There cannot be flood & drought at once!!!

 It is that time again when we get to see the Finance Minister and the Industries Minister more on the news channels than cricket or movie celebrities. Arguably the most abused jargon in economics is dominating the headlines all over. Yes, inflation is what it is. Well, it has been hovering at around 7 per cent for a few weeks now and that’s well over 200 basis points more than the comfort level for the RBI.

As alarming as this number is, it does not tell the complete story! We are one of the few countries in the world, which report inflation at WPI (Wholesale Price Index) and not CPI (Consumer Price Index). In a vast country like ours and especially with the fact that we do not have the robust of supply chains, the gap between WPI and CPI is critical. In CPI terms, the impact of inflation on a person in Delhi is significantly different from the impact on a person in Shillong!

Rising inflation

As can be seen on every news channel and read in every newspaper, there is rising inflation in the economy, which means that we have to shell out more than what we used to before for our consumption. Does that mean that suppliers are better off than the consumers?

Logic suggests it should be the case. But amidst the rising prices of wheat, rice, and pulses there are reports of farmer suicides and loan waiver to help save the struggling farmers! I thought only one of these situations could exist at a time.

When the oil prices are soaring sky high, the whole world suffers but surely someone stands to gain and in this case it is the oil producing economies. But what is happening in India is quite inexplicable! Something is missing in this equation. Surely you cannot have a situation in which both consumers and suppliers are worse off — that cannot happen in a free market!

Yes, we do have government interventions in the form of price ceilings and support prices but that is applicable to a very few goods included in the calculation of inflation. By and large, it is a free market, and the market clears at the equilibrium price – meaning the price at which both the supplier and the consumer are willing to execute the trade.

All this even before the RBI has tinkered with its monetary policy to suck some liquidity out of the economy! When that happens, suppliers will be just as bad and consumers are going to be even worse off. How do we explain this dead weight loss?

A structural problem

Admittedly, we need to address shortage in supply of goods but that does not fix the problem completely, we must dig deeper. We cannot have fears of food shortage on one side and farmers moving out of agriculture or committing suicide on the other. This is a structural problem rather than a seasonal or a cyclical one.

If there is a danger of shortage of motorcycles when there is a demand for them in the market, what we would witness is that the Bajajs and the Hero Hondas would be increasing their production and not moving out of their business or declaring bankruptcy! But why is it different with agriculture?

Is this a strong case for our agricultural supply chain to be a value-decreasing phenomenon? Is it the middlemen who are responsible for this dead weight loss? To keep a bunch of middlemen happy, is it fair to make the rest of the country pay the price? Is it not the right time for us to spend more efforts on creating direct sourcing networks? Isn’t e-chaupal a good initiative to be emulated?