are

derived from tropical plants. Plants

are important source of grazing for

cattle and other herbivores. Flesh

of animals is an important source

of food for human beings.

Arvind Singh

fOCuS


Biodiversity helps in increasing

the agricultural production and

also in developing disease resistant

varieties. It was evident in the early

1970s when an epidemic called

grassy stunt disease of rice caused

by virus destroyed more than

160,000 hectares of the crop in Asia.

A resistance gene borrowed from

wild rice variety of Central India

named Oryza nivara controlled

the disease. It was the only known

genetic source of resistance to the

grassy stunt disease.

Biodiversity plays an important

role in protecting the water

resources. The natural vegetation

cover in water catchment helps in

maintaining hydrological cycles,

regulating and stabilizing water

runoff and acts as buffer against

natural disasters like flood and

drought. Vegetation facilitates

the percolation of water into the

ground, thus helping in maintenance

of ground water table.

T h e s t a n d i n g m a n g r o v e

vegetation along the sea coast

serves as a shield against natural

disasters like cyclone and tsunami.

Biodiversity plays significant role in soil formation and its protection.

The vegetation improves the soil

structure, increases the water

holding capacity of the soil and also

raises the nutrient level of the soil.

Biological diversity plays

important role in nutrient recycling.

It is the sink and source of nutrients.

Microbes in the soil, facilitating the

nutrient return to the soil decompose

the dead plant parts and animals.

Biodiversity helps in elimination

of environmental pollut ion.

Breakdown of the pollutants and

its absorption is a feature of many

plants. The plant Vinca rosea

(Sadabahaar) has the ability to

degrade Trinitrotoluene (TNT)

like explosive. Several strains of

microorganisms have been found

useful for the purpose of cleaning

up toxic wastes. Some plant species

thrive on soils that are rich in heavy

metals. Several plants have the

ability to hyperaccumulate metals

like copper, nickel, cadmium,

chromium, cobalt and mercury.

They can be planted on toxic waste

sites where they remove the toxic

metals from the soil. The Indian

mustard (Brassica juncea) has the

ability to absorb cadmium and

chromium from the soil. Aquatic plants like Eichhornia crassipes, Lemna minor and Azolla pinnata are

used for disposition and extraction

of metals like copper, cadmium,

iron and mercury from water.

Forests comprising diverse

group of plant species are the major

sinks of carbon dioxide. The latter

serve as a green house gas causing

global warming. Thus ecologically

diverse forest ecosystems help in

mitigation of global warming.

Biodiversity provides stability

to the ecosystem and maintains

the ecological balance. Plants and

animals in ecosystem are linked

to each other through food chain

and food web. The loss of one

species in the ecosystem affects the

survival of other species. Thus the

ecosystem becomes fragile.

Ecologically diverse forest

ecosystems are home of wild-life

and tribals. The forest of surrounding

areas fulfils all the needs of the tribals. Due to constant association

with the forest environment tribals

have evolved a curious knowledge

of plants and their utility for them.

Many of the uses for which plant

tribals employ products are not

known outside their restricted

community.

Biodiversity of India

With 2.4 per cent of the world’s

land, India contributes 8 per cent

to the world diversity. It has,

therefore, been designated as one

of the 12 megadiversity regions

of the world. India is recognized

as a country uniquely rich in biodiversity because of its tropical

location, varied physical features

and climate. Indian biodiversity is

estimated to be over 45,000 plant

species contributing 8 per cent of

the world’s flora and about 80,000 animal species constituting 7 per

cent of the world’s fauna of which

33 per cent flora and 62 per cent fauna are endemic (found nowhere

else in the world) to India. Among

the plant species, the flowering

plants have a much higher degree of

endemism, a third of these are not

found elsewhere in the world. Of the

estimated 45,000 species of plants

about 5,000 species of algae, 20,000

of fungi, 1,600 of lichens, 2,700 of

bryophytes, 600 of pteridophytes

and 15,000 of flowering plants have been identified and described so far. Indian flowering plants represent 15 per cent of the flowering plants


of the world. Among flowering

plants orchids have high species

diversity (1,082) found mainly in

North-eastern Himalaya.

Apart from the high biological

diversity in Indian wild plants

there is also great diversity of

cultivated crops. The traditional

cultivar includes 30,000 to 50,000

varieties of rice and a number of

cereals, vegetables and fruits. The

highest diversity of cultivars is

concentrated in high rainfall areas

of the Western Ghats, Eastern

Ghats, Northern Himalayas and the

North-Eastern hills.

As far as faunal diversity is

concerned, India is home for 67,000

species of insects (including 13,000

butterflies and moths), 4,000 of

molluscs, 6,500 other invertebrates

2,000 of fishes, 1,200 of birds, 540 of reptiles, 200 of ambhibians,

and 500 of mammals, in which 62

per cent ambhibians and 32 per

cent reptiles are endemic to India.

Among lizards, of the 153 species

recorded 50 per cent are endemic.

Among the larger animals 79

mammals, 44 birds, 15 reptiles

and 3 amphibians are threatened

today and 1,500 plant species

belong to endangered category

(the species which are in danger of

extinction).

Indian sub-continent alone has

given the world nearly 320 species

of wild animals, whose centre

of origin lies in India. Livestock

diversity is also high i.e. 27 breeds

of cattle, 40 breeds of sheep, 22

breeds of goats and 8 breeds of

buffaloes are available in the

country. However, today many of

these are standing on the verge

of extinction due to the increased

use of exotic breeds. Jersey and

Holsteins have largely replaced

indigenous breeds of cattle.

India has contributed 167 species

of cultivated plants along with their

320 species of wild relatives and

land races and several domestic

animals. Rice, sugarcane, jute,

jackfruit, ginger, turmeric, black

pepper, bamboos, camel, mithun

and water buffalo have originated

in India.

India is extremely rich in

Ecosystem diversity as well.

According to Wildlife Institute of

India the country has 10 biographic

zones: (i) Trans-Himalayas (ii)

Himalayas (iii) Desert (iv) Semi-

arid (v) Western Ghats (vi) Deccan

(vii) Gangetic Plain (viii) North-

East India (ix) Islands; and (x)

Coasts

The North-East, the Western

Ghats, Western and North-Western

Himalayas are rich in endemism.

At least 200 endemic species are

found in the Andaman and Nicobar

islands.

Hot spots are the regions of

high biodiversity with massive

threat to flora and fauna due to

high biotic pressure. Of the 18

biodiversity hot spots of the world 2

belong to India. Western Ghats and

Eastern-Himalayas are the hot spots

of biodiversity in India.

The Andaman and Nicobar

islands are extremely rich in

species, and many subspecies of

different animals and birds have

evolved here. The islands alone

have as many as 2,200 species of

flowering plants and 120 species of ferns. Out of 135 genera of

land mammals in India 85 (63%) are found in the north-east. The

north-eastern states also have 1,500

endemic plant species.

A m a j o r p r o p o r t i o n o f

amphibian and reptile species,

especially snakes, is concentrated

in Western Ghats, which is also

habitat for 1,500 endemic plant

species. The Coral reefs around the

Andaman and Nicobar islands, the

Lakshadweep islands and the Gulf

areas of Gujarat and Tamil Nadu

are biologically diverse ecosystems

and are often called ‘tropical rain

forest’ of the ocean.

Causes of loss of biodiversity

The fundamental causes of

biodiversity loss include:

1. Unsustainably high rates of

human population growth and

natural resource consumption.

2. Introduction of exotic species

associated with agriculture,

forestry and fisheries.3. Economic systems and policies

that fail to value the environment

and its resources.

4. Inequity in ownership and access to natural resources,

including the benefits from

use and conservat ion of

biodiversity.

5. Inadequate knowledge and inefficient use of information.


6. Legal and institutional systems

that promote unsustainable

exploitation.

Conservation of Biodiversity

Conservation of biodiversity

refers to planning and management

of biological resources in a way

so as to secure their wide use and

continuous supply, maintaining

their quality, value and diversity. The World Conservation Strategy

has suggested the following steps

for biodiversity conservation:

1) Efforts should be made to

preserve the species that are

endangered.

2) Prevention of ext inct ion

requires sound planning and management.

3) Varieties of food crops, forage

plants, timber trees, livestock,

animals and their wild relatives

should be preserved.

4) Each country should identify

habitats of wild relatives and

ensure their protection.

5) Habitats where species feed,

breed, nurse their youngs and

rest should be safeguarded and

protected.

6) International trade in wild plants

and animals be regulated.

For the conserva t ion o f

biodiversity the immediate task will

be to devise and enforce time bound

programme for saving plant and

animal species as well as habitats

of biological resources. Action plan

for conservation, therefore must be

directed to :

i) Inventorization of biological

resources in different parts of

the country including the island ecosystems.

ii) Conservation of biodiversity

through a network of protected

areas including National Parks,

Sanctuaries, Biosphere reserves,

Gene Banks, Wetlands, Coral

reefs etc.

iii) Restoration of degraded habitats

to their natural state.

iv) Reduction of anthropogenic

pressure by cultivating the

species elsewhere.

v) Rehabilitation of the threatened

and endangered species.

vi) Protection and sustainable use

of genetic resources/germplasm

through appropriate laws and

practices.

vii) Conservation of microbes

which help in reclamation and

rehabilitation of wastelands and

revival of biological potential

of land.

viii)Control of over-exploitation

t h rough Conven t ion on

I n t e r n a t i o n a l Tr a d e i n

Endangered Species (CITES)

and other agencies.

ix) Rehabil i ta t ion of t r ibals

displaced owing to creation of

protected areas.

x) Protection of domesticated

plant and animal species in

order to conserve indigenous

genetic diversity.

xi) Multiplication and breeding

of threatened species through

modern techniques of tissue culture and biotechnology.

xii) Maintenance of corridors

between different nature

reserves for the possible

migra t ion of spec ies in

response to climate, or any

other disturbing factor.

xiii)Restriction on the introduction

of exotic species without

adequate investigation.xiv)Suppor t fo r p ro tec t ing

t r a d i t i o n a l i n d i g e n o u s

knowledge and skills for

conservation.

xv) Discouragement of monoculture

plantations.

There are two main categories

of biodiversity conservation:

Ex situ conservation and In situ conservation:

1. Ex situ conservation : This

is conservation outside their

habitats by perpetuating sample

population in genetic resources

centres, zoos, botanical gardens,

culture collection etc. or in the

form of gene pools, and gamete

storage for fish; germplasm

banks for seeds, pollen, semen,

ova, cells etc. In this type

of conservation, plants are

maintained more easily than

animals. Seed banks, botanical

gardens, pollen storage, tissue

culture and genetic engineering

have been playing important

role.

India has done commendably

well as far as ex situ conservation of

crop genetic resources is concerned.

Gene banks have collected over

34,000 cereals and 22,000 pulses

grown in India. It has also taken up

such work on livestock, poultry and

fish genetic resources. However, there is need to develop facilities for


long and medium term conservation

through :

i) Establishment of Genetic

Enhancement Centres for

producing good quality of seeds.

ii) Enhancement in the existing

zoos and botanical garden

network.

iii) Seed-gene banks.

vi) Tissue culture gene banks

v) Pollen and spore banks

vi) Captive breeding in zoological

gardens; and

vii) I n v i v o a n d i n v i t r o

preservation

2. In situ conservation : This is

the conservation of genetic

r esources th rough the i r

maintenance within natural or

even human made ecosystem

in which they occur. This type

includes a system of protected

areas of different categories,

managed wi th d i ff e ren t

objectives to bring benefit to the society. Strict Nature Reserve/

Wilderness Area, National

Parks, National Monuments/

Natural Landmark, Habitat/

Species Management Area,

Protected Landscapes and

Seascapes, Managed Resource

Protected Area, Wildl ife

Sanctuaries and Biosphere

Reserves belong to this type of

conservation.

Protected Area Network in India

The protected areas in India

includes National Parks, Wildlife

Sanc tuar ies and Biosphere

Reserves.

National Parks : These are

areas dedicated to conserve the

scenery, natural objects and the

wildlife therein. In these areas,

all private rights are non-existent,

forestry operations and grazing of

domestic animals are prohibited.

Certain parts of the parks are

developed for tourism, enjoyment

and study in such a way that it will

not disturb or scare the animals. The

boundaries of the National Parks

are circumscribed by legislation.

There are 89 National Parks in

India, occupying nearly 4.1 million

hectares (1.25%) of the land area of the country.

Wildlife Sanctuaries : These are

dedicated to protect the wildlife,

and their boundaries are not limited

by state legislation. In a sanctuary,

killing, hunting or capturing of

any species of birds and mammals

is prohibited except by, or under

the control of the highest authority

in the department responsible

for management of a sanctuary.

Forestry and other usages are

permitted to the extent that they do

not adversely affect the wildlife..

India has 500 wildlife sanctuaries

occupying about 12 million hectares

(3.6%) of land area of the country.

Biosphere Reserves : These

are multipurpose protected areas

which are meant for preserving

genetic diversity in representative

ecosystems by protecting wild

populations, traditional life style

of tribals and domesticated plant/

animal genetic resources. Each

biosphere reserve has following

zones:

i) Core zone : where no human

activity is allowed.

ii) Buffer zone : Limited human

activity is allowed.

iii) Manipulation zone : Human

activity is allowed but ecology is

not permitted to be disturbed.

iv) Restoration zone : Degraded

area for restoration to natural

or near natural form.

Nilgiri Biosphere reserve was

the first biosphere reserve of India established in 1986. Today there

are 15 Biosphere Reserves in India,

three of which i.e. Sunderban,

Gulf of Mannar and Agasthymalai

Biosphere Reserves have been

improved as World Biosphere

Reserves by United Nations

Educational, Scientific and Cultural Organization (UNESCO).

Conclusion

In a biodiversity rich developing

country like India the fast growing

human popu la t ion has pu t

tremendous pressure on biological

resources. Hence unsustainable

use of the biological resources has

resulted in the loss of biological

diversity of the country. Besides

this, introduction of exotics have

also substantially contributed to

the loss of biological wealth of the

country. Therefore, conservation of

biodiversity is the need of the hour

not only for the fulfillment of food, fodder, fuel, timber and medicinal

requirements but also for the enhanced agricultural production,

ecological balance, mitigation of

environmental pollution and natural

calamities. q



Retrofitted Car for the Physically Challenged

ShODh yATRA

UJIB KHAN, born in January 1974, is an automobile mechanic f r o m J a i p u r . A childhood attack of

polio has left his lower limbs weak and only partially functional. Being handicapped himself, he has encountered problems that any disabled person faces, when it comes to mobility and has developed a technique to retrofit any car with attachments, making it disabled friendly.

Mujib faced a tough childhood due to his disability, but he was not a man to sit at home and rue his fate.

In the 1990s, he started his business of making bedsheets on order and selling them to exporters.

As the export market became dull, and objections rose over use of certain dyes in the material, he had to change his line of work. With his keen interest in mechanical things, he then started a scooter and motorcycle-repairing workshop. In

M this small 5’ by 5’ workspace, he did all types of work on two wheelers including repairing, tinkering and painting.

It was in this workshop where, after a lot of trial and error, he developed the hand-operated car and showed disabled people the way to be independent. This made Mujib a hero of sorts and a role model for the youngsters in his area. People watch in disbelief as they see Mujib, stop and get out of his car on crutches. It is difficult for them to imagine a man with impaired limbs, drive on the main highway!

Genesis

Though they had a Maruti van at home, which was used by his father and brother, Mujib regretted the fact that due to his disability he could not drive around. Hiding from the family, he started his work on the car. After initial experimentation, he attached a rod to be able to operate brake and accelerator and drove the car in the absence of his parents.

The principle consists of

modifying the driving actions so that the controls are transferred

to hand by use of leverage, wires

and linkage mechanism


Once he had completed his initial modification, he slowly started to learn to drive the vehicle. In about a couple of month’s time, he had perfected his driving. No body helped him at any stage and he learnt all by himself. Then he took his van to his workshop to incorporate a system wherein both normal and modified mode of driving could be fitted.

He worked on it for six months, still the modifications in the car were looking like jutting intrusions and not blending with the vehicle dashboard, facia and controls. However, slowly people started acknowledging his efforts, the process of evolution continued, and he started making the attachment commercially.

After modifying dozens of car, he at last became successful in developing such a retrofit, which perfectly blended with the car interiors.

He modified the existing Maruti 800, Mahindra Scorpio, etc. to make it suitable for people with lower limb impairments. The modifications were made in brakes, clutch and accelerator.

All these controls were modified in such a way that hands can operate these.

For the person with one leg, the clutch remains at its original position while the other controls are modified to be operated by hands.

These modifications were made in such a way that a normal person could also use the cars in the conventional fashion.

Innovation

The innovation lies in the modification to accelerator, brake and clutch arrangement for operation by hand. Comfort, simplicity and ease of operation are other features embedded in the controls.

There are references in literature for modifications in cars to suit handicaps. Most of them have the telescopic mechanical members for actuating brake and accelerator pedals. Mujib has used parallel system for hand-operated controls, which enhances safety.

The principle consists of modifying the driving actions so that the controls are transferred to hand by use of leverage, wires and linkage mechanism.

Brake pedal is activated either by mechanical arrangement made of linkages or by using an additional hydraulic cylinder arrangement.

Using the push-pull type switch, installed on the dashboard, the accelerator gets activated through a wire connecting it to the engine.

The clutch wire is connected to a semi circular hand steering element, which is connected through the steering assembly to the clutch plate to operate the clutch.

Currently the design is adapted for Scorpio and Maruti, and has to be standardized for any other vehicle. The innovator wants to modify the kit to meet the needs of physically challenged users with one hand and one leg and reduce the cost.

This kit is especially important, as many car companies have discont inued the expensive custom solutions that they had earlier introduced for physically challenged people.

Mujib works on a single car at a time and it takes him around 3-4 days to work on it. The price of attachment varies from model to model. The kit for a Maruti 800 costs around Rs. 10,000 while a similar one for a Honda City could cost anywhere between Rs. 15000-20000.

His first commercial kit was made for Mr. Chandra Pal Singh, SMS Hospital, Jaipur in the year 1995, who was really satisfied with his work and helped him get orders to modify another 15-20 cars. Now after modifying around 70-80 cars, his kit has blended ubiquitously with the existing car interiors like an ‘invisible presence’ in the cars that help physically challenged people with

non-functional limbs. q

(E-mail : [email protected], www.nifindia.org)The modification to accelerator, brake and clutch arrangement for operation by hand.


They will go on to various fields and professions and reflect what education really

signifies, a journey from darkness

to light

Education for All : A Lesson from Jagjagi Kendras

BEST PRACTICES

HILE RTE is poised to make education universally accessible to all sections of society, the Jagjagi Kendras

in Sitamarhi district of Bihar, set up under Mahila Samakhya Programme as a part of the Bihar Shiksha Pariyojana stands out as a precursor.

It arose as a response to the situation on the ground, where hundreds of little girls were simply left out of the school system. The reasons were stero-typical, an unholy mix of poverty and the entrenched mind-set which sees girls’ education as totally dispensable, probably antithetic to their only perceived role in society, as home-makers. There are today some 230 Kendras across the 13 blocks in Sitamarhi, practically in each village, bringing the light

of knowledge through Jagjagi,

literally meaning the twinkling of lights!

wSujata Raghavan

The Kendras do not have a building, which in a sense opened up doors within the community for them. Often it would be a Panchayat Bhavan, or someone’s home or simply an open safe space. This very naturally led to a sense of ownership and involvement of the community, taking the learning in the Jagjagi Kendras beyond, to actually chip away at old prejudices and medieval mindsets.

The Kendras are entitled to receive a fixed amount under various heads from the Bihar Shiksha Pariyojana. A one-time payment of Rs.2075 to cover ‘infrastructure’ costs like ‘durries’, glasses, water jugs; another yearly amount of Rs.3075 for running costs of educational aids like blackboard, chalk, colour pencils and chart paper. The teacher, one per Kendra is entitled to Rs. 1,000/- . Within this princely amount, the kendras have functioned and made optimum use of not only their resources

The author is Manager, Programs & Editor, Charkha Features.


but also an intrinsic creativity,

which marked their approach to

education.

The Jagjagi Kendra is unique in a sense; it did not suffer from

any grandiose vision or plans, but

addressed the needs of girls who had

crossed their formative childhood

years without basic schooling. Girls

whose parents, mostly agricultural

labourers did not pause to think

before condemning them to a life

of domestic chores, looking after

younger siblings, cutting grass and

tending to cattle. While the boys

invariably were encouraged to go

to school and there are several

primary and middle schools in the

area, it was common to see girls

reaching adolescence, unlettered

and growing much like the wild

grass around their village.

In s t ead o f adop t ing the

c o n v e n t i o n a l a p p r o a c h t o

teaching, these Kendras developed

an ‘organic’ way which would

link learning with the natural

environment of these girls. This

was actually a finely evolved

system but broken down to words,

symbols, associations and linkages

with common everyday things in

their lives. A creative combination

of learning by alphabet and by

association. For instance the term

“ ghar parivar”. Literally it means

“ home-family”, figuratively it

denotes a somewhat larger concept

of rules of the household, authority

of elders, role of each member,

coexistence, mutual respect as part

of the learning. The girls are taken

through this, through interactive

sessions to provoke response.

At a more basic level, the actual

term “ghar parivar” is taught as

alphabets, each of the starting

alphabets like ‘g’ and ‘p’ are taken

up to make other words, again with

an active participation by the girls.

In essence, learning is imbibed

by correlating it with their lives,

it becomes a discipline or study,

which corroborates or strengthens

what they already know.

The beauty of this form of

teaching lies in the fact that it is

not based on some esoteric or

unviable principles which exist in a

vacuum but seeks very concertedly

to mainstream the girls into the

education system. The system

takes in these girls from literally

zero and to the level of Class V,

after which they have acquired the knowledge and skill required for entering Middle School.

Renu Kumari of Ashogi Got

village, now 18 years old, is a living

testimony to how this actually

works. One of 6 siblings of Ram

Bharose, who used to works as an

agricultural labourer, little Renu’s

education simply did not figure in the family’s priorities, until a day

when she was 12 years old, another

village girl who had joined the

Jagjagi Kendra excitedly shared her

experience and as only children can

do, urged her parents to allow Renu

to join. Initially both these girls

took Renu’s mother to the Kendra

and after convincing her, worked

on the brothers and father, all who

were ranged against the very idea

initially. However they too relented

and a brilliant new chapter unfolded

in Renu’s life, the darkness of

ignorance slowly yielding way to

the lamp of knowledge.

A promising student, Mahila

Samakhya program coordinators

nurtured the spark in Renu. She

was given the task to supervise the

Mid Day Meal schemes running in

village schools. Today Renu is in

the last year of school and her eyes

are set on acquiring a BA degree and then sitting for the Railway

exams or taking to teaching. Today

she is the only educated person

in her family. The respect that is

accorded to her, the responsibilities

she undertakes in all family matters

is of a value that stems only from

education.

R e n u a n d h u n d r e d s o f

little girls in Sitamarhi live a

transformed life, they have an

identity, which allows them to

craft their lives and bring about

change in their environment. It

is through them, that the role

of Jagjagi Kendras and indeed

the vision of Mahila Samakhya

shines through. According to Renu

“Mahila Samkhya has opened up

the path of learning for me. I have

the desire and will to stand on my

own feet now” .

The Jagjagi alumni is also doing

the institution proud. The girls are

enrolling for B.A, M.A after passing

out of the school system, the entry

into which it was unthinkable

left to their natural environment.

They will go on to various fields and professions and reflect what education really signifies, a journey from darkness to light. It is also in a

sense a journey from exclusion and

deprivation to being masters of one’s

own destiny. q(Inputs Lata Kumari, Sitamarhi, Bihar)

Charkha Features


DO yOu KNOW?

what is the objective of the unique Identification Project ?

Establishing one’s identity

is a major problem that people

face in India. As on date , there

is no single document that can be

used for identifying a person and

people are forced to carry multiple

documents to be used for different

purposes. Thus every time you

wish to avail of a service like

opening a bank account, obtaining

a passport, mobile connection etc

you are forced through a rigmarole

of providing different sets of

identity documents. Further, the

present sets of identity documents

being used today do not provide

migrants with a mobility of

identity, nor do they include the

poor and marginalized people.

The UID project aims to provide

each person in the country with a

unique identification number which will become a single source

of verifying his identity. This

would not involve issue of any

identity card. The basic identity

of a person will be linked to his

biometrics and stored in the UID

database. Whenever there is a

need to establish the identity of the

person, the same can be provided

through his UID through an online

authentication process.

will it be compulsory to get a uID number ?

It will not be compulsory to

get a UID number, but certainly

uNIquE IDENTIFICATION PROJECT

most beneficial. Any person

who is a temporary or ordinary

resident of India is eligible for,

and should get a UID number as

this would spare them the hassle

of repeatedly providing supporting

identity documents each time they

wish to access some service. The

UID will also facilitate entry

for poor and underprivileged

residents into the formal banking

system, and the opportunity to

avail services provided by the

government and the private sector

and also give migrants mobility

of identity.

How will the uID database be created ?

Creation of the UID database,

wi l l involve a network of

institutions at largely three levels.

At the point of first public interface there will be Enrolling Agencies

who will enrol people into the UID

database. These Enrolling Agencies

will be monitored by a network of

Registrars which would include

government and private sector

agencies who already have the

infrastructure for public interface

for eg banks, insurance agencies,

LPG distribution companies,

NREGS etc. Outreach Groups

working among women, children,

underprivileged persons etc will

also be engaged. At the central

level there will be a Central Identity Data Repository which

will manage the central data and

the network of Registrars.

How will a uID number be issued ?

A resident will first have

to apply before an Enrolling

Agency and submit the required form, with information asked

for, documents, photograph and

biometric elements like all ten

fingerprints, both iris scans. This information will be sent through

the Registrar to the UID central

database. There it will go through

a process of de-duplication. This

means that if he will be issued a

UID number only if his details

are not already in the database.

If his details are already there

in the database, his application

will be rejected. De-duplication

makes his UID number really

unique and also serves to prevent frauds. In case wrong information

is fed into the data base or a

person wants to change some

information about himself, this

will have to be done in accordance

with the laid down procedure.

The policy will also take into

consideration disabled persons

and the biometric standards

prescribed will ensure that these

groups are not excluded. In the

case of people without hands/

fingers only photo will be used for identity determination and

there will be markers to determine

uniqueness. Children will be required to get their biometric information updated every five


years till they are 18 when their

biometrics stabilize.

How will authentication be done ?

The process would provide

for an online authentication of

the biometrics of the person. A

one to one online match will be

run between the biometrics of

the person and his biometrics as

present in the UID database. The

reply to an authentication process

will be given in a “Yes” or “No”.

How will inclusion of the underprivileged be ensured under the project ?

Inclusion of the underprivileged

is one of the major objectives of

the UID project, as it is these

persons who find it most difficult to prove their identities and are

forced to forego benefits and

subsidies. To ensure that every

such needy person gets a UID

number the project will work

through its network of registrars

who already have a presence at local

levels and have the infrastructure

for public interface. In addition

the project would be involving

outreach agencies like civil society

working among women, children

and underprivileged sections of

the society.

How secure would the database be?

The UID database will be

guarded both physically and

electronically by a few select

individuals with high clearance.

It will not be available even for

many members of the UID staff

and will be secured with the best

encryption, and in a highly secure

data vault. All access details will

be properly logged.

what is the institutional set up under which this project is being implemented ?

The government has constituted

a Unique Identification Authority of India as an attached office

under the Planning Commission.

The Authority is headed by

Shri Nandan Nilekani, its first

Chairman. The Authority will

develop and implement the

legal, technical and institutional

infrastructure for the project. q

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Fax : 26175516Also ensure that it is drawn in favour of ADG (I/C)Publication Division, Ministry of Information and

Broadcasting, New Delhi.


NEw GERM PLASM TO INCREASE SAFFRON CuLTIVATION IN VALLEY

Concerned over decline in area and production of saffron in the Valley, the government is contemplating introduction of new germ plasm to deal with the problem. According to Official sources in past ten years there has been steady decline in saffron production in the Valley. In 1998

the crop was grown on 4161- hectares which came down to 2880- in 2002. The production in 1998 was 65.25 quintals. Interestingly, in 2004 while the area under saffron was increased to 3025 hectares and the production didn’t rise beyond 48.34 quintals. In 2008-09 the area under saffron cultivation was 2667 hectares and the production was 56.13 quintals. The yield rate of saffron has been highest in 2007 at 3.75 kg per hectare.

Officials attribute the decline in saffron production and cultivation to lack of adequate irrigation facilities and increasing diversion of agricultural land to urbanization and industrialization particularly in the Valley’s saffron belt in Pampore. Besides, monoculture of the same germ plasm for centuries, poor cultural practice, reluctance of saffron growers of investment in improving their own infrastructure facilities, unprecedented drought like conditions from 99 to 2002-03 and in 2008-09 and incidence of corm rot disease have led to decrease in the production and apathy of growers towards its cultivation.

A plan has been prepared to increase the production and the farmers would be given seeds, fertilizers, borewells for irrigations, the plan has been prepared by the Agriculture Department in collaboration with the Sheri Kashmir University of Agriculture and Sciences. The government would try to fix the problem by replacing the existing corms through the introduction of a new variety of germ plasm. The world’s best saffron is grown in Pulwama and Budgam districts of the Valley. In Jammu its cultivation is limited to district Kishtwar in Chenab Valley. q

J&K WINDOW

J&K uSHERS IN DAwN OF CLOuD REVOLuTION

Private companies in India may have lagged behind in adopting cloud computing. So it's the government now which has decided to act as a beacon. In one of the first cloud pilots in the country, Jammu & Kashmir has successfully used computing services offered by Madhya Pradesh to roll out citizen

services within 60 days at zero initial cost. If two or more states start sharing IT infrastructure, it may save the exchequer almost 50% of the Rs 1,378 crore allocated for state data centre projects. The centre is pushing other states too to use the cloud model which enables sharing of resources (like software and hardware) already possessed by one state with others through a pay per use model.

In one of the first pillots, the J&K government is all set to successfully roll out its ration card and recruitment services automation from a data centre based in Madhya Pradesh, in a few days. The pilot spanning 60 days has been completed successfully and MP will get revenues from J&K on a per transaction basis. According to the ministry of IT and Communications, Cloud services are going to become mainstream, and the ministry is encouraging other states to share applications and data centres, as successfully demonstrated by these two states. The SDC (state data centre) project is part of the Rs 27,000 crore National e-Governance Plan rolled out in 2005. So far, only 13 states have been able to roll out their data centres. The remaining 22 states and union territories are yet to commence rollout. This pilot can change the paradigm of citizen services delivery.

Some states which are already rolling out data centres can act as cloud providers. Once established, the data centres will house data on citizens' property, transport, tax etc apart from hosting applications for running police stations and state government portals. Citizens of those states which launch e-governance later might not have to suffer since states can use data centres of other states on a pay per use basis. For running data centres, states also have to spend money on power, cooling solutions and security software but innovative models like Software as a Service or cloud computing can reduce costs. If states start adopting cloud computing many tech majors which would be building separate applications and data centres for each state might have to be content with fewer contracts. The cloud market is at a nascent stage in India at $110 million. q


Overall Assessment • With the improving growth outlook, monetary and fiscal exit measures have started. • While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline

inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth.

• In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses.

Highlights Global Economic Conditions • Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery, however,

remains significantly divergent. The projections for global output for 2010 generally point to consolidating recovery, led by the Emerging Market Economies (EMEs). The WTO projects world trade to stage a strong recovery in 2010.

• The risks to the overall global macroeconomic environment have, however, increased because of large public debt in advanced economies, on the back of concerns relating to reduction in potential output, high unemployment rates, impaired

financial systems and premature exit from the policy stimulus. • With stronger recovery in EMEs driven largely by domestic demand, improving exports and return of capital flows, EMEs

face the risks of inflation and asset price build up. Indian Economy Output • The Indian economy exhibited clear momentum in recovery, and despite the impact of a deficient monsoon on agricultural

production, GDP growth for 2009-10 has been estimated at 7.2 per cent, up from 6.7 per cent recorded in 2008-09.

• Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector.

• Survey data suggest pick up in capacity utilization levels in recent months, which still remain below the previous peaks.

• Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normal monsoon. Support for sustained momentum in growth can be expected from all three major components, viz., agriculture, industry and services.

Aggregate Demand • Final consumption expenditure remained subdued during 2009-10, as growth in both private final consumption expenditure

and government final consumption expenditure decelerated. Investment demand, particularly gross fixed capital formation, however, showed a gradual recovery during the year.

• While the momentum in investment demand is expected to continue, pick-up in private consumption demand could drive the recovery in growth. Growth in corporates sales, after remaining significantly depressed over four consecutive quarters, staged a strong recovery in Q3 of 2009-10, indicating improving private demand conditions.

• The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary.

External Economy • India’s external sector position improved alongside the recovery in the global economy. After declining for 12 consecutive

months, exports recovered in October 2009. Similarly, imports recovered in November 2009 following a phase of

decline.

• Despite a lower trade deficit, the current account deficit widened during April–December 2009, as compared with the corresponding period of the previous year. This is attributable to a fall in invisibles, particularly on account of business

services.

• During 2009-10, foreign exchange reserves increased by US$ 27.1 billion, comprising mainly of increase in gold holdings (US$ 8.4 billion), SDRs (US$ 5.0 billion) and foreign currency assets (US$ 13.3 billion). The bulk of the increase in

foreign currency assets was on account of valuation.

• Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital

inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management.

Macroeconomic and Monetary Developments in 2009-10


Monetary Conditions • Reflecting the stronger recovery in economic activities, growth in broad money (M3) and flow of credit to the private

sector exceeded the Reserve Bank’s indicative projections for 2009-10.

• While the increase in CRR effected by the Reserve Bank in its Third Quarter Policy Review of January 2010 led to some moderation in excess liquidity, overall liquidity conditions remain comfortable as reflected in the daily reverse repo operations.

• The banking system’s credit to the government was the prime driver of monetary expansion during the year. The flow of resources to commercial sector distinctly improved from both bank as well as non-bank sources.

• Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation. Financial Markets • With market activity returning to the pre-global crisis level, volatility in the domestic financial markets was much lower

during 2009-10 than in the year before, when the crisis erupted.

• Despite considerable stability and the commencement of exit, markets faced concerns emerging from large government borrowings and the increase in inflation. This affected yields in the government bond market.

• The transmission of lower policy rates to the credit markets improved, albeit, slowly. • Asset prices increased at a relatively faster pace in the recent months, reflecting optimism about the economy’s prospects

as well as easy liquidity conditions. • With the revival of capital inflows, nominal exchange rate appreciated. Given higher domestic inflation, the appreciation

in real terms was even higher.

Inflation Situation • Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10. • The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of

a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised.

• This is evident from the acceleration of inflation in non-food manufactured products from -0.4 per cent in November 2009 to 4.7 per cent in March 2010.

• Inflation, as measured by consumer price indices (CPIs) also remained high, though there was some moderation in February 2010.

• These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations.

Risks to Growth • Apart from monsoon-related uncertainty, there are downside risks to growth: First, private consumption demand needs to improve significantly to support the growth momentum. Second, global recovery, despite gaining strength, is expected to remain fragile, which has implications for exports.

Third, the exit from fiscal stimulus and the growth-supportive monetary policy, unless calibrated carefully, could impact the growth process.

Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings. This has adverse implications for the potential growth of the economy.

• Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent. Inflation Outlook • Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are,

however, upside risks to inflation: First, international commodity prices, particularly oil, have started to increase again. In several commodities, the import

option for India to contain domestic inflation is limited, because of higher international prices. Second, the revival in private consumption demand and the bridging of the output-gap will add to inflationary

pressures.

Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation. q

(RBI Release)


North east diary

SuCCESS AFTER SHIFT FROM SHIFTING CuLTIVATION

Ajhumia, one who does jhum clutivation, has turned progressive rubber planter thanks to the initiative

of the Soil and Water Conservation Department. The Department's 2009- 10 annual report reveals

the success story of lenggan M Sangma of Doldenggare under dalu C&RD block. Sangma, the

Nokma (headman) of his village, was a jhumia and owned assets including a paddy field, three hectares of cashew nut and one hectare of areca nut plantations.

The Nokma was finding it tough to look after his family of eight till 1986-87 with a meagre income. The Soil and Water Conservation Department came forward to sponsor him to cutivate rubber in a

one hectare area. He was also sent to Kerala by the Department for a study tour on rubber cultivation.

Impressed with his efforts, the Department again offered him two hectares of land.

The Soil and Water Conservation Department has been making efforts to prevent soil erosion

in the hilly state by encouraging farmers to go for alternative livelihood by doing away with

jhum cultivation or shifting cultivation for which huge patch of forest land is cleared every

year. J Sangma now plants a mixture of rubber clones of RRIM 600 and RRIM 105 besides other.

With the existing number of 1200 standing rubber trees, the average yield per hectare is 800-900 kg

per year. He grows 1200 kg of paddy in his 32.5 bigha plot of land and about 50 quintals of cashew from an eight acre plantation per year. q

wORLD BANK TO ASSIST RuRAL PROJECTS IN NORTH EAST

The World Bank will provide Rs. 5 billion to four north eastern states-Mizoram, Nagaland, Sikkim

and Tripura to create self-employment opportunities for the tribals and poor people living in rural

and remote areas. The Bank would provide the assistance for the North East Rural Livelihood

Project (NERLP), starting this financial year (2010-11).

The pilot project of the NERLP would be implemented in two districts each of the four north eastern

states aiming to generate livelihood of those people who are yet to get any assistance from any medium

or major scheme. The NERLP has four components-social empowerment, economic empowerment,

partnership development and management, project management. NERLP would play a vital role in

transforming rural economy, eradicating poverty and providing viable employment opportunities by

utilising local and natural resources. It is aimed at socio-economic development of tribals and other

backward people. The Development of North Eastern Region (DoNER) ministry in consultation with the

Department of Economic Affairs and World Bank has finalised the NERLP. It would be implemented through a society registered at Guwahati.

The NERLP is based on the IFAD (International Fund for Agricultural Development) assisted North

Eastern Regional Community Resource Management Project (NERCRMP) which has been successfully

implemented in two districts each of Meghalaya, Assam and Manipur. IFAD ia a specialised agency

of the United Nations and its mission is to enable the rural poor to overcome poverty. 32,000 self-help

groups (SHGs) have been formed in Tripura and the state government has been providing Rs. 50,000

to these under the Tripura Support Scheme (TSS). The SHGs are producing and marketing more than

250 products. q


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Yojana Inflation

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Transcript of Yojana Inflation