“Clearly now going forward, the accommodative monetary stance will have to be reassessed” Usha Thorat, RBI Deputy Governor, Dec 2, 2009
The above emphasis was also shared by R Rangarajan, Chairman, Prime Ministers Economic Advisory Council. This is in response to shooting up of food prices in recent times. This has clearly worried the Government of India as food inflation has been up 17.4% in the third week of November 2009, and the Government is under pressure in the Parliament. To fight this menace, a tighter monetary policy is being considered.
What Does Tight Monetary Policy Mean?
It is a course action undertaken by a Central Bank (RBI in India) to constrict spending in an economy that is seen to be growing too quickly, or to curb inflation when it is rising too fast. The usual policy is to "make money availability scarcer" by raising short-term interest rates. This raises the cost of borrowing and effectively reduces its attractiveness.
However one question is how many people use borrowed money to buy food? In cases of tightening economic situations most families will first stop on luxuries, then some basic household necessities and the last would be food expenditure. So you will see the Construction Industry (housing), Auto Sector, textiles, tourism being hit first, causing acute financial pressure on the economy.
So by the time the scarcity of money causes families to restrict a demand for food, the whole economy would have gone for a spin (downward). The fact that the food prices have been shooting up has been know for many months. Earlier the Government was highlighting low Inflation, showcasing only 0.7% in April while the commodity price for food was shooting up. Long term solutions are needed, not knee jerk reactions.
As I had written in my previous article in May, India’s economy is dependent on the Monsoon, and correspondingly to the Agriculture sector.
http://sunilmohal.blogspot.com/2009/05/indian-economy-set-to-buck-negative.html
The Government has limited options:
1. Being Politically correct, Tighten Monetary Policy, and tank the economy. However the food prices would remain high till the next crops come in, and the purpose is defeated.
2. Being politically incorrect, but economically correct, do nothing, wait for the next harvest to come in, and hope the economy does not tank.
3. Focusing on long term solutions, like
a) Creating Food Storage facilities. Currently India looses Rs. 58,000 Crore (About $ 13 Billion) annually on food wastage, as per MrSubodh Kant Sahai in speech in Parliament in March 2008.
b) Better Pesticide usage. "It is estimated that India loses approximately 18% of the crop yield valued at Rs 90,000-crore ($ 20 Billion) due to pest attacks each year," as per a CARE Ratings report.
c) Better irrigation to increase crop yields.
"Leadership is, among other things, the ability to inflict pain and get away with it - short-term pain for long-term gain."- George Will
4 comments:
Hi Sunil,
You've asked me since forever to post here and today I decided to say yes.
An increase in real food (contains nutrition) supply is what reduces the price. In the real world, only goods and services pay for goods and services. Money of various ilks (commodity, representative, other real money) facilitates trade but money that specifically represents promises to pay debt later facilitates theft and only theft.
We generalize our concept of 'food' to be all inputs that nourish survival and desirable (healthy) growth, and of course we block consciously willed obesity as in excessive hoarding. Stagnation is always a relatively weak position. Clear that even this generalized concept of healthy & nourishing inputs is part of functional economies, it must then be in agreement with the price setting given by supply and demand.
While bankers hope to exist, ordinary people have the power to survive and re-establish a real economy by increasing the supply of food to one another. Remember that money is always at most an option to trade, and it is always the seller's decision. Money has the illusion of privilege, and it has at most optional privilege. Anybody can say no to a banker's request to buy them, their goods IOR their services. Then the bankers will see that they cannot eat their promises to pay.
All the best to you and yours,
Jennifer
There are many challenges like this that have been postponed for far too long or should we say brushed under the carpet, and the recent crises whether food or economic that we now face is a severe reminder that inaction will plant more seeds for future crises.
There are many challenges like this that have been postponed for far too long or should we say brushed under the carpet, and the recent crises whether food or economic that we now face is a severe reminder that inaction will plant more seeds for future crises.
Monetary Policy is a general inflation fighting tool, it doesn't fix why the food prices are going up. And it appears from the press India's government is more worried about rising prices of food causing fears of inflation, or the food prices trickling into more general measures of inflation, than the rising cost of food itself. Some US inflation figures leave the ever changing food and energy prices out to get a more stable number. That also gets complaints, because then the figures don't reflect what the average person sees as their costs.
I think you are right that the rising cost of food is a supply and demand issue, and the demand is better met with finding more food rather than less money. The extra money spent on food may slow other areas of the economy, even without tightening the money supply.
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