No doubt in the coming policy review , RBI has to take some stiff measures. I believe the central bank is going to raise the interest rate by at least 50 basis point. This is surely going to hit the manufacturing sector but the country has no option. With the state assembly elections coming up this year , the Finance minister would be under tremendous pressure from allies for a pro common man budget. India is the country in which state government had fallen in past on the issue of soaring onion prices. BSE has already lost more then 10 percent in the new year . So this will be a difficult task for the central bank to choose the correct path.
Let us take a more closer look on the present inflation tactics being used by central bank . By raising the interest rate , central bank is trying to reduce the money circulation in market and hence bring down the prices . This is certainly going to hurt industries and entrepreneurs. The central bank has used the monetary policies in past to tame the inflation. But now seriously we have to think Is the monetary policy going to be effective ? I believe the soaring prices of commodities is result of explosion in demand side. With economy growing at an average of 7 percentage in last decade , the per capita income as increased. Now we have bigger middle class earning better salaries and having high aspirations. Even the demand is increasing in the country side. And on the other side the population has also increased significantly in last 30 years. So demand side explosion is fueled by higher per capita income and population. Now government cannot deny people of their basic consumptions. If millions of people had come out of poverty , we cannot blame them for food inflation. India has to admit it is lagging far behind on the supply side. In the last forty years we have not seen any major increase in crop production. Indian agriculture has become stagnant. Today also tonnes of grain are wasted in our store houses. We do not have a good grain procurement policy. The government had not invested much in agriculture. Still in many place farmers are solely dependent on monsoon. Electricity is far from their reach. At least 20 percent of our crop produce is wasted in procurement and storage.
Most of store houses are in pathetic conditions. The ineffective procurement policy is leading to black marketing and hoarding.
Now government is running out of time. If it is not going to invest in the production side, the day is not far when central bank's monetary policy will have no effect on the inflation. Agricultural production need to be boosted to meet the growing demand.
Five steps which I am looking for in the upcoming budget :
1. Separate allocation of fund for up-gradation of grain store.
2. Allocation for irrigation projects.
3. Revisiting the procurement policy.
4. Support and encourage technology transfer to farmers.
5. Create a public- private partnership environment for building agricultural infrastructure.
21st century India need one more green revolution and it needs urgently. A country with millions of people under poverty cannot afford to depend on imports of food grain. I think the memories of 60's should be fresh in our policy maker's mind when we were on the mercy of Western world for bread and butter.