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Old Monday, May 28, 2007
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The cost of rising prices

PRICE is the end product of all economic activities. It is therefore a complex issue to be tackled. The current upsurge in prices can be attributed to failures of the market as well as of official policies. The worst hit is the 74 per cent of the population which lives below two dollars a day or less than the officially fixed minimum wage of Rs 4,000 per month. In view of the rising cost of living, the industrial workers find that they are unable to make both ends meet. Countrywide people are living under the worst kind of poverty. The purchasing power of the poor is being eroded by food price inflation, now at an abnormally high rate of 10.2 per cent. A report carried in this newspaper on Friday says that the speculators and hoarders, active as usual on the eve of the budget, have raised the prices of many kitchen items. The price of wheat, a staple diet of the poor, also shot up because the government chose to allow exports without first building strategic stocks required to keep market volatility under check. Nor was there much wisdom in allowing exports in the early stages of crop harvesting when the initial and final crop estimates always vary because of the inability of food departments to accurately assess the crop size. On Thursday, the government had to suspend exports to prevent speculators from exploiting the market but flour mills representatives claim that the raised prices of atta would not come down.

A day later, export of gram was also suspended but that of rice continues with its price soaring

With the overseas sales of manufactured goods falling, the government appears to be focusing on the export of food grains at the cost of the poor consumers. The inconstancy in policies — allowing and then suspending exports — is not in the best interest of the market. The government’s intervention in the event of market failure should not create market distortions. What the government needs to do is to actively help people with excess money to find productive avenues rather than create artificial shortages for profiteering especially when the country has production and trade surpluses as in the case of wheat and gram. One gets the impression that whether it is the government, the market or the State Bank, the commitment to price stability is weak. All business ethics are set aside by the renter class to make a quick buck.

Apart from the fiscal expansion that contributes to high inflation, the government is dragging its feet on updating the competition law to curb unfair trade practices. The State Bank has yet to start inflation targeting while keeping the food prices outside the ambit of its monetary policy. While the major economic agents have easy access to corridors of power, the poor have no voice in policy-making that can only be ensured by periodical elections and democratic accountability. The principal issue in combating high inflation and poverty is the quality of economic growth. Despite robust growth averaging seven per cent for the past four years, unemployment is on the rise again. In the absence of a growth strategy anchored in equity, price stability will remain elusive and economic progress would have no meaning for the vast majority. Only a few will continue to benefit at the expense of many; a perilous course indeed.
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