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UPA’s Disco Dancing on Inflation and Employment Failure To Contain Inflation

Updated: April 23, 2011 4:17 pm

The present government misled the people by stating that the inflation would come down to seven percent by March, 2011. Prior to that, during the past six months, the same government was promising that the inflation was a just a passing phase and it would come down within forty days. RBI too was bluffing that by using CRR and other monetary tools, the inflation would be back to normal. Nothing has since happened till date. On the other hand, interest rates have been increased and loans have become costly. Printing extra money or reducing money quantity from the market need not have any relations with inflation as long as this is done in respect of monopoly market situation. We have the recent experience of the USA. The Federal Reserve has been printing tons of money during the past three years to bailout banks and big industries from total collapse. Total quantity of such extra money printing could be exceeding a trillion dollars. However, there is still no sign of high inflation in that economy. Similar situation was experienced during 1930’s Great Depression. J. M. Keynes had advised to print huge sums of money then to generate demands for industrial goods and create more employment opportunities. His famous saying is well known to us. He said, “First pay for digging pits and also later for filling the same pits again”.

                It shows that the present government of India has no tools to bring down the inflation even to seven percent. Question is raised as to why only seven percent? Why not two, three or zero percent? What is so sacrosanct about seven percent?

                Let us not forget that we are living in monopoly capitalist economic system since early 1990s. Inflation and capitalism cannot live separately. They are interdependent like interest and capitalism, poverty and capitalism. If this is valid, why not then say that very boldly instead of misleading the people?

IS INFLATION UNAVOIDABLE?

First we are having no free market economy, though everyone spreads disinformation in this regard. We live in monopoly and oligopoly market systems where the monopolists decide the prices of goods in factories and not in the free market like agriculture produce. These are called ‘sellers’ prices’. Monopoly enterprises charge prices not for charity but for profit maximisation. Sellers’ prices are, therefore, called monopoly prices. These prices influence all other prices in non-monopoly product fields, like farming, small industries, trading and in other unorganised sectors. If these competitive sectors purchase from monopolists its raw materials, semi-finished goods, machines, etc. its cost of input will continue to rise. It has thus cascading effects on market prices.

                The government as well as other political parties always makes so much noise about rise in food prices and never about the prices of industrial goods. Onion, tomatoes, potatoes, vegetables, etc are always the targets of all the political prices. None of them is seen raising their voice against other daily necessities like toothpaste, soaps, cooking and other oils, spices, clothes, processed foods items, coming from the industrial sector. The prices of these daily necessities are rising constantly without anyone noticing them. Everyone wants today’s prices of only farm products lower than yesterday, notwithstanding the rise in their own income levels (like pay commission benefits, DA increases, handsome wage agreements with employers, salary increases of MPs etc). None of them talks in the case of industrial consumables. No one ever thinks about the losses being incurred by farmers when the prices of farm products are forced down, sometime even much below the cost of production. Sometime the farm products are just thrown in the open field as the transporting cost involved in transporting them is more than the selling prices. Why then blame farmers for committing suicides in large number?

                Inflation is coming with another disturbing element of unemployment of young people in our society who are compelled to migrate to cities and driven to criminal activities. Monopolists invest in machinery than in manpower to maximise profits as the research in technology and science progresses. Supplies of manufactured goods are made by creating more demands through advertisements and simultaneously controlling the production in factories below the installed capacities. One can easily watch the installed production capacity lying idle in most of the factories. This is nothing but contrived scarcity of products in the market as termed by .J.K. Galbraith. This phenomenon is not unique only to India but also applicable to all the capitalist economies. The Western economists call this as stagflation, that is, economic growth without employment but with inflation. We in India are slowly getting into this phase of stagflation. Prof. Paul Samuelson has challenged young economists to find a solution to this problem and claim a Noble Prize. This shown how much the economists in the West are worried about. He says: “No jury of expert economists can agree on a satisfactory solution for the modern disease of stagflation; many of the proffered cures may be as bad as the disease itself. This is why one can win for herself or himself a Noble Prize on the basis of an empirical or theoretical breakthrough that will help the mixed economy better with the new scourge”. (Guidelines to Chapter 41 of his book Economics, 11th edition)

WHAT IS THEN THE REMEDY?

In states like Maharashtra, Goa and Gujarat, there has been a state policy to fix annually, or as per needs, the selling prices of milk by assessing state-level benchmark of the cost of production involved in milk production. The government has such data on yearly basis. The prices are fixed as per the fat contents of cows’ and buffalos’ milk separately. This may not satisfy all the milk producers in the state. But it gives a state-level benchmark, which is taken into consideration by all the producers while finding out whether the prices are beneficial for them or not. Some suppliers may still be losing the profit margins due to higher cost of production in their areas, and some may be gaining extra profits due to already having lower cost of production. Those who lose the profit margins or incur loss are either forced to think of reducing the cost of production by better management to remain in the same business or look for alternative products as substitutes. Those who are better off due to declared prices will augment their existing production capacity and/or fully utilise the present idle capacities for maximising profits. When the prices are attractive, some new entrants would venture into this activity to try their skills. The history shows new entrants in this activity. They need not stick to state declared maximum prices. They, instead, can sell the milk at lower than the declared prices. This helps to increase the total supply of milk in the market as well as add more employment. The government may still revise the maximum regulated prices next years after assessing the cost of production. Over time, due to competition, the prices could be lower than the previous year. This way, we eliminate inflationary impact over a period of time. Additionally, we have more openings for young entrepreneurs. For them, it becomes some income better than no-income. Employment as well as production activity get boost in the economy. Stagflation thus gets resolved after some time.

                If this statement is valid, we need to think of extending this logic to industrial and other products also. The government has all the statistical data within its own machinery. It can annually analyse the cost of production of hundreds of industrial consumables and other products needed by consumers. In order to keep the economy progressing, it can add some reasonable percentage of marketing expenses and transportation charges and profit to the average cost of production of every item and declare a national benchmark price for everybody’s knowledge. The profit margins would be in line with desired returns on investments in economy. This is called ‘regulated prices’. In this case, the percentage of profit remains the same for all the producers, but the amount of profit will defer from enterprise to enterprise. The data of cost of production as well as prices will be classified by generic names of the commodity. Those who are holding patents shall sell their products under the same patented or brand names but they would have to remain within these limits of prices and face competition in free market. None of them would be allowed to sell any such products at prices higher than the declared prices by the state.

                There could be fear among enterprises from the organised sector about disclosing the cost of production of their products in this process. It is to be noted here that while working out the national benchmark for any product, the state will not declare any individual enterprise’s cost of production of any single item. Instead, the national level averaging of all the products would be combined for this purpose. As such, no secrecy is disturbed.

                This benchmark price will be beneficial to many but not beneficial to some. Those who suffer losses due to this national benchmark price structure will either try to economise the cost of production by improving the management techniques to remain in profitable business, or think of quitting and starting a new line of products. Each entrepreneur with normal level of management will surely earn some profit. Therefore, no one would lose the business unless there are exceptional situations of bad management. Small entrepreneurs will welcome these moves. They will certainly not lose the money as their own overheads are much lower than the big players in the market.

                In case of those who are already above the benchmark prices would try to maximise production at that price by better utilising existing idle production capacities and/or install additional capacities for this purpose. Alike the case of milk production as mentioned above, new young entrepreneurs would get an incentive to venture into the production of some of these items where the benchmark prices are tempting to make some money. Existing producers would also add employees to meet the higher productions. These prices will be common for any enterprise, whether monopoly or non-monopoly.

                Regulated prices will remove uncertainties in the market about inflation. The inflation would initially be in the expected range of prices of all the major consumable items. We are not talking about non-consumable products here like cars, special machinery, etc. Monopolists and oligopolists too will fall in line with the national policy decision in this regard. In the competitive market conditions, each producer will always endeavor to reduce cost of production to get maximum profits and outwit competitors. Workers will prefer to share in profits over a period of time than asking for wage increases as the inflation impact would not be much visible.

                As we know, the state regulates support-prices of major agriculture produce as a national policy. It is also like Reserve Bank of India regulating interest rate structure in our economy. Minimum wages are also regulated in many economies including India. Their rates are decided by compiling many types of statistical data. The rates are based on cost of family budget. As per some recent survey, India’s average family expenses for food and consumables are roughly around forty six percentage of total family income. This makes the life of a common man miserable.

                If our goal is to remove stagflation and more particularly rising inflation and unemployment, regulated prices are the right solution. The most important aspect in this regard is that no seller will sell the products at a price higher than the national benchmark price. However, there is no restriction for anyone to sale the same products at lower than the national benchmark price. Legislation for this on the lines of minimum wages or interest is essential to enforce this discipline in the economy. This does not breach the existing law of competition.

                This policy, as Dr MG Bokare says in Stagflation: “Its cure, autonomously promotes its parameters of wage-rate and interest-rate. Presently, we follow the policy of wage-rates and interest-rates, which go to govern rate of profit. It is reversed in the suggested solution. The state budget will be metamorphosed. Expenditures on schemes to support unemployed people will cease as a component of budget. Secondly, government’s own purchases of goods will cost less. The salaries of the state employees will not rise. Taxes could be lower over time.”

By DG Bokare

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