Four Things the Economic Survey Tells Us This Government Will Do To Cut Inflation

1 Comment » Written on July 9th, 2014 by
Categories: Budget2014

The economic survey for 2013-14 is out. The salient points they say brings us to some conjecture on what they will do tomorrow to contain inflation. Here’s the source.

Move To Market Prices for Fuels

They say:

It is important to be cognizant of the fact that deregulation of diesel prices, power–sector
reforms, and generally the move from administered to market-determined prices will release suppressed inflation in the
short run. Nevertheless, the consequent reduction in subsidy and fiscal deficit will have the salutary effect of reducing inflation

It would be a little crazy to deregulate prices entirely in one shot, given public resistance, But it’s likely that the government reduces duty for diesel, petrol and LPG to the extent that the pressure of moving to market prices will ease up.

Selective NREGA

The Rural Employment Guarantee Act does not target productivity. In fact it targets the lack of it by disallowing spending on machinery.

The Economic Survey says:

The projects selected for schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) do not improve the productivity of the agricultural sector commensurately. The increasing wages under such schemes have reportedly created shortage of labour in the agricultural sector as well as caused a wage-price spiral. The solution lies in selection of productivity-enhancing projects for ambitious public policy programmes like the MGNREGS

Does this mean we see the scope for the employment guarantee act reduced? I would personally welcome that. The concept of people getting paid regardless of what they produce is phenomenally dumb.

Limiting MSP Procurement and Making FCI Efficient

Here’s something you didn’t know:

If the policy of supporting farmers through MSP and procurement is to continue, the MSP should be scrupulously linked to the cost of production. Procurement should not be open-ended, and the practice of some state governments of charging as high as 14-15 per cent mandi fee/tax and paying high bonuses over and above the MSP must be discouraged. Experience has shown that the Food Corporation of India (FCI) has not been able to release enough stocks in the market to soften cereal prices while recovering its economic cost. While farmers can be incentivized by gradually removing restrictions on exports, the FCI can learn to procure stocks from markets more efficiently and manage risks through the futures market

Could this mean there is a revamp of the FCI infrastructure? It’s highly inefficient.

Plus, we’ve already seen that FCI will change procurement where states give additional benefits over MSP. This extra “bonus” is a very bad idea, and distorts the economics.

The focus on ‘public-private’ partnership might just mean that FCI loading and unloading is subcontracted out, and FCI employees better get ready to start working more. And with a focus on limited procurement, things could change significantly for the agri sector. In the short run it’s not good, but for the longer term, this is great.

Remove Fruits and Vegetables from APMC

They say:

The State Agricultural produce marketing committee (APMC) Acts have created monopolies and distributional inefficiencies. They constitute a major roadblock in the way of creating a national market for agricultural commodities. Apart from breaking the monopoly and dissuading state governments from treating the APMCs as liberal
sources of revenue, substantive efforts have to be made to create alternative trading platforms in the private sector where it is possible to reduce the layers of intermediation. Since this may take time, fruits and vegetables should be taken out of the purview of the APMC Acts immediately. A processor should be able to buy directly from farmers without having to pay any mandi fee/tax to the APMC.

Basically, we’ll cut the APMC down to size. These are terrible markets now, since the markets are dominated by trading families and who don’t allow outsiders to get in. Many conduct only voice auctions which can be manipulated. And there’s no real need to pay tax to a mandi when it has failed in the function it has performed.

This is going to be fun, because the opposition parties will hate any or all of this. However, it might be that they only set the stage for such things tomorrow. (Changing the APMC for instance, is not really a budgetary function).

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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

One Response to “Four Things the Economic Survey Tells Us This Government Will Do To Cut Inflation”

“While farmers can be incentivized by gradually removing restrictions on exports”.

A hell lot of permissions/permits were required to sell farm produce of one state in another state., but now we are dreaming about removing restrictions on exports???? Exports will be allowed., but a temporary upwards in local prices will attract a ban on them which won’t be removed when prices subdued.


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