Why Modi’s idea of price stabilisation fund is illusory

The BJP's prime ministerial candidate Narendra Modi is indeed a man bursting with passionate ideas to pull the economy out of the morass it finds itself in. He talked of drip irrigation, perhaps taking a cue from Israel that has demonstrated to the world how water shortage engendered by hostile neighboring countries can be overcome through imaginative use of water. Inter-linking of rivers is also not an idea that can be dismissed off as far-fetched though the inevitable side effect that it would throw up---rehabilitation---has to be satisfactorily addressed.

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However, on the economic front, the two proposals made by the BJP in rapid succession seem to be illusory. The first was abolition of taxes and replacing them with a tax on bank deposits. That it would drive a lot of economic activity underground besides being otherwise irrational is a genuine objection raised by many economists. In his address to the BJP workers on Sunday, Modi touched upon the idea of price stabilisation fund to tame inflation.

To be sure, he did not elaborate on the issue but the proposal is not novel. The Commerce Ministry started operating one such scheme way back in 2003 for rubber and tea growers so as to make India competitive in the export market besides sustaining the growers.

Oil exporting countries like Norway, Russia and Oman have their price stabilisation funds whose main purpose is to cushion the impact of volatile price movements in international trade on the country's exporters. But then it is one thing to insure a segment of the economy from the impact of egregious price fluctuations and quite another to insulate the entire economy from the crushing impact of price rise. One did discern from his speech that what he was adumbrating upon was an umbrella scheme targeted at the entire nation.

In the event, the idea of price stabilisation fund is as romantic as the idea of Sovereign Welfare Fund (SWF) as far as India is concerned. The country's mandarins float the idea of SWF from time to time especially when the economy is even on a slight upswing and our forex reserves are registering a momentary increase, little realising that our forex reserves are largely comprised of hot money like foreign institutional investments and external commercial borrowings. SWF is only for export surplus countries. Period.

Norway and Abu Dhabi are classic examples. On the back of overflowing revenue from oil exports, these nations endeavour to invest their petrodollars not in low-yielding American government bonds but in relatively high-risk avenues like share markets in emerging economies and direct investments in companies abroad that are floundering.

China had a dalliance with SWF but soon realised that it is better to soldier on with the idea of cultivating nations in Africa and South America. Abu Dhabi grinned and bore when Citibank pulled a fast one on its trusting if naïve SWF.

While the SWF bug bites us biennially, so to speak, the price stabilisation fund on a broad front to fight what Modi calls highest inflation in Asia is presumptuous and unworkable. It might perhaps work if the nation is able to land windfalls like huge remittances back home from Swiss bank accounts reportedly harbouring anything between $500 billion to $1,500 billion. The government may in that event import essential commodities or subsidise petroleum products with them. The truth is we do not have enough headroom to operate a price stabilisation fund catering to all sections of economy.

Modi must realise it is simply not on, given our double whammy—fiscal deficit and current account deficit. At the same time, he is right that inflation is a monster that needs to be tamed. The RBI can do only a limited job in the sense it can only address the problem of too much money chasing too few goods and services by impounding the extra dough sloshing around in the economy.

But the malaise actually lies elsewhere. On oil inflation, we can do precious little at least in the short run. Food inflation can be addressed if we increase supply. Too much focus by policymakers on cereals to the neglect of pulses has been one single factor responsible for the very high prices of the only protein product the nation of vegetarians by and large consumes in reasonable quantities. The food security law and the government's public procurement are both guilty of assuming that only wheat and rice items are the spreads on the Indian dining tables.

Time has come for special agricultural zones with accent on corporate farming on a scale that lowers the cost of production even while improving productivity. Should this happen not only would the problem of food inflation addressed but also the rush to urban areas stopped. Rural folks would have the satisfaction of doing the work close to their hearts this time round for large corporates that can pay them decent wages and secure their future.