ISSN-0971-8400

SPECIAL ISSUE
AUGUST 2010

A DEVELOPMENT MONTHLY

RS 20

August 2010
Chief Editor : Neeta Prasad Editor : Manogyan R. Pal

Vol 54
Joint Director (Prod) : J.K. Chandra Cover Design : Sadhna Saxena E-mail (Editorial) : editoryojana@hotmail.com : yojanace@gmail.com (Circulation) : pdjucir_ jcm@yahoo.co.in Website : www.yojana.gov.in

Let noble thoughts come to us from every side

Rig Veda

CONTENTS
MANAGING INFLATION IN THE POST-CRISIS ENVIRONMENT .....................................................5 Subir Gokarn INFLATION IN INDIA: TRENDS, CAUSES AND POLICY OPTIONS ...............................................................10 N R Bhanumurthy FOOD INFLATION IN INDIA: CAUSES AND REMEDIES ......14 Ramesh Chand, P Shinoj THE INFLATION CHALLENGE TO POLICIES .........................19 Shashanka Bhide INFLATION EPISODES IN INDIA...............................................22 Manas Bhattacharya INFLATION: MYTHS, REALITIES AND A POLICY AGENDA .....................................................................25 V Shunmugam, Debojyoti Dey INFLATION AND STATE OF THE ECONOMY..........................30 K R Sudhaman HOW MONETARY POLICY IMPACTS STOCK PRICES ..........33 Ajay Goyal ANALYzING INFLATION............................................................37 Avanindra Nath Thakur MEASURING INFLATION ...........................................................41 Shivkumar Biradar NSS FOR SOCIAL ASSET CREATION .......................................47 P V Basheer Ahammed LIVELIHOOD FOR THE MARGINALISED ...............................54 J Cyril Kanmony BIODIVERSITY AND ITS CONSERVATION .............................57 Arvind Singh SHODH YATRA RETROFITTED CAR FOR THE PHYSICALLY CHALLENGED............................................62 BEST PRACTICES EDUCATION FOR ALL : A LESSON FROM JAGJAGI KENDRAS.....................................64 Sujata Raghavan DO YOu KNOw? ........................................................................66 J&K wINDOw ...........................................................................68 MACROECONOMIC AND MONETARY DEVELOPMENTS IN 2009-10 .....................................................69 NORTH EAST DIARY .................................................................71

Our Representatives : Ahmedabad: Amita Maru, Bangalore: M. Devendra, Chennai: I. Vijayan, Guwahati: Anupoma Das, Hyderabad: V. Balakrishna, Kolkata: Antara Ghosh, Mumbai: Minakshi Banerjee, Thiruvananthapuram: VM Ahmad.
YOJANA seeks to carry the message of the Plan to all sections of the people and promote a more earnest discussion on problems of social and economic development. Although published by the Ministry of Information and Broadcasting, Yojana is not restricted to expressing the official point of view. Yojana is published in Assamese, Bengali, English, Gujarati, Hindi, Kannada, Malayalam, Marathi, Oriya, Punjabi, Tamil, Telugu and Urdu. EDITORIAL OFFICE : Yojana Bhavan, Sansad Marg, New Delhi Tel.: 23096738, 23717910, (23096666, 23096690, 23096696- Extn. 2509, 2510, 2565, 2566, 2511). Tlgm.: Yojana. Business Manager (Hqs.) : Ph :24367260, 24365609, 24365610 For new subscriptions, renewals, enquiries please contact : Business Manager (Circulation & Advt.), Publications Division, Min. of I&B, East Block-IV, Level-VII, R.K. Puram, New Delhi-110066, Tel.: 26100207, Telegram : Soochprakasan and Sales Emporia : Publications Division: *Soochna Bhavan, CGO Complex, Lodhi Road, New Delhi -110003 (Ph 24365610) *Hall No.196, Old Secretariat, Delhi 110054(Ph 23890205) * 701, B Wing, 7th Floor, Kendriya Sadan, Belapur, Navi Mumbai 400614 (Ph 27570686)*8, Esplanade East, Kolkata-700069 (Ph 22488030) *A Wing, Rajaji Bhawan, Basant Nagar, Chennai-600090 (Ph 24917673) *Press road, Near Govt. Press, Thiruvananthapuram-695001 (Ph 2330650) *Block No.4, 1st Floor, Gruhakalpa Complex, M G Road, Nampally, Hyderabad-500001 (Ph 24605383) *1st Floor, F Wing, Kendriya Sadan, Koramangala, Bangalore-560034 (Ph 25537244) *Bihar State Co-operative Bank Building, Ashoka Rajpath, Patna-800004 (Ph 2683407) *Hall No 1, 2nd floor, Kendriya Bhawan, Sector-H, Aliganj, Lucknow-226024(Ph 2225455) *Ambica Complex, 1st Floor, above UCO Bank, Paldi, Ahmedabad-380007 (Ph 26588669) *KKB Road, New Colony, House No.7, Chenikuthi, Guwahati 781003 (Ph 2665090) SUBSCRIPTION : 1 year Rs. 100, 2 years Rs. 180, 3 years Rs. 250. For neighbouring countries by Air Mail Rs. 530 yearly; for European and other countries Rs. 730 yearly. No. of Pages : 76 Disclaimer : l The views expressed in various articles are those of the authors and not necessarily of the government. l The readers are requested to verify the claims made in the advertisements regarding career guidance books/institutions. Yojana does not own responsibility regarding the contents of the advertisements.

YOJANA August 2010

A Symbol for the IndIAn rupee

he Union cabinet recently approved a symbol for the Indian Rupee. It was necessary considering the fact that the Indian economy is integrating fast with the global economy and India is emerging as a prime investment destination worldwide. The symbol will standardize the expression for Indian Rupee in different languages, both within and outside the country, and serve to distinguish the Indian currency from those countries whose currencies are also designated as Rupee or Rupiah, such as Pakistan, Nepal, Sri Lanka and Indonesia. Designed by Shri D. Uday Kumar, the symbol was selected through a public competition among resident Indian citizens. The jury was headed by Deputy Governor, RBI. The symbol will be included in the Unicode Standard for representation and processing of text, written in major scripts of the world to ensure that it is easily displayed/printed in the electronic and print media as all the software companies provide support for this Standard. Encoding in the Unicode Standard will also ensure encoding in the International standard ISO/IEC 10646 The symbol will also be included in the Indian Standards, viz. 13194:1991 Indian Script Code for Information Interchange (ISCII) through an amendment to the existing list by the Bureau of Indian Standards (BIS). The ISCII specifies various codes for Indian languages for processing on computers along with the key-board layouts. After encoding of the symbol in the Unicode Standard and National Standard, NASSCOM will approach software development companies for incorporating the Rupee symbol in their operative software, as a new programme or as an update, to enable the computer users worldwide to use the symbol even if it is not embedded on the keyboards (in a similar manner, we use the Euro symbol, which is not embedded in the keyboards in use in India). The symbol will be used by all individuals/entities within and outside India after its incorporation in q `Unicode Standard, ISO/IEC 10646 and IS 13194.

YOJANA August 2010

About the Issue

nflation episodes in India have been frequent during the pre-liberalisation period. A crushing combination of persisting shortage of practically all types of goods allied with an expansionary monetary stand meant, in simple words, too much money chasing too few goods. That phase fortunately came to an end as India entered an era of fast growth and reduction in administrative controls on prices of most goods since the early nineties. There have been periods of inflation since then, but those came with specific causes and responded fast to policy changes.

The inflation this time around that began towards early part of 2008-09 has proved tougher to eradicate. The causative factors at the initial stages were the sudden boom in global commodity prices which transmitted to the Indian economy. The simultaneous spike in real estate prices complicated the efforts to contain the general price level in the economy. The RBI responded with a series of interest rate hikes but those came to an abrupt end as the global economy went into a tailspin. Between chasing inflation and plummeting growth rates, the central bank chose to address the latter in the second half of 2008-09. This phase too came to an end, sometime in May-June of 2009. The gradual accumulation of steam in inflation was now again led by commodity prices, but this time the push came from domestic causes. The government to its credit over the last few years has pumped in additional purchasing power in rural India through the NREGA and other better directed schemes. So the impoverished ends of villages are now demanding a better life chance, meaning more food. This is one of the reasons why food inflation refuses to go away. The supporting factor in the current episode is the steeling of prices in the manufacturing sector as demand conditions have improved. Real estate prices especially in cities like Delhi, Mumbai, Pune and Jaipur are already back to their pre-downturn level and threatening to rise further. To finance the demand for credit from the corporate sector the RBI has got to expand the money supply at a faster clip. The expanding pace of growth of GDP, plus inflation is a shorthand calculation of how much credit needs to grow to feed an expanding economy. But that pace of credit growth is a recipe for further inflation. So the combination of factors makes it extremely likely that inflation will persist for some more time. Meanwhile finance minister Pranab Mukherjee has said inflation will ease soon and as early as August. The optimism is based on the prices prevailing in the economy at the same time last year. He is also pinning his hopes on a bumper kharif harvest that will bring down prices. The myriad phases of inflation will be explored in the various articles we have collated from the top experts q in the field. We hope you enjoy the same.
YOJANA August 2010 3

InflAtIon bASIcS
Inflation may be caused due to several economic factors:
l When the government of a country prints money in excess, prices increase as there is too much money in circulation chasing too few goods.

l Increase in production and labor costs have a direct impact on the price of the final product, resulting in inflation. l When countries borrow money they have to cope with the interest burden. This interest burden may result in inflation. l High taxes on consumer products can also lead to inflation. l Demand pull inflation is when the economy demands more goods and services than what is produced. l Cost push inflation or supply shock inflation is when non availability of a commodity would lead to increase in prices.

The problems due to inflation would be:

l When the balance between supply and demand goes out of control, consumers could change their buying habits forcing manufacturers to cut down production. l Inflation can create major problems in the economy. Price increase can worsen poverty, affecting low income household, l Inflation creates economic uncertainty and is a dampener to the investment climate, slowing growth and finally reducing savings and thereby cutting consumption. l The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business. l Manufacturers would not have an incentive to invest in new equipment and new technology. l Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.

YOJANA August 2010

INflATION
POlICy STANCE

Managing Inflation in the Post-Crisis Environment

Subir Gokarn

The Growth Backdrop The Indian economy weathered the global crisis of 2008-09 quite well. Even as much of the developed world is still quite some distance from its pre-crisis growth rate, several emerging market economies (EMEs) have made up the lost ground relatively quickly. As indicated in Chart 1, India saw its growth rate decline from 9.4 per cent in 2007-08 to a trough of 6.7 per cent in 2008-09. There was a modest recovery in 2009-10 to 7.4 per cent, with the second half of the year showing a slight improvement over the first. The outlook for the current year is generally more positive, with several forecasters projecting growth to be around 8.5 per cent. While this is still somewhat short of the pre-crisis performance,

there is a widespread perception that, with the several capacity constraints that the economy faces, more rapid growth than this would quickly trigger strong inflationary pressures. Inflationary Pressures R e g r e t t a b l y, t h o u g h , inflationary pressures have been visible in the economy even in the early stages of the recovery. Chart 2 indicates that the turnaround in headline inflation, as measured by the overall Wholesale Price Index (WPI) began in June 2009. This was clearly a period in which the recovery was in its very early stages, with the economy growing at an annual rate of around 7.5 per cent, significantly below the pre-crisis rate. It was logical to attribute the rise in the inflation rate to supply-side factors.

Management of current inflation requires both supply-side and demand-side approaches. Monetary policy has addressed the latter with a gradual, calibrated set of actions on both interest rates and liquidity management
The author is Deputy Governor, RBI. YOJANA August 2010

Chart 1 GDP Growth

10 9 8 7 9.2 7.6 5.9 7.3 7.6

in the overall inflation rate. From October 2009 onwards, fuel inflation has been positive and rising quite rapidly.

In short, the Indian 4 economy has clearly 3 seen a spurt of inflation, 2 significantly driven by 1 supply-side factors in 0 2007-08 2008-09: H1 2008-09: H2 2009-10: H1 2009-10: H2 a period during which Source: Central Statistical Organisation. growth was relatively s l o w. P r e v a i l i n g The validity of this inference help to reverse the trend in this wisdom on monetary is evident from the same chart. component of the index. But, the policy suggests that supplyThe prices of primary articles most significant cause of reversal side pressures, particularly if began to rise in March 2009 but is likely to be a moderation they are temporary in nature, the rate of increase accelerated in food prices over the next are not effectively tackled by s h a r p l y a r o u n d A u g u s t . A few months in response to a conventional monetary measures, significant contributor to this reasonably good monsoon. which are more directly aimed at was the rapid escalation in food The other supply-side driver reining in demand. Apart from the prices as a consequence of a weak of inflation in recent months has temporariness of these supplymonsoon. Later in the year, as been energy. The inflation rate side factors, the overall state prospects of a global recovery for the fuel component of the of the economy should also be looked brighter, commodity WPI began rising in June 2009. considered. The same wisdom prices continued to rise. The Though it remained in negative argues that, if the economy is at or combination of rising global territory until October 2009, the close to full capacity utilization, commodity prices and domestic rise itself contributed to a rise monetary actions in response food prices contributed to a sustained increase in the Chart 2: WPI Inflation and its Major Components 20 inflation rate for primary 15 articles until April 2010. 10 There has been a plateauing since then. This is partly 5 attributable to a global 0 softening of commodity -5 prices, as uncertainties -10 about the sustainability of -15 Overall WPI Primary articles the recovery have arisen. Fuel group Manufactured products If this continues, it will
5

Per cent

Per cent

Jun-08

Jun-09

Apr-07 Jun-07

Feb-10

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Feb-08

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YOJANA August 2010

Aug-09

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to supply-driven inflationary pressures may be appropriate. While they will not directly address the cause of the inflation, by signaling a willingness to compress demand, they will rein in expectations of inflation spiraling out of control. The fact that the economy was still growing at a relatively slow pace in the second half of 2009-10 implied that there was some slack still available in capacities across sectors and that the threshold for strong monetary actions had not yet been reached. However, monetary assessments at that time could not be made independently of the very drastic measures that had been taken when the global crisis precipitated in September 2008. Those actions took the monetary position, as reflected in the repo and reverse repo rates and the cash reserve ratio (CRR) quite some distance from what would be considered normal levels. Even in the early stages of recovery,

therefore, every opportunity to revert these instruments to normal needed to be exploited. I shall return to this point a little later in the article. The Rising Significance of Demand Coming back to the inflationary situation, while a significant proportion of the rise in the inflation rate over the past year can be attributed to supplyside factors, demand pressures became visible in early 2010. While it is difficult to identify a perfect measure of demand-side inflation - what is conventionally referred to as core inflation - a practical measure that reflects the underlying forces to an extent is the sub-component of the manufacturing component of the WPI, which excludes food products. Chart 3 displays the pattern of this sub-component Non-food Manufacturing Inflation

As growth slowed in 200809, this indicator also moved downwards. It actually went into negative territory for a few months, before turning marginally positive in December 2009. While this turnaround was clearly not indicative of any rapid build-up of demand pressures, the fact that it had happened was a signal that the business cycle had bottomed out and growth was on its way back up. However, after that rather sedate start, this indicator began to accelerate rather rapidly in the early months of 2010. At the time that this article was written, the numbers for June 2010 had just been released; this indicator had risen to 7.3 per cent. The inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. It is incumbent on the government and the central bank to use all the means at their disposal to rein inflation in. In this effort, monetary policy has two specific objectives: (i) to prevent the spillover of supply-side pressures into a more broad-based inflationary process and (ii) to moderate demand to levels consistent with the capacity of the economy to meet it without provoking price increases.
7

Chart 3: Non-food Manufactured Products Inflation

12 10 8

Per cent

6 4 2 0

Dec-07

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YOJANA August 2010

Jun-10

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Monetary Policy: Thought and Action Let us look at the thinking and actions on the monetary front against the backdrop laid out above. As already indicated, drastic monetary actions were taken during the last quarter of 2008, sharply bringing down both the policy rates and the CRR. Looking back on this period, it can be reasonably argued that these measures contributed to the stabilization of the economy and the relatively small impact of the crisis by infusing massive amounts of liquidity into the system. The fiscal stimulus, which came in various forms during the same period, helped by directly creating demand in a situation in which private demand was sluggish. Without these combined interventions, the outcome would

almost certainly have been far worse. The monetary stance remained in a critically supportive mode until October 2009, when the first steps to move towards a normal position were taken. Table 1 lists all the monetary actions taken from then until July 2, 2010. Four key concerns have influenced the sequence and magnitude of the monetary actions listed in the table. First, even while the Indian economy has recovered quite rapidly from the slowdown, there is persistent global uncertainty. Emerging market economies (EMEs) have generally done quite well in coming out of the crisis, but a major part of the global economy - the US, the UK, the Eurozone - is not only showing only very modest signs of recovery, it is

also manifesting new stresses, partly as a result of the huge build-up of sovereign debt, which governments used to support their various fiscal stimulus packages. Over the past few weeks, optimism about a sustained, even if slow, global recovery, has been giving ground to concerns about another imminent slowdown. One thing that we learnt from the events of 2008-09 was that India is not immune to global turbulence. Be it through trade, capital flows or a general sense of confidence about economic prospects, a global problem quickly becomes a domestic one. Given these linkages, the risks from the global economy need to be taken into consideration while formulating domestic policy. Second, the reality is that the policy instruments are far

Table 1: Monetary Policy Measures Since October 2009 S. No. 1 1 Monetary Policy Instrument 2 Reverse Repo Rate Present Rate (%) 3 4.0 Change Since October 2009 (basis points) 4 +75 Remarks

5 25basis points (bps) each in March, April and July 2010 25bps each in March, April and July 2010 75 bps in January 2010 and 25 bps in April 2010 October 2009

Repo Rate

5.5

+75

Cash Reserve Ratio Statutory Liquidity Ratio

6.0

+100

25.0

+100

YOJANA August 2010

from being in a normal position. As the economy recovers, it is imperative that policy instruments be brought as quickly as possible back to a position consistent with the state of the economy. This is essential for the management of expectations as well as to recreate the capacity to respond, should another shock hit the economy. But, as important as it is to return to normal quickly, it is equally necessary to do so non-disruptively. The kind of rapid and massive reductions that were made to instruments during the crisis simply cannot be replicated in the reverse direction. Growth is picking up and confidence gradually returning to businesses and consumers, but given the vividness of the crisis, the process is still likely to be vulnerable to both external shocks and domestic ones. Rapid transitions in the policy regime might constitute one such shock. In essence, on this consideration, while rapid and drastic actions are entirely warranted when dealing with a crisis, managing a return to normalcy requires a more gradualist and calibrated approach. Third, notwithstanding the above two issues, the fact is that inflation has taken hold, with both supply and demand pressures

contributing to it. Monetary policy must respond. The table indicates that it indeed has. Action on rates and liquidity, through the CRR, began in January and has continued at the measured pace indicated earlier over the past six months. One strong criticism of the Reserve Banks approach has been that it has been too little, too late. I would submit that the test of this is yet to come. It is well-known that monetary policy acts with a lag. It could be anywhere between 6 and 12 months, even longer before demand side pressures abate in response to an action. Given this, actions taken during January-July 2010 should start to show their impact on inflation over the next 6 to 12 months. The fact that the non-food manufacturing inflation rate went up sharply during the first half of the year is in and of itself cannot be attributed to the absence of monetary actions during this year. To address that, actions would have had to be taken in the second half of 2009. But, at that point even the domestic recovery was at best in its early stages and its trajectory was quite uncertain. An anti-inflation stance in those conditions would have been rather risky.

Finally, as I have already mentioned, an important lesson from the crisis was the critical role of liquidity in the financial system in maintaining economic stability. The policy approach over the past few months has been very conscious of the need to balance the exit from an abnormally high liquidity situation, which the response to the crisis created with the current liquidity requirements of both the public and private sectors. Conclusion To conclude, the management of current inflation requires both supply-side and demand-side approaches. Monetary policy has addressed the latter with a gradual, calibrated set of actions on both interest rates and liquidity management. The pace and sequencing of the actions has been influenced by both persistent global uncertainties and the need to support the domestic recovery. This has required a balancing act between reining in inflationary expectations and adequate liquidity in the domestic financial system. While the current rate of inflation is a legitimate concern, the results of this policy stance should become visible over the next few months. q
(E-mail : subirgokarn@rbi.org.in)

YOJANA August 2010

INflATION
OVERVIEW

Inflation in India: Trends, Causes and Policy Options

N R Bhanumurthy

As the choice is between high growth and high inflation, one would suggest that even at the cost of India achieving slightly lower growth, moderating inflation is crucial

S DEFINED in economics text books, inflation is a sustained rise in the general level of prices of goods and services over a period of one year. In other words, it indicates the percentage rise in the general prices today compared to a year ago. The rise (fall) in inflation means that purchasing power of money declines (increases). This measure is very useful in understanding the trends in cost of living and also in comparing the trends in major macroeconomic variables. From the policy point of view, particularly for the monetary authorities, tracking of inflation is quite essential in formulating necessary growth policies.

inflation in May 2010 is at 10.16%, against the RBIs comfortable level of around 5%, as stated in the April 2010 Annual Credit Policy statement. In this context, here we look into the recent trends in the inflation rates (both headline and also the sub-components) and the main drivers of these high rates. In the end, some discussion on the policy options that might help in containing inflation would be specified. Recent Trends Before we look into the recent trends in the inflation rates, we need to understand the existing measures of inflation. As in any economy, India also has two broad estimates that cover the prices in wholesale market (which is called Wholesale Price Index (WPI)) and the retail market (Consumer Price Index (CPI)). Within CPI there are three sub indices that cover three groups namely industrial workers, urban non-manual employees and

In the recent period, India has been witnessing very high inflation rates and this has become a serious policy concern as it could have adverse impact on both growth and welfare of the country. The recent data shows that the headline

The author is Professor, National Institute of Public Finance and Policy, New Delhi. 10 YOJANA August 2010

agricultural laborers. But there is no consolidated CPI for the whole economy. In the case of WPI, the index covers only the prices of goods and not the services, thus, making difficult for the policy makers and researchers in choosing the appropriate price index for target and also for research. However, WPI is the one that is tracked by the analysts and policy makers as the information flow is faster with WPI compared to CPI, which comes with a lag of two months. It is also generally assumed that any changes in the prices in wholesale market would eventually transmit (or pass-through) to the retail market. Hence, WPI might be a better indicator for tracking the general price level in the economy. However, a look at the graph below shows that the convergence between WPI and CPI inflation is quite weak, particularly during the high inflationary periods, and also takes a long lag. Thus, this divergence in price indices also results in divergences in the policy impacts as well. The recent trends in the inflation numbers show that India is experiencing high inflation situation since the end of 2009 and currently it is at an uncomfortable level of 10.16% in May 2010 and there are expectations that this would increase further. At the disaggregated level, one may note that the prices of both food and non-food and the fuel group are increasing sharply since the middle of 2009, while the inflation rate in the manufacturing sector was almost subdued at around 6% for a long time. As minimum rise in the inflation rate acts as an important incentive for the production activity,
YOJANA August 2010

this could have adverse impact on the consumption and could particularly affect the poor who are largely not indexed in India. Based on this, our own study in the past have shown that the threshold (or the optimal or tolerant) inflation for India is at around 4 to 4.5%. Policy makers (particularly the monetary authorities) would try to contain the inflation at around this range. Although India does not follow the inflation targeting regime (where the inflation rate should be controlled at a level fixed
Month Apr-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 All 8.04 11.82 12.27 6.15 1.20 -1.01 0.46 8.10 9.44 10.06 11.04 9.59 10.16 Primary Articles 8.85 10.56 11.59 11.15 5.21 6.52 8.41 16.09 15.45 15.99 18.25 13.88 16.60 Food 5.54 5.93 7.72 9.95 7.54 10.89 14.20 20.04 18.41 18.11 17.39 16.87 16.49

by the legislation. For instance, UK has fixed the inflation target at 2%), it is generally clear from the policy statements (such as annual Credit policy) that the Central Bank would try to control the inflation once it crosses the comfortable level. Causes for high inflation As discussed above, currently, in May 2010, the WPI inflation is above 10%. Monetarists, led by Nobel Laureate Milton Friedman of Chicago School, across the globe believe that in the long-run,
Nonfood 10.99 17.09 16.97 9.35 -0.88 0.12 -3.56 9.84 10.87 12.95 24.69 10.53 18.60 Fuel group 7.02 16.27 16.59 -0.21 -6.00 -12.53 -8.18 5.92 8.12 10.22 12.71 12.55 13.05 Manufacturing 8.07 10.60 10.93 6.63 2.29 0.64 0.53 5.42 7.30 7.52 7.38 6.70 6.41

Recent trends in inflation (in %, at disaggregated commodities level)

Source: Estimated from data available at RBI. All the data pertain to month-end information.

11

inflation is always and everywhere a monetary phenomenon. This means that the money supply growth is the major determinant of inflation and in the long run higher inflation rate can be controlled only through tight monetary policy. But there are other competing schools, such as Keynesians, that say that money is not so important rather than the aggregate demand caused by private and government spending that determines inflation. Hence, Keynesians suggest that money is not the only one determinant of inflation. Money has a role only when its growth is higher than the economys capacity to absorb. There is also a view that explains cost-push version of inflation, which is largely due to supply-shock that results in fall in aggregate supply. Overall, while there are many theories that explain the causes of inflation, based on enumerable empirical studies, relying on one school of thought might not be wise. In India also there were many studies on inflation determinants and their conclusions are quite diverse. As the behaviour of inflation is very dynamic the theoretical explanations of this behaviour could also be dynamic. Hence, this needs to be examined on a regular basis. In the case of India, one may also need to note that within the WPI basket there are many commodities prices that are still administered by the government. For example, the prices of many of the food items, such are rice, wheat, pulses and edible oils, are still announced by the government through its Commission for Agrucultural Costs and Prices (CACP) that declares the Minimum Support Prices (MSP)
12

before the harvest session. In the fuel group also, until very recently the prices were administered and even now the prices of diesel and kerosene are regulated. In that sense, only two-thirds of the WPI consumption basket is determined by the market forces. Looking at the table, one can derive that the current high inflation is caused by sharp rise in the prices of primary articles and the fuel group prices. The causes behind this rise are many. First, as we know, Indian agriculture still heavily depends on the monsoon, bad monsoon last year has crippled the agricultural output growth and, hence, resulted in rise in food prices. Secondly, the Government, to support the agricultural activities, has hiked the MSP on many important commodities atleast four times in the past three years. This has had a permanent shift upwards in the overall agricultural prices. Thirdly, there is also a rise in the overall cost of production due to rise in the labour costs, which has been attributed to labour shortages following the successful implementation of MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) in many of states. Fourthly, there is also a general rise in the world commodity prices (in particular, food and fuel prices) following the huge global stimulus packages that were warranted following global financial meltdown. These global prices appear to have passed on to domestic prices through commodity exchanges. Fifthly, the recent governments decision to deregulate the fuel prices and do away with fuel subsidies has also resulted in inflationary

expectations. Lastly, in the postLehman collapse, the government, similar to other industrialized countries, has launched both fiscal and monetary stimulus programs. This has pushed the fiscal deficit (both centre and state) to nearly 10.8% of GDP in 2009-10. This could have also pushed the inflation from the demand side through rise in the aggregate demand with given output. Apart from all these factors, the current high inflation could also be due to very low base last year. For example, the headline inflation even upto September 2009 was close to zero with deflation in June 2009. Overall, as the inflation numbers, similar to other macroeconomic variables, have seen sharp volatility both at domestic and also at international level, the year 2010-11 could be a year of some macroeconomic stabilization. Policy Options High inflationary situation has created policy dilemma. As managing inflation is largely the responsibility of the monetary authorities, there were calls for the RBI to tighten the monetary policy. (RBI had followed accommodative policy by cutting the policy interest rates by 400 basis points, in the postLehman saga as part of stimulus program). But, as the economy was just recovering after the global slowdown, there were also apprehensions that any tightening at this juncture could restrain the economy from robust recovery. As India was experiencing increasing inflationary expectations, the RBI has decided to hike the interest rates by 25 basis points in July 2010. This is based on the judgment that
YOJANA August 2010

the demand side (or core) inflation is firming up within the headline inflation, which can be controlled only by monetary tightening. As the inflation is not purely due to demand side reasons and core inflation (estimated as nonfood and non-fuel inflation) is building up but only at around 6 to 7%, monetary tightening measure alone is not sufficient to contain this double-digit inflation. Fiscal and sectoral policies also have vital roles. Reducing fiscal deficits is identified as one of the policy measures to achieve stable inflation with growth. Towards this, the Central Government has already laid down the path for fiscal stimulus reversal that could

contain aggregate demand-push inflation. This year, the government has already shown its seriousness in implementing other fiscal measures such as disinvestment to bring down the deficits. But there are many other structural measures that are needed. One such measure is to bring in changes (or revamping) in the current public distribution system (PDS), which, given the huge food stocks, could have been a major channel through which food inflation could have been contained. To sum, following both monetary and fiscal stimulus packages, the Indian economy is strongly coming out of the slow-down phase. But the high inflation appears to create

dilemma for policy makers. As the choice is between high growth and high inflation, one would suggest that even at the cost of India achieving slightly lower growth, moderating inflation is crucial as the cost of high inflation is much higher than the loss of growth. This is particularly more so for a country such as India, where the people working in the unorganized sector is very high and they are not protected from the rising cost of living. Further, as the trickle down of prices is faster than the trickle down of incomes for the poor, controlling inflation could be prioritized. q
(E-mail : nrbmurthy@gmail.com)

YOJANA August 2010

13

YE-8/10/2

INflATION
ANAlySIS

Food Inflation in India: Causes and Remedies

Ramesh Chand P Shinoj

As area available for agriculture and food production is going to shrink, focus should be given on enhancing the productivity of crops to keep pace with growing demand for food

NDIA HAD not faced double digit inflation in food during the last several years despite serious drought and decline in food output in some years. The scene of food inflation has turned quite different after 2008. In most of the months year on year inflation remained close to or above 10 percent since mid 2008. This is causing a serious concern as expenditure on food accounts for more than 50 percent of total household expenditure in rural and 43 per cent in urban areas. Households in lower income categories spend much higher percentage of their budget on food compared to the higher income groups. This indicates that food inflation hurts more than any other commodity group and low income consumers are affected much more than high income consumers.

The reasons for food inflation can be grouped into two categories:

those which follow from changes in global market and those which are related to domestic economy. With the increase in liberalization of trade in agriculture since early 1990s domestic food prices have been strongly influenced by international prices. However, food prices in India and international markets have not behaved in the same way after the year 2006. Global food price increased by 26 per cent during the year 2007 and reached historical peak by middle of 2008. In contrast to this, food prices in India (refer to the whole sale price index for food items that include food articles plus food products, with base 1993-94) increased by less than 8 percent during 2007 and 2008. Further, monthly food prices in global markets increased by 20 percent between January and June 2008 while India experienced only 12 percent increase. This difference in behavior of the domestic and international prices

The authors are respectively Director and Scientist, National Centre for Agricultural Economics and Policy Research, Pusa, New Delhi 14 YOJANA August 2010

has evoked serious concern because of persistently high rate of food inflation in the country and also raised several questions. Why food inflation in India is ruling much higher than the inflation in international prices? Are Indian prices lower than international prices and closing the gap between the two necessitates higher inflation in India? Has trade ceased to be an important instrument for a country like India in taming food inflation? In a country like India, which is largely food sufficient at aggregate level and where trade to output ratio is not very high, domestic factors matter much more than global factors in determining medium and long term trend in prices. These factors are numerous and they relate to domestic demand, supply, food administration, state intervention, changes in market conditions. Further, factors like demand and supply depend upon many variables like growth in income, distribution of income, dietary diversification, urbanization, money supply, credit, technology,

and weather related variables, to name a few. Structure of Inflation Dividing the commodities included in WPI in two major groups, viz. food and non food, shows that rate of price increase was higher in non food group compared to food group during January 2008 to October 2008. After this food and non food prices follow disparate trend. There was a sharp fall in inflation in non food items whereas food prices moved towards double rate of increase. For about 9 months from March - November 2009 WPI for non food prices was lower than corresponding figures during 2008 which resulted in negative inflation in non food prices. In contrast to this food price inflation in the same period increased from 8 per cent to 20 per cent. Because of negative growth in non food inflation the overall rate of inflation remained close to zero in this period. After November 2009, prices of non food items also started rising which pulled up overall rate of inflation in

the country to double digit level during February March 2010. There is some slowdown in food inflation after December 2009, but food inflation still rules above 16 percent (May 2010). Causes of Food inflation Taking a closer look at food inflation based on WPI over the last two years, it becomes apparent that manufactured food products have been contributing in a higher proportion than primary food articles towards rise in prices. During May to July, 2008 when the rate of overall inflation was at peak, the share of manufactured food products in total food inflation was in the range of 55-60 per cent (Figure 2). This higher share is not a matter of surprise as manufactured food products have a higher weight in the overall index than primary articles. However, it would indeed attract interest if the case is opposite as happening in the recent months. Lately, it is noticed that, primary food articles are increasingly outweighing manufactured food products in terms of aggravating food prices. Among the primary articles, cereals, milk and meat have higher share but rapid increase in prices of pulses and fruits and vegetables are also igniting food inflation. To cite specific examples, the price of rice increased 12 per cent during January, 2008 to May, 2010 where as wheat prices increased 7 per cent. Among pulses, price of pegion pea rose by 62 per cent and that of black gram shot up by 105 per cent during the same period. Price of sugar, a manufactured food product
15

Figure 1. Inflation in food and non-food commodities YOJANA August 2010

(Table 1). Wheat production was less than targeted, but not lower than that of previous year. Production of oilseeds and sugarcane also suffered a perceptible reduction. At such instances of supply shortfalls that lead to lower accessibility of poor people to food, the government often resorts to enhanced delivery of essential commodities from the buffer stock through Public Distribution System (PDS) and through open market sales. However, in the present situation, none of these mechanisms seems to work efficiently. On the one hand, the government is grappling with high food inflation, on the other hand it grapples with large volume of stocks much above stipulated buffer stock norms. As of 1st June, 2010 the stock of food grains in the central pool rose as high as 60 million tons whereas the prescribed stock limit in July is only 26.9 million tons. It is a matter of double loss to retain such high levels of stock, first due to excessive expenditure incurred on storage and second, it remains inaccessible to

Figure 2. Contribution of various commodity groups to food inflation

increased steeply with an average rate of inflation of 40 per cent between January, 2009 and May, 2010. The fact that all these articles are essential and irreplaceable components of the daily diet of an average Indian consumer adds gravity to the situation. Analyzing the causes Supply side constraints and structural deficiencies The steady increase in food prices can be attributed to a variety of long-term and short term causal factors. The most important and widely discussed is the demand supply imbalance in essential food commodities. With a steady growth in income of the people and increasing urbanization, the demand for food is rising consistently year after year. The increase in earnings of below poverty households from programs like MGNREGA also seems to be contributing favourably to growth in food demand. On the other hand, various supply side constraints like stagnating area under cultivation, and plateauing of crop yields etc are posing limits to
16

production. The drought in the last year caused by deficient south-west monsoon is an immediate reason for supply shortfalls during later half of year 2009 extended to 2010. The country received around 25 per cent less precipitation in the 2009 kharif season in relation to long-term average. As a result, production of major food commodities got affected leading to overall shortfall in food grain production and other major crops like oil seeds and sugar cane. The shortfall in rice production was around 20 per cent with respect to the previous year

Table 1. Production of major food crops and their shortfalls in recent years Crop Rice Wheat Cereals Pulses Total food grain Oilseeds Sugar cane 2006-07 93.4 (1.7) 75.8 (9.2) 203.1 (4.1) 14.2 (5.9) 217.3 (4.2) 24.3 (-13.2) 355.2 (26.3) 2007-08 96.7 (3.5) 78.6 (3.7) 216 (6.4) 14.8 (4.2) 230.8 (6.2) 29.8 (22.6) 348.2 (-2.0) 2008-09 99.2 (2.6) 80.7 (2.7) 219.9 (1.8) 14.6 (-1.4) 234.6 (1.7) 27.7 (-7.1) 285 (-18.2) 2009-10* 80 (-19.6) 81.5 (1.0) 197.6 (-10.1) 15.1 (3.4) 212.7 (-9.3) 24 (-13.4) 259 (-9.1)

Note: Figures in parentheses indicate per cent change from previous year; * Figures are provisional.

YOJANA August 2010

people thus contributing to rising prices. The International link India almost insulated its food sector from transmission of high global food prices during 2007-08 through domestic intervention and trade measures including export bans. Such an effect is evident from the price peaks witnessed in global food prices in mid 2008. The prices of most commodities in majority of the countries remained subdued in the first half of the year 2009 on account of contraction of demand associated with recession and financial downturn. Even after a sharp fall in global prices from the peak level during 2008, the level of these prices in most cases remained higher than prices in India. This, when global prices were falling, there was pressure on food prices in India to rise to come in a sort of equilibrium with global prices. This explains why domestic food inflation remained high when global prices declined after late 2008. During 2009 -10 (June to May), global food prices again started showing up. FAO food price index, which is a composite of 5 major food groups, increased by 17 percent since June 2009 till May, 2010. The sharpest jump was visible in sugar prices. FAO sugar price index shot up from 233.1 in June, 2009 to 375.5 in January, 2010 due to supply shocks in Brazil. In the same period prices of dairy products went up by 86 per cent and edible oils prices increased by 11 per cent. All these
YOJANA August 2010

price changes are transmitted in varying degrees from global markets to the domestic markets through various channels. Another striking observation with longterm implication is that the real unit values of imports of major agricultural commodities are seen to be rising during the last ten years. The unit value of pulse imports at 1993-94 prices in the year 2001-02 was Rs. 8833 per ton which increased to Rs. 10781 per ton by 2008-09. Same trend was observed for wheat, sugar and vegetable oils too. This has longterm implication in terms of taking the domestic prices to higher levels over a period of time and reflects the supply side constraints at global level. It is observed that some part of food inflation in India is due to integration of domestic price trends with global price trends. However, the current crisis appears to be more due to domestic factors than external reasons Forward trading Forward trading and speculation in food commodities is said to be another factor fuelling food inflation. A common notion is that during shortages, the futures prices of commodities remain very high and the traders take cue from these prices to decide on the spot prices. Even though essential food grains are out of the purview of forward marketing, percolation of price effect from other food and non-food commodities in the forward markets cannot be ruled out. However, there is no conclusive study so far to either

accept or refute the hypothesis that futures trading leads to inflation. Abhijit Sen committee appointed to look at the matter maintained that current evidence available does not provide any conclusive evidence whether there is any casual relationship between futures trading and rise in prices of agricultural commodities. However, it is to be noted that their report does not rule out the possibility of futures trading contributing to inflation either. Managing food inflation Several initiatives have been taken by the government and the central bank to contain general inflation. The RBI has tightened its monetary policy by making upward revision in its key policy rates several times in last one year period. However, monetary policy has very limited role to counter inflation in food commodities which is essentially caused by supply side constraints and the underlying deficiencies are chronic in nature. Food commodity driven inflation has become a persistent phenomenon and the corrective measures involve concerted efforts over an extended period of time. With public investments already hiked substantially in the recent years, there is now a need to pay attention to improve efficiency of such investments. As area available for agriculture and food production is going to shrink focus should be given on enhancing the productivity of crops to keep pace with growing demand for food.
17

Overhauling the PDS is another corrective measure which can be undertaken in the medium term. Piling up of food grains in the granary beyond the stipulated levels is an avoidable proposition. Resorting to open market sales at specific intervals would help in both relieving the granary of excess stocks and checking the build up of prices in the domestic market simultaneously. It is also logical to widen the scope of PDS by including more essential commodities like pulses, edible oils and sugar, to provide some protection to the poor against food inflation. However, it is not clear whether expansion in PDS coverage to include more items is helping in reducing food inflation or it is adding to food inflation because of rise in subsidies and leakages in our delivery system. Resorting to food imports can help in checking domestic prices to make up the supply shortfalls, provided imports are planned on time. Our past experiences with wheat imports give ample evidence of imports turning costlier with international prices moving up with Indias decision to go for import. We need to develop a system for getting advance information on demand and supply imbalances and tune our trade policy accordingly. As an immediate remedy, all steps to prevent hoarding and speculation in food commodities have to be expedited. The states should be proactive to forego some taxes on account of interstate transport of commodities at least for the time being till the prices reach normal levels. Downward revision of state-specific customs and excise duties on diesel may also help bring down the prices of inputs used in agriculture. In essence, measures to control inflation in general, and food inflation in particular, can be classified as immediate remedies and mediumand long-term remedies. Immediate remedies are more like treating the symptom leaving aside the causes which requires long-term visioning and planning. q
(E-mail : rc@ncap.res.in pshinoj@ncap.res.in) 18

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INflATION
PERSPECTIVE

The Inflation Challenge to Policies

Shashanka Bhide

The coincidence of food and fuel led inflation episodes may be a matter of chance but they draw attention to the need for a longer term perspective on these key sectors
YOJANA August 2010

HE HIGH rate of inflation is destabilizing for the individual households, businesses and the economy as a whole. Double digit inflation brings down the purchasing power of households at least in the shortrun as income levels do not rise so quickly for most people. After a relatively long period of moderate price inflation, we have experienced now two episodes of high inflation. We have had double digit annual rate of inflation based on consumer price index (CPI) for industrial workers since July 2009 until May 2010. While inflation rate has been unusually high in the last five months, even when measured using the wholesale price index, it is important to note that there has been sharp volatility in the inflation rate over the last two and a half years covering the period from January 2008 to May 2010. The price situation has changed from

high inflation to negative inflation and then back to high inflation during this period. In both the cases, international price shocks were important determinants although the domestic supply constraints in the form of effects weak monsoon were more prominent in the latter half of 2009-10. The demand side factors were an important influence in the first episode of recent inflation, prior to the global economic crisis: there were large capital inflows requiring active interventions by the RBI to manage exchange rate volatility. An important feature of the inflation episodes of 2007-08 and 2009-10 is that its bite was through the increase in the prices of essential commodities: fuel and food. The impact, even when limited to two segments of the consumption basket, has been widespread. The international markets also played a positive role in keeping inflation limited to some sectors rather than

The author is Senior Research Counsellor, NCAER. 19

full blown transmission across sectors. The drop in the prices of commodities as the global economic crisis intensified gave some time for Indian consumers to bear the food inflation. The current inflation has also occurred at a time when the markets have had much greater role to even out the supply demand mismatches. After all, the trade policies are now relatively freer than ever before, exchange rate is more flexible, domestic markets are more competitive and monetary policy is more geared to deal with inflation. Without these features the impact of inflation may well have been more intense. It is not that there were no demand side pull factors during this period. There was a strong fiscal stimulus or an expansionary fiscal policy in the works to offset the decline in private sector demand during the period of global crisis. The monetary policy was liberal to provide enough liquidity to the system when there was increased risk aversion among the lenders. Some of this loose fiscal and monetary policy positions may have had some lagged inflationary impact. Thus, both international and domestic dimensions of the economy were influencing the price scenario. The policy response has had to address both these factors. It was necessary to ensure that the essential commodities were in adequate supply but at the same time it was necessary to align demand to the emerging medium term to longterm supply potential. In the period before the global economic crisis of 2008-2009,
20

there was a sharp increase in the prices of food commodities in the international markets. The price of petroleum crude rose from $70 per barrel in July 2007 to $140 in August 2008. These enormous price increases were attributed to the heightened pace of economic growth, especially in China and India. The high energy prices also began to shift crop areas from grain production for food to grain for energy. However, as the global financial markets crashed in 2008 and world trade slumped, the price of petroleum crude dropped to $40 per barrel by December 2008. There were concerns of deflation at the time, which is no less a policy challenge as inflation. The crude oil prices began to rise gradually and by March 2010, they are at $80 per barrel. The transmission of international prices to domestic prices in the petroleum sector is controlled by the price policy of the government with respect to petrol, diesel, kerosense and LPG. Commenting on the rising rate of inflation in the second half of 200910, the economic survey for 2009-10 said, Apprehensions of shortages in agricultural production due to a deficient south-west monsoon this year are mainly responsible for increasing inflation. The Survey expected overall food inflation to decline after its high level of 19.77 per cent in December 2009. Between January 2010 and May 2010, the overall annual inflation rate measured by the Wholesale Price Index (WPI) has remained at about 10 per cent in each of the five months. We may note that

between March and June 2009, the WPI based annual inflation rate was actually below 2 per cent. This low rate of inflation had actually continued right upto November 2009 when the inflation rate rose to 5.5 per cent. The volatility is evident from these numbers. The role of specific drivers of inflation is evident when we consider sector specific prices. As we noted earlier, food and fuel prices have remained the drivers of both upward and downward changes in the overall price index during 2008-10. This pattern points to greater role of the supply demand imbalances in these sectors rather than an overall general demand led inflation. The rise in food and fuel prices would transform into a more general price rise especially if global markets are not offsetting these changes. The consumer price index (CPI for Industrial Workers) has been in double digit growth for an even longer period, from July 2009 to May 2010. The CPI assigns higher weightage to food items than is the case with WPI. Whichever way one looks at the price scenario it reflects sharp rise in the price level in the last 6-8 months. The rise in the prices of pulses, vegetables such as potatoes, food items such as sugar, the group of eggs, meat and fish and milk has been very steep. To the extent that some of this increase is on account of temporary setbacks to supplies due to the poor monsoon of the last year, the policy response has to focus on ensuring that the markets are competitive and safety nets such as the PDS operate efficiently. Access to international markets should remain freer.
YOJANA August 2010

It has been often said that we need consistent and stable trade policy regime so that trade decisions are taken by the suppliers and consumers on a longer term perspective. In the case of agricultural produce, particularly food products, our approach has been one of self-reliance. Although it is necessary to expand domestic production capacity, it is also necessary to have access to international supplies and provide markets to domestic producers. What is needed is improvement in productivity so that our producers remain competitive in international markets. The need for a longer term view is also evident in the case of petroleum products. The coincidence of food and fuel led inflation episodes may be a matter of chance but they draw attention to the need for a longer term perspective on these key sectors. An effective safety net of PDS at affordable prices for the poor is beyond doubt necessary. But it is also necessary to avoid the situation where grain in stock has to be disposed of in the international

markets at unremunerative prices. The bountiful stock of grain when prices are rising steeply is paradoxical. Resources such as land need to shift to sectors where there are supply failures and not be tied down to specific sectors. More vegetables need to be grown and they are presumably harder to import. The petroleum sector presents an equally difficult challenge. Demand for energy will keep rising sharply over the medium to long term. We need policies that incentivise more efficient use of energy. Inability to target subsidies effectively- as in the case of kerosene and diesel- implies inefficient use of these resources. Given the essential nature of these energy sources, there is a need for an effective safety net for the poor. But subsidising consumption can become unsustainable proposition very quickly if the supplies do not improve quickly enough. Deregulation of fuel prices when they are highly subsidised does imply a steep increase in prices. But this measure is more likely to

yield more sustainable outcomes. There is also a need to be more transparent about the need for high taxes in the petroleum sector. Without the measures to improve efficiency in the use of energy high taxes would become a source of revenue for the government. The inflation episodes of the recent two years have highlighted the delicate balance of supply and demand in the two crucial sectors: food and energy. Adequate stocks of foodgrain with the government have proved important buffer against insecurity. In the case of energy the more secure balance of payments position has been a source of security. The short-term policy measures have focused on managing liquidity and reducing the scope for speculation and hoarding. But we also need longer term measures to improve supply systems so that the economy can respond quickly to resolve supply-demand mismatches and minimize the vulnerability to q inflation.
(E-mail : sbhide@ncaer.org)

YOJANA
Forthcoming Issues
September 2010 Yojana will bring out an issue on Sports Development in India October 2010 The October 2010 issue will focus on Food Security
YOJANA August 2010

September 2010 & October 2010

21

INflATION
lOOKINg BACK

Inflation Episodes in India

Manas Bhattacharya

R A D I T I O N A L LY, INFLATION in India has primarily been caused by supply shocks; drought and consequent increase in food prices, or (and) increase in oil prices reflecting hikes in the international prices of crude oil.

To recall, inflation in 1979-81 was caused by supply shocks created mainly by a combination of the hike in global oil prices and the drought, affecting adversely the domestic agricultural sector. In the early years of the 90s, India experienced double digit inflation. A major trigger of inflation around this period was a sharp rise in the value of oil imports due to rise in world oil prices in the wake of the gulf crisis. This was the period when agriculture performed poorly for several years adding to the supply shocks. The problem was exacerbated by high fiscal deficit and increase in the money supply. A steep devaluation in the wake of economic reforms also made import costlier. The policy response to the crisis took the shape of tightening

While Indias vulnerability to international prices has evidently increased and it can hurt the poor severely, a long term strategy would need to be in place to modernise and strengthen Indias agriculture sector
22

Once in a while demand pressure also manifests in inflation. The most common example cited is that of the increase in the pay of civil servants in the wake of awards by the Pay Commission; that of the Fifth Pay Commission is stated to have been felt in the escalation of prices in 1998-99; and the impact of the Sixth Pay Commission was manifest in 2008 and 2009. Inflationary situation may worsen if the domestic and external factors that contribute to escalation of price level overlap in the same period.

The author is Economic Advisor in the Ministry of Tourism, Govt of India YOJANA August 2010

of the monetary policy, capping the issue of ad-hoc treasury bills by the government restraining thereby government borrowing and liberalising imports to ease shortages. In the decade starting with 2000, India did not experience doubledigit inflation. The peak inflation during this decade was between 8 to 9 per cent. Till 2007-08, the highest annual average inflation experienced was 7.2 per cent, and this was in 2000-01. In that year too it was driven by the fuel, power and lubricant group, which experienced 28.5 per cent increase in the average annual inflation. The next high inflation year was 2008-09, when the average annual inflation was 8.41 per cent. This was driven by a steep rise in the prices of primary articles, which rose by 10.06 per cent. There was also unprecedented increase in the prices of manufactured products; it rose by 8.10 per cent, a height, which was never attained in this decade. Fuel prices were high, but not very high. It may be noted that 2008-09 was a recession year. After experiencing more than 9 per cent GDP growth in three preceding consecutive years, growth fell to 6.7 per cent in 200809. Interestingly, several factors coincided during this period. First, primary sector growth slumped from 4.6 per cent in 2007-08 to 1.6 per cent in 2008-09. Second, the first instalment payment of the
YOJANA August 2010

Sixth Pay Commission was released adding to the demand pressure; and third, there was steep increase in the volume of import combined with increase in import prices. The unit value index of import increased from 210 in 2007-08 to 239 in 2008-09. The volume index of import also increased from 218 to 262 (Base year 1999 -2000 = 100). There was also steep increase in the Minimum Support Price (MSP) of Paddy, which increased from Rs. 645 per quintal in 2007-08 to Rs. 850 per quintal in 2008-09. As per the Economic Survey 2008-09 of the Government of India, in 200809, the MSP in almost every crop had witnessed increases of about 30 per cent or more. Within the primary articles, food inflation was 8 per cent, the highest in the last five years, the inflation of non-food articles was also high at 11.2 per cent, the second highest in the last five years and the inflation of minerals at 34.9 per cent was also the second highest in the last five years. Within the manufactured product group, food products have one of the highest weights, which experienced steep inflation of 10 per cent, the highest in the last five years. Similarly, the product group chemicals and chemical products, which have the highest weight in the manufactured products group, had experienced 7.2 per cent inflation, the highest in the last five years. The basic metals alloys and products group

experienced 14.4 per cent inflation, the second highest in the last five years. A unique feature of this inflation is that so many product groups simultaneously experienced pressure on their prices. Globally, the spurt in the prices of crude oil, minerals and metal related products impacted domestic prices in India significantly. Inflationary pressure in India reached its peak at 12.8 per cent in August 2008 and gradually eased thereafter and the trend broadly corresponded with the trend in global inflation. The annual average inflation for 2009-10 was a low 3.6 per cent. However, this should not camouflage the fact that inflation remained hardened in primary articles. Average inflation in primary articles was 10.62 per cent. Overall inflation was low due to negative inflation in fuel, power and lubricant category and positive but low inflation in manufactured products. Around this time the domestic administered prices of petrol and diesel were revised upward and made effective from July 2009. In 2009 -10, year-on-year inflation was the lowest (and negative) in August 2009 and started picking up thereafter. Inflation gradually rose from 0.5 per cent in September 2009 to 9.9 per cent in March 2010. This was primarily driven by inflation in primary articles. The second
23

instalment payment of the Sixth Pay Commission was released in October 2009 bringing in demand pressure in the market. October 2009 was also the turning point for the global food prices to start rising. The period coincided with deficient monsoon, floods in some of the southern states, decline in agricultural production and consequent expectation of shortage in the domestic market. Year-on-year inflation in April 2010 was 9.59 per cent; inflation in primary group of articles was 13.88 per cent; 12.55 per cent for the fuel and power group and 6.70 per cent for the manufactured group. In the month of May 2010, the overall year-on-year inflation was 10.16 per cent. The inflation of the primary articles was 16.60 per cent; fuel group exhibited 13.05 per cent and manufactured products registered 6.41 per cent inflation. In India inflation is measured in terms of the Wholesale Price Index (WPI) and it has tracked global prices well. It may be noted that the international practice of measuring inflation is by the Consumer Price Index (CPI). In India, CPIs are computed separately for industrial workers (CPI-IW), urban nonmanual employees (CPI-UNME) and agricultural (rural) labourers (CPI-RL). The coverage in terms of number of items included in the basket for computation of the
24

CPIs is much less than that of the WPIs. The base years for the CPI are 1982 for the industrial workers, 1984-85 for the urban non-manual employees and 198687 for the agricultural labourers. In comparison, the base year for the WPI is 1993-94. The inflation, if measured by the CPIs is subject to the qualification that it has less number of items under coverage and has older base years and therefore may not capture the changes in the production and consumption patterns over time adequately and therefore the impact of changes in prices on consumer welfare. Nonetheless, the Economic Survey, 2009-10 of the Government of India shows that the food inflation from April 2008 to December 2009 have been tracked in a similar fashion by all the three indices, WPI, CPI-IW and CPI (rural labour). It would be of interest to study the most recent trends in food prices as evident from the CPI-IW since it has much higher weight on food items than the WPI has on primary articles. Food prices are critically driving inflation these days and have significant impact on poverty. This index shows that the food inflation reached its peak in December 2009 at 21.29 per cent and thereafter it started declining gradually reaching 16.03 per cent in March 2010. This might partly be a reflection of the

fact that international prices have also started softening. One can therefore look for a cooling off in prices to stay if the forthcoming monsoon does not betray. The government generally a d o p t s a s e t o f r e g u l a t o r y, administrative and economic measures to combat inflation. In 2009-10, the set of measures included monetary tightening, liberalising import, reducing import duties on food items, removing levy obligation of imported sugar, imposing ban on export of nonbasmati rice, edible oils and pulses (except kabuli chana), using Minimum Export Price (MEP) to regulate exports of onion, suspending futures trading in rice, urad and tur, imposing stock limit orders in the case of paddy, rice, pulses, sugar, edible oils and edible oil seeds, distribution of imported edible oils to states at a subside prices, distribution of imported pulses through Public Distribution System (PDS) at a subsidised prices and higher allocation for distribution of wheat and rice to states etc. While Indias vulnerability to international prices has evidently increased and it can hurt the poor severely, a long term strategy would need to be in place to modernise and strengthen Indias agriculture sector. The reform in this sector has so far been slow and sluggish. q
(E-mail : manasb2@gmail.com) YOJANA August 2010

INflATION
VIEWPOINT

Inflation: Myths, Realities and a Policy Agenda

V Shunmugam Debojyoti Dey

Commodity derivatives can indeed emerge as the most effective hedging avenue for Indians, for risks arising out of runaway inflation and price volatility
YOJANA August 2010

FRONT-PAGE news item on July 8 in a prominent business daily said it all: Maverick chef Sanjeev Kapoor is reportedly cooking up recipes and modifying existing ones in his repertoire to fight the food price inflation battle in the kitchen. Indeed, the current runaway inflation in India, while not historically unprecedented, is definitely unusual on at least two counts: one, despite the government trying all ammunitions up its sleeve, high inflation has been ruling the roost continuously for more than two years now. Second, the current persistent inflation is ironically coinciding with the greatest global recession and its (hopeful) recovery since the Great Depression; in other words, while most countries are looking to control deflation, India seeks to do just the opposite - reign in inflation.

what does not cause inflation What explains the current runaway inflation? Reasons are

galore from drought-induced food grains supply shortage to increasing money supply and rising international prices of most commodities, spilling over to consumer prices. As is apparent and well-publicized, it is indeed a combination of all these factors that is contributing to inflation currently. We look at some of these factors in the next two sections. What is not so apparent and is actually the favorite whipping boy is the commodity futures market its role in stoking the fire of inflation. As a result, banning futures trading is often the first knee-jerk reaction of these constituencies; though the expert committee that looked into any possible connection between commodity futures and inflation could not find any. In this section, we seek to bust the myth of causality between high commodity prices and futures trading, providing the following seven clinching evidences to the contrary: Fact # 1: As shown in Table 1, the weight of futures-traded food

The author are Chief Economist and Economist, respectively, with the Multi Commodity Exchange of India Ltd., Mumbai. 25

commodities in the Indian wholesale price index (WPI) is rather small, less than 5 percent, which is even less than the combined share of two commodities not traded on futures exchanges sugar and rice. Hence, even if there were to be futures trading-induced price rise, its impact on general food price inflation would be negligible. Fact # 2: As Table 1 shows, for the futures-traded commodities that are the most significant in the WPI (wheat, maize, cotton, groundnut oil, together account for almost 4 percent in WPI), the volume of futures trade is very small vis--vis that of physical trade. Hence, it is highly unlikely, even theoretically, for such small volumes to have a significant impact on physical market prices. Fact # 3: The price rise in the futures-traded commodities has

been much less than that in the nontraded commodities. For example, the spot price of Chana (also traded in the futures market) increased by less than 12 percent from December 08 to December 09, while the prices of other pulses not traded in the futures market Tur, Urad and Moong surged by 61, 70 and 148 percent, respectively, in the same period. Fact # 4: Let us focus on the price behaviour of a food commodity, Tur, which was banned for futures trading comparing the spot price movement between the period when future trading was active and when it was delisted. As may be seen in Table 2, contrary to the perception that futures trading drove up prices, the reality is that such trading actually helped reign in the price of Tur.

Both Facts # 3 and 4 are manifestations of the beneficial effects of a well-functioning futures market, which not only enables riskaverse individuals to pass on their risks to other market participants, but also brings in transparency, thus making it difficult for reckless traders and unscrupulous entities to drive up commodity prices. The policy implication of this aspect is detailed in Sections 5 and 6 Fact #5: Exchange-disseminated (advance) price signals refer to wholesale market prices, while consumers pay retail prices. The margin between the two is determined by transaction costs, which include, among others, the risk premium added by traders on account of price volatility. To the extent that commodity exchanges provide transparency in transactions and help reduce price volatility, exchange-traded commodities typically lead to better prices for both producers and consumers by reducing the aforesaid margin at each level in the entire value chain. Indeed, the commodities that show the highest price volatility in India are typically not exchangetraded. For example, a comparison of average daily volatility of Tur, Urad, and Chana (see Table 3) clearly shows that the average daily volatility in Tur and Urad (not traded in futures) was much higher than that in Chana, which has a futures market. Their volatility got further magnified during the last kharif when the monsoon played truant, demonstrated by the price volatility in the monsoon period of mid-June to mid-October 2009. This clearly shows that futures trading can contain price volatility the major cause behind hoarding. Stricter administration of antiYOJANA August 2010

Table 1: Share in wPI and ratio of futures to physical market volumes of select agricultural commodities Commodities Share in wPI Futures Commodities Volume Vs Spot Volume Share in wPI

Commodities traded on Commodity Futures Exchanges Wheat Maize Barley Gram (Chana) Coffee Raw Cotton Groundnut seed Rape & mustard seed Soyabean Oil 1.38408 0.18561 0.02734 0.22365 0.08188 1.35674 1.02883 0.58066 0.17838 2.9% 2.7% 25.8% 639.7% 198.9% 7.8% 0.0% 398.9% 298.0%

Commodities not traded on Commodity Futures Exchanges Garlic Moong Urad Tur (Arhar) Sugar Bajra Jowar Tea Onions Rice 0.05905 0.11225 0.09619 0.13466 3.61883 0.11044 0.22189 0.15739 0.09372 2.44907

Source: Ministry of Commerce of Industry; Exchanges websites; Directorate of Economics & Statistics: Department of Agriculture & Cooperation; NHRDF; CMIE India Harvest. Volume figures pertain to December, 2009

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Table 2: Tur Percentage change in prices during different time periods Duration Status % Increase in Prices 32.5% 6.5% 86.6%

Oct 2001 to May 2004 (32 months) Pre futures trading Jun 2004 to Jan 2007 (31 months) Feb 2007 to Dec 2009 (35 months) During futures trading Post delisting

such as late blight. These affect production and lead to consequent volatility in prices, as explained below in two commodities potato and sugar. Potato prices slumped in the 2007-08 marketing season to as low as 2 Rs/Kg due to huge production of over 31 million tonnes, a record. Late blight in the next growing season across major growing areas critically affected production, delayed market arrivals and increased prices. Potato price inflation got a further shot in the arm with a huge price rise in other vegetables and the consequent consumer switch to potatoes. Sugar price inflation, on the other hand, was largely attributed to the cyclical effect of commodityprice relationship. After two consecutive years of bumper production, huge inventory and consequent low prices, domestic sugar market in the 2008-09 marketing season witnessed shortages, thanks to a 44% decline in production, leading to price rise. The production decline, in turn, was owing to a shift in acreage away from cane to food crops, where farm gate prices saw better realization over the past two years and the Minimum Support Prices (MSP) of these crops were also supportive. Poor rainfall in this and subsequent season also contributed to diversion of land to less water-intensive crops. As these instances show that extraneous factors causing supplyside shocks are primarily responsible for current inflation. Yet, one of the erroneous policy responses to inflation was banning of futures trading in several commodities. In fact, the prices of such commodities did not decline following the ban. On the contrary, prices of some of
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Source: CMIE India Harvest, Data for Delhi market

hoarding measures can only address the malaise i.e. hoarding but does not attack the main cause for hoarding i.e. price volatility. Allowing the futures market to develop and mature will address the cause of hoarding through reduction in price volatility, as argued further on in the article. Fact #6: India is a net importer of commodities such as soybean oil and crude palm oil and, thus, relies on international prices for these commodities. If futures prices in Indian commodity exchanges do show a spurt in these prices, which also gets reflected in spot prices, they merely mirror high international prices (Table 4). Besides, adverse currency movements also make imports costlier. If the Indian prices were higher, the arbitragers always had the opportunity of buying from low selling physical markets, carry over and then deliver on commodity exchanges. Fact #7: A spurt in futures prices

can actually be used as a correct signal of impending shortages and administrative measures taken to augment supply, accordingly. For example, when (in 2009) sugar prices in the international markets jumped over 127 percent, the domestic price rose by only 79.6 percent (see Table 4), thanks largely to the measures taken by the Indian government to augment supply. What caused inflation If the futures market did not cause the recent bout of inflation, what did? Any attempt to analyze the reasons for price rise in India, especially in agricultural commodities, should follow an understanding of the fundamental supply-side dynamics of these commodities, much of which are specific and peculiar to India. Supply of most staple commodities is prone to large fluctuations owing to diversities in cultivation ecosystems, exposure to agro-climatic shocks such as moisture stress, major diseases

Table 3: Average daily volatility in spot prices traded vs not traded - on Indian Commodity Exchanges CY 2009 Chana (Gram) Tur Urad 1.39% 7.00% 6.40% June 16 to October 16, 2009 1.54% 11.60% 10.90% Commodity traded on Commodity Futures Exchanges Commodities not traded on Commodity Futures Exchanges

Source: CMIE India Harvest; data for Delhi market YOJANA August 2010

Table 4: Percentage change in futures prices in international markets Commodities Soybean Oil (CBOT) Sugar (Raw) CPO Cotton Source: Bloomberg Exchange CBOT (CME) NYBOT (ICE) Bursa Malaysia NYBOT (ICE) CY 2009 20.2% 127.4% 48.4% 54.6%

together with the public sectordominated banking ecosystem, did take proactive steps to nip the formation of asset bubbles in the bud. Yet, money supply grew concomitantly, in part also because the RBI had to prevent the rupees appreciation coinciding with huge forex inflows during the boom period. When money supply exceeded the absorptive capacity of the economy, aggregate spending outpaced aggregate production and, thus, prices surged to signal that growth needed to be tamed. But policy action to slow growth is a politically difficult decision in India which is struggling to attain rapid growth on a sustainable basis. Yet, growth in the aggregate measure of Indias broad money supply, or M3, was 12 percent in 2004-05, which increased to 21.7 percent in 200607, before moderating slightly at 18.6 percent in 2008-09 (Source: Economic Survey). Ironically, in the aftermath of the Great Recession, the countries whose loose monetary policy was partially responsible for the financial crisis culminating in the recession had to continue with the same policy to thwart a full-fledged depression. Thus, while the US Federal Reserve maintained an interest rate of less than 2 percent for the greater part of the boom years, it is forced to keep it at nearzero levels currently to provide liquidity to an economy striving to come out of recession. In India, in addition to a loose monetary policy, we saw a slew of expansionary fiscal policies during the same time, the biggest of which (viz. Sixth Pay Commission Implementation and the National Rural Employment Guarantee Program) were not
YOJANA August 2010

these commodities e.g. sugar and potato, afflicted with acute supply shortages, continued to rise at an increasing rate. The fact is: futures only help predict future prices and, therefore, act as a market signal for future availability. To that extent, they can aid in taking policy measures to respond to the impending supply situation well in time. Hence, there is actually a need to strengthen the institution of futures markets, if only to receive timely signals for future availability of commodities. A demand-side interpretation of inflation As the above analysis clearly proves, it is not only that there is no evidence of causal links between the future market and inflation, but prices in this market also tend to rise more moderately, which gets reflected in similar moderation in the price rise in the spot market as well. Independent observers, economists and even the Abhijit Sen Committee, appointed by the Indian government, corroborated the absence of any causal link. The reasons for inflation were multifarious, the supply-side issues of which have been briefly discussed above. Immediate policy response to inflation has been scarce little on the supply side, not just because the issues fall in the realm of structural bottlenecks inherent in the Indian economy, but also because in a
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globalised economy as ours external shocks get quickly transmitted into the national economy. Therefore, an emphasis on demand management is critical, especially because it seems to contribute substantially to inflationary pressures and constitute the doable dos. Expansionary fiscal and monetary policies in the backdrop of the global recession of 2007-09 may have contributed to high inflation, but even the years preceding the recession witnessed significant accommodative fiscal and monetary conditions, leading to creation of the first principles of inflation: too much money chasing too few goods. Truth be told, there was a loose monetary policy in tandem with expansionary policies of most nations during the boom years of 2003-2007. The US, for example, kept interest rates at just 1 percent for years after the 2001 recession. This made the already spendthrift Americans to spend much more than they earned, creating a huge US trade deficit and corresponding trade surpluses in emerging economies, including India. Besides, inflation in the US economy was kept down by outsourcing economic activities to low-wage nations like India. This created another set of conditions for high growth in India where prices assets such as stocks and housing increased at unprecedented rates. The Reserve Bank of India,

even linked to the recession. What monetary authorities in these nations failed to note was that when the resultant inflation coexists with policy-induced low interest rates, a regime of very low or negative real interest rate is created. This makes the real money supply much higher than the stock of nominal money supply, further stoking up the inflationary fire. A Merrill Lynch study found that a 1 percent fall in the real interest rate increases commodity prices by 17 percent over 10 months. Thus, expansionary monetary policy creates inflationary pressures even indirectly through negative interest rates. Hence, authorities in India are currently fighting inflation through a monetary squeeze, even if it means slowing growth, Monetary tightening is deemed necessary now more than in the previous months, as inflation has spilled over from food to non-food items and industries are showing signs of growth at rates exceeding what current capacity permits. Commodity derivatives: an effective inflation hedge The above is a one-shot demand side view of the economy that is facing inflation in recent times. Characteristically, policies aimed at effective demand management have been employed to rein in this monster. However, monetary policies cannot address the supplyside of the market, which actually is the raison detre of the price rise that we are witnessing currently. Besides, monetary policies are more effective as policy signals for setting expectations of market participants, rather than creating or controlling availability of real goods and services, and effect markets
YOJANA August 2010

only with a lag. Additionally, when commodity price increases are transmitted from markets overseas, or are caused by extraneous factors such as a monsoon failure, there is little that domestic monetary policy can do. Hence, it is a combination of monetary and fiscal tightening which can prevent inflation from attaining unmanageable proportions and avert its spill-over from one sector to another. At the micro level, while inflation cannot be prevented by individuals and corporate entities, its effect on them can be minimised by a powerful inflation-hedging device that has received scant attention from all the stakeholders the institution of commodity futures market. It has gained huge popularity in emerging economies like India and China where exchangetraded commodities are available to consumers and producers to hedge risks arising from a possible galloping inflation. As examined and proven in paras above, not only futures-traded commodities have suffered less from inflationary effects but their price volatility also has been muted compared to other commodities. Indeed, suitability of commodity derivative products and large requirements of numerous price hedgers have meant that commodity futures have proven to be an effective derisking instrument for many market participants. Yet, many risk-hedging products, such as options and indices, which can be appropriately tailored to meet the risk appetite of diverse corporates are currently not permitted in India. Similarly, participation by financial institutions and foreign entities is also not permitted in our markets, though their entry could provide

the much-needed depth, liquidity and popularity to the commodity derivatives market. This market in India is still guided by the Forward Contracts (Regulation) Act, 1952, which was enacted in the backdrop of wartime shortages, a context far-removed from the realities and demands of todays economy. With a strong regulator within a liberal policy environment, which is the avowed objective of Indian economic liberalization agenda, commodity derivatives can indeed emerge as the most effective hedging avenue for Indians, for risks arising out of runaway inflation and price volatility. Conclusion and outlook Many observers opine that the persistent inflationary tendency in the Indian economy over the last several months is a long-term phenomenon, a result of rapid economic growth, rising incomes of a youthful population, stagnating agricultural production and supply capacity falling short of demand. Hence, it is imperative to take long-term visionary initiatives to moderate inflationary pressures and absorb the price shocks before they hit the real economy. Monetary management and fiscal policies such as price controls and quantitative restrictions can only prove to be effective as short-term solutions. An innovative policy regime must necessarily include items such as strengthening of institutions which absorb and prevent price shocks from impacting the real sector: the institution of exchange-traded commodity derivatives. It is time the opportunities thrown open by globalization are harnessed in designing an innovative policy framework towards this end. q
(E-mail : shunmugamv@gmail.com debojyoti.dey@mcxindia.com ) 29

INflATION
OVERVIEW

Inflation and State of The Economy

K R Sudhaman

With demand picking up there will be inflationary pressure. But the wearing out of low base effect and good farm output this year will help in moderating it
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NFLATION IS something which nobody is happy about. It is like a tax and hits the poor the hardest. Inflation means the rate of increase in prices over a period of time, say a week or a month. It is measured for food and other primary articles, fuel and manufacturing. If one says inflation is coming down it does not mean that prices are coming down. It means that the rate of increase in prices was less. In India Inflation is measured in terms of wholesale price index unlike in the developed nations where inflation is measured on the basis of consumer price index, which reflects the retail prices. There will always be some amount of inflation in a growing economy. Also as per classical economic theory a small dose of inflation is good for a growing economy as it has a multiplier effect on growth.

In India, high inflation in 2009 and the current year 2010 is mainly due to the fact that the country

faced severe drought resulting in fall in summer Kharif food grain output. This pushed up inflation to an unprecedented level and food inflation touched nearly 20% in December 2009 after which it began to fall. Food Inflation was mainly due to supply constraints, which started easing with the arrival of winter Rabi crop and seasonal factors tapering off. But what was more problematic was food inflation spreading to other areas resulting in overall inflation going into double-digit. Inflation in May this year was at 10.16% and it is expected to be high in June as well because of the recent fuel price hike. The government decided to carry forward an unpleasant reform measure to decontrol pricing of petrol and move towards decontrolling diesel prices. The Government could no longer wait as state-owned oil companies were bleeding because of underrecovery due to subsidised fuel prices particularly, that of kerosene and cooking gas. So, government

The author is Economic Affairs Editor Ticker News YOJANA August 2010

freed pricing of petrol due to which price of petrol went up by Rs 3.50 per litre. Diesel, whose pricing too would be eventually decontrolled, was increased by Rs 2.00 per litre. Kerosene was increased by Rs 3.00 a litre and LPG Rs 35 a cylinder. Despite the increase in fuel prices, under-recovery of state-owned oil marketing companies Indian Oil, Bharat Petrleum and Hindustan Petroleum is likely to be Rs 53,000 crore this financial year. June Inflation is likely to be up by 0.9% because of the fuel price hike. But what is significant is that inflation which has been partly high because of the low base effect, is expected to fall with the wearing off of the base effect. Also fuel price hike may push up inflation in the short run but in the long run it will lead to demand contraction, thereby helping in moderating inflation. The low base effect is also likely to wear off from June as around this time last year inflation started rising. Inflation is measured year-on-year. Due to global recession in 2008-09, inflation was unusually low and at times negative during that period. As Inflation is compared with what it was in the previous year, the inflation this year has got magnified or exaggerated because of the low base effect. With the low base effect wearing off from June this year inflation will begin to fall and as Reserve Bank and Government had projected, it is expected to be around 5-6% by the end of this financial year 2010-11. With good monsoon projected this year, food output is expected to be good. The Planning Commission Member incharge of agriculture, Abhjit Sen had indicated that farm output would grow by 5-6%.
YOJANA August 2010

India has one of the highest food grain stocks this year, estimated at around 60 million tonnes. So unlike last year, food inflation is not expected to be high this year. The high inflation from the middle of last year will bring into play the high base effect which will help further in inflation being lower than what it would have been otherwise. Significantly, last year, despite comfortable food grain stock of about 44 million tonnes, wheat and rice prices were high as the government could not take a decision to subsidise further to release these food grains in the public distribution system at lower prices. This is because of the fact that the government already had high food subsidy bill and was not in a position to give more subsidy to food with fiscal deficit mounting to 6.6% of GDP in 2009-10 due to the fiscal stimulus package provided to ward off the impact of global crisis on Indian economy. Strangely this resulted in food grain stock going up by 7 million tonne in a year when production fell due to poor monsoon. Another factor for inflation has been that Minimum Support Price for various agricultural crops has been increased substantially in the last few years. This has no doubt put more income into the farmers hands, but at the same time it has pushed up the prices of agri-products. Indian wheat prices are much higher than global wheat prices, which are ruling around $170-200 per tonne. This means that landed price of imported wheat is around Rs 10-11 per kg whereas Indian wheat sent from Punjab to southern city like Chennai costs Rs 13-14 a kg. This has resulted

in a peculiar situation where flour mills in south India prefer to import wheat rather than buy wheat from Punjab or Haryana. Also carrying and storage cost of food grain is also contributing to higher price of Indian food grains. Government has therefore embarked upon an ambitious plan to provide food security to over 50-70 million families below the poverty line. After Right to Education through Education for All and Right to Work through National Rural Employment Guarantee Programme, food security would be the third major initiative of the Government for the social uplift of the poor. The food security legislation is in process of formulation. Under the programme all below poverty line families will be provided 35 kg of food grain every month at Rs 3 a Kg. A significant development is that nobody is complaining about inflation now. This is because the purchasing power of people has gone up, particularly in the rural areas because of the higher minimum support price and National Rural Employment Guarantee Programme. But what is worrying now on the inflation front is that it has spread to manufacturing, particularly with growth picking up in the face of economic recovery. Last year Reserve Bank pursued an easy and accommodative monetary policy and the government came out with two or three rounds of fiscal stimulus package to minimise the impact of global crisis on the Indian economy. The easy monetary policy and the fiscal stimulus were together aimed at demand revival to
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help the sagging growth. Lowering of Cash Reserve Ratio several times from 9% in 2008 to 5% by early 2009 had brought-in nearly Rs 4 lakh crore liquidity into the banking system. Cash Reserve Ratio is the percentage of the deposits that commercial banks park with the central bank. This is an instrument that is used to suck out or release liquidity into the banking system. This instrument is used to control money supply and thereby Inflation. Now the CRR is 6%. With the economic recovery and growth, inflation has surged to double-digit forcing Reserve Bank to tighten its monetary policy. Reserve Bank would perhaps want to suck out more liquidity from the system with surging capital flows. It would be keen to move back to normal levels. But at the moment temporarily liquidity position is slightly tight because of a little over Rs one lakh crore payout on account of the 3G and broadband spectrum auction. This tight liquidity position will change shortly and Reserve Bank may then start hiking CRR, perhaps in its quarterly review of monetary policy in July end. There will also be hardening of interest rates to ensure as Reserve Bank hikes key policy rates to contain inflation. With May inflation at 10.16% indicating non-food items have contributed higher prices, the central bank is of the opinion that inflation is now generalised and demand-side pressures are evident. Therefore, Reserve Bank on July one took yet another baby step, as RBI Governor D Subbarao calls, to tame inflation by rising repo and reverse repo rates by 0.25%. Repo is the interest rate at which
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the central bank lends banks in the short term. Reverse repo rate is the one at which banks deploy surplus funds with RBI. Repo and Reverse Repo rates are also called key policy rates or overnight rates. After the July 1 hike, Repo rate is 5.50% and Reverse Repo rate is 4%. In the annual monetary policy in April, Reserve Bank hiked Repo and Reverse Repo rates by 0.25% to 5.25% and 3.75% respectively These are clear signals that the key policy rates have to brought back to pre-2008 normal levels. There could be further hike in key policy rates and CRR in July policy as well. RBI kept CRR untouched now saying easing liquidity and raising rates at the same time may seem inconsistent. However it should be noted that the liquidity easing measures have become necessary to manage what is essentially temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit (from accommodative monetary policy) which remains focused on containing inflation and anchoring inflationary expectations without hurting growth. Reserve Bank and the Finance Ministry have a tough task ahead in balancing inflation and growth as both are equally important. With the economic rebound, Indias GDP growth was 7.4% in 2009-10 as against 6.7% in the previous year, which witnessed sharp deceleration in growth from over 9% in the preceding year due to global financial crisis. Now growth is picking up and it is expected to be around 8.5% in the current financial year and would

go back to high growth of 9% next year (2011-12). There are surging capital inflows, FDI is expected to go up to 35 billion dollars this year. Infrastructure spending is increasing and it is expected to be over $1 trillion in the 12th fiveyear plan beginning 2012-13 from $500 billion in the 11th five-year plan ending 2011-12. Exports are picking up and are expected to touch $200 billion this year. These are signs of economy on rebound, which is the second fastest growing economy in the world after China. India is expected to overtake in growth in the next 2 or 3 years. Aware of these fast developments Government has already started withdrawing from the fiscal stimulus. Fiscal consolidation is crucial for containing inflation. The fiscal deficit, which shot up to 6.6% of GDP in 2009-10, is to be brought down to 5.5% of GDP in 2010-11 and to 4.1% of GDP in the subsequent years. With the Rs 1.06 lakh crore bonanza from 3G and broadband spectrum auction in May and June, containing fiscal deficit is not going to be a problem this year. But Inflation is going to be an issue with growth picking up. The only dampner to growth could be the European debt crisis which may slowdown exports and capital inflows. With demand picking up there will be inflationary pressure. But the wearing out of low base effect and good farm output this year will help in moderating it. Reserve Bank is ever watchful and has been swift enough to take timely monetary action to contain inflation without hurting growth momentum. q
(Email: sudhaman23@hotmail.com) YOJANA August 2010

MACROECONOMICS
RESEARCh

How Monetary Policy Impacts Stock Prices

Ajay Goyal

According to the interest rate channel, tightening of monetary policy leads to higher interest payments and to lower net profits. According to the bank lending channel, monetary tightening reduces supply of bank loans

ONETARY POLICY is a much debated issue these days. Central banks around the world appear to have begun tightening monetary policy. Tightening of monetary policy evokes a shrill protest from financial markets and financial press. This article shows how monetary policy influences share prices.

discount rate may rise. When interest rates fall, the discount rate may fall. Monetary policy changes may also impact the future stream of cash flows. According to Ioannidis and Kontonikas (2008), monetary policy influences stock returns in two ways. First, it influences the discount rate which may be taken to be the weighted average cost of capital. Secondly, it influences the future stream of cash flows. Impact of monetary policy on the discount rate The capital structure of a firm may be assumed to include debt and equity. Thus, the weighted average cost of capital or the discount rate may be defined as the weighted average of the after tax cost of debt and equity

Changes in the official policy rate (bank rate) influence asset prices such as bonds and equities. Equity prices may adjust in response to changes in the rate of interest. This may occur since equity returns are discounted by a larger or smaller factor, depending upon the rate of interest. This factor is called the discount rate. When interest rates rise, the

The author is Assistant Professor, Jindal Global University. YOJANA August 2010 33

(Ross, Westerfield & Jordan, 2007, p488). Mathematically, the weighted average cost of capital may be expressed as: Weighted Average Cost of capital (Wacc) = Proportion of debt x After tax cost of debt + Proportion of equity x Cost of Equity

rate affect the cost of debt and equity and hence the weighted average cost of capital. Monetary policy and the risk profile of a firm Monetary tightening may raise the risk facing a firm. Consequently, equity owners and debt owners may raise cost of supplying equity capital and debt capital. Loan capital becomes more expensive following monetary tightening thus lenders raise interest rates. Equity owners demand higher returns as the required return rises following monetary tightening. The required return or expected return is defined by the Capital Asset Pricing Model as follows: Expected Return = Risk free rate + Beta x Market Risk premium

is the return required by financial investors over and above the risk free rate. The expected return is the return required by shareholders to remain invested in the stock and may also be expressed as the required return. If investors do not receive the expected return they may be tempted to sell the stock, lowering the stock price. The expected return is also known as the cost of equity. Monetary tightening raises the risk free rate and beta which is the systematic risk facing the firm. The risk free rate rises because the policy interest rate has risen. The systematic risk may rise because of increased riskiness of firms. The riskiness refers to the inability to meet fixed and variable expenses. Hence, monetary tightening raises the cost of equity. Thus, monetary tightening may influence both the cost of equity and the cost of debt. Similarly, monetary easing may lower the risk facing a firm. Consequently, equity owners and debt owners may lower the cost of supplying equity capital and debt capital. Thus, monetary easing lowers the weighted average cost of capital. Monetary transmission mechanism
YOJANA August 2010

Monetary tightening (an increase in the policy interest rate) may lead to an increase in the after tax cost of debt while monetary easing (a reduction in the policy interest rate) may lead to a decrease in the after tax cost of debt. Thus, monetary tightening should increase the weighted average cost of capital and monetary easing should decrease the weighted average cost of capital. The share price of a given stock may be defined as the present value of future cash flows discounted by the weighted average cost of capital. For a given stream of cash flows, an increase in the weighted average cost of capital would lower stock returns and a decrease in the weighted average cost of capital would raise stock returns. The weighted average cost of capital may also be taken as a proxy for the discount rate facing a firm. This is because the risks affecting a firm which impact the discount
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Risk free rate is the rate of return on riskless investment such as treasury bills issued by the Central bank. Beta of a security is a measure of systematic risk. It measures volatility of return of a security in comparison to volatility of market portfolio such as FTSE 100 or S&P 500. Systematic risk is the risk facing a firm due to macroeconomic factors such as monetary policy changes, exchange rate adjustments, oil prices etc. Market risk premium

This section highlights how monetary policy is able to influence riskiness of stocks. This may also help to explain heterogeneity in industry and individual stock returns. Two mechanisms have been put forward to explain how monetary policy influences the riskiness of stocks. These are the interest rate channel and the credit channel. Interest rate channel According to the interest rate channel, tightening of monetary policy leads to higher interest payments and to lower net profits (obtained after subtracting interest payments from gross profit) and cash flows of corporations. This is known as the cost of capital effect. If profits and cash flows are lower, then the expected share price (present value of future free cash flows discounted by the relevant risk factor) would be lower (Bean, Larsen and Nikolov, 2002 & Bernanke & Gertler,1995). According to Mishkin (1995), tightening of monetary policy reduces the supply of money. Since individuals have less money to spend, they reduce spending on equity. This lowers the price of equity and consequently stock returns. Monetary tightening, by raising interest costs, increases the financial risks facing firms.
YOJANA August 2010

This is the risk of not being able to meet interest and principal payments on debt contracts with financial institutions. Business risks may rise if firms are unable to meet operating expenses. Monetary tightening may induce a reduction in current consumption and investment expenditure. Households facing higher borrowing costs reduce consumption expenditure. Moreover, consumer confidence falls as lower expenditure in the macro e c o n o m y c r e a t e s recessionary fears. Reduced investment expenditure may lead to job losses. This contributes to lower consumer confidence. If both business and financial risks rise, total risk would increase. In such a scenario, investors would demand higher returns for remaining invested in risky stocks. Other things remaining same, the required return can be obtained only if the current share price falls. Share prices would fall on expectations of lower future corporate profitability (higher wages and interest payments) and reduced future consumer spending. A fall in the value of stock indices m a y l o w e r i n v e s t o r wealth. This would in turn reduce consumption expenditure. This may, in the long run reduce share

prices even further. This is known as the wealth effect. Interest rate channel may help to explain heterogeneity observed in industry stock returns. Certain industries involving huge capital outlays on plant and machinery rely on debt financing and are more sensitive to interest rate shocks. Further, industries such as real estate and leisure experience lower demand when monetary tightening takes place. Thus, the interest rate channel may help to explain industry specific effects of interest rate shocks. Broad Credit Channel The broad credit channel comprises of the bank lending and balance sheet channel. According to the bank lending channel, monetary tightening reduces supply of bank loans. This lowers investment spending by firms and lowers total output in the economy. The bank lending c h a n n e l a ff e c t s s m a l l f i r m s adversely that would not be able access other sources of credit. However, companies listed on the stock exchange may not be affected. Listed companies may be regarded as large sized companies who may be able to obtain credit on the best terms and may not suffer from credit rationing associated with monetary tightening.
35

According to the balance sheet channel, tight monetary policy might adversely affect the balance sheet of companies by reducing cash flow net of interest and reducing the availability of collateral to obtain loans. Lower cash flows reduce the net worth of firms. Cash flows are lower because interest burden is higher. Secondly, tighter monetary policy may reduce spending by the banks downstream customers. This would indirectly reduce cash flows of firms even further. Consumption spending falls as borrowing costs facing households are higher and consumer confidence is low. Thus, households prefer to substitute current consumption for future consumption. The credit channel does not operate independently but works in conjunction with the interest rate channel. Weaker balance sheets increase the external finance premium (difference between the cost of internal funds and external funds) due to higher risks in lending to financially weak borrowers. Thus, the worsening of borrower s balance sheet worsens the availability of credit and reduces investments. This would further lower profits and cash flows leading to a further worsening of balance sheet. This may not only lower equity returns
36

but also lower aggregate demand and hence economic growth in the long run. This would lower share prices even further as share prices may react to macro- economic fundamentals. This is known as the financial accelerator principle (Bernanke and Gilchrist, 1999). The external finance premium rises for all firms but the size of the external finance premium is higher for smaller firms. The size of the external finance premium depends on the net worth of firms. Thus smaller, younger and more financially constrained firms may face a higher external finance premium. This is due to higher information asymmetry in case of such firms. Firms face different discount rates consequent to monetary policy changes depending on their risk profile. As a result some firms, depending on their risk profile may not be able to obtain credit even at a higher rate of interest. This may help to explain heterogeneity observed in individual stock returns to monetary policy changes. According to the credit channel view of monetary policy, firms that are subject to a higher degree of informational asymmetry would suffer a greater decline in share prices. Smaller firms, younger firms and more financially constrained firms face risks that are increasing in the

degree of information asymmetry (Fazzari, Hubbard and Petersen, 1988). The risks facing firms are the ability to cover fixed and variable costs. According to Arnold (2005), information asymmetry may be defined as a situation where one party to a transaction has more information with respect to the risk and return than the other party. Thus borrowers and owners may have superior knowledge regarding risk and return as compared to lenders and investors. Information asymmetry creates a wedge between the cost of internal and external finance (external finance premium) due to higher risk perception. External finance premium which is a proxy for the individual firm risk profile rises in the event of monetary policy tightening. Thus stock returns which are present value of future cash flows adjusted for risk falls for younger, smaller and more financially constrained firms. Even unconstrained firms may face a certain degree of information asymmetry and they too may experience volatility in stock returns. However, the heterogeneity lies in the different degrees of stock return volatility. Investors may sell high risk stocks and buy low risk stocks contributing to market volatility (Bernanke, Gertler and Gilchrist, q 1996).
(E-mail : ajay_27@yahoo.com) YOJANA August 2010

INflATION
ANAlySIS

Analyzing Inflation
Avanindra Nath Thakur

Targeting food inflation should not be viewed only as a matter of price stability but also in terms of food security for all, particularly for those who are still vulnerable despite a high and sustained growth rate of national income
YOJANA August 2010

N A country like India where more than two thirds of its population doesnt have adequate means to ensure minimum prescribed level of calorie intake, any further rise in the prices of food grains will have a disastrous impact on their living conditions. The rise in the prices of food items which can be termed as food inflation therefore should be the prime concern of policy makers of any developing country like India.

got little success in controlling inflation. Broadly, inflation in India is measured under two indices:The Wholesale Price Index (WPI) and the Consumer Price Index(CPI). CPI is calculated in four different ways, which are CPI for Industrial Workers and CPI for (UNME) in urban areas and CPI for Rural Labour and CPI for Agricultural Labourers in rural areas. Although the consumer price index reflects the prices realized at the final consumption level and is inclusive of all market distortions such as indirect taxes etc, the Whole sale Price Index is used more frequently for measuring the overall inflation because of its simplicity in calculation and regularity in the measurement process.

Except for certain incidences in 1996-97 and 1998-99, inflation remained not only more or less at the desired a level but also showed stability within a small range. However, since 2008 the situation has changed as inflation has started fluctuating at relatively higher scale. Despite several fiscal and monetary initiatives, the government has

The author is a research scholar at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi 37

During 2009 ( from April to December) the inflation based on Wholesale Price Index has shown a remarkable deviation from its past behaviour. The years 200001, 2004-05 and 2008-09 have shown higher than five percent of average annual inflation. During 2000-01 the basic factor behind inflation was the rise in the international prices of fuel. In 2004-05 along with higher international fuel prices, rise in the prices of manufacturing items because of higher growth and consequent rise in demand in the sector was responsible for overall inflation. In 2008-09 the situation was different as the inflation was primarily due to the rise in the prices of all the three items ( viz. Primary articles, fuel etc. and manufacturing items) including food products. This was mainly because of greater integration of Indian economy with the global market. However, the situation was completely different in 2009-10. During this period a substantial deviation between the WPI and CPI was found and this was more pronounced till the end of the year 2009. In June, July and August, 2009 the WPI remained negative while all the variants of CPI were well above ten percent. This difference continued till the end of the year with some decline in the gap during the later period. The reasons for the differences are quite evident. The major driver of inflation in the four
38

variants of CPIs (viz. Agricultural labour, rural labour, UNME and industrial worker) was the rise in the price of food items. The weightage of food items have been much higher in CPIs than in the WPI. The weightage of food items including processed food is 25.43% in WPI while this share is 46.20%, 69.15%, and 66.77% in CPI for Industrial Workers, CPI for Agricultural Workers and CPI for Rural Labour respectively. Therefore any increase in food prices has affected CPI much more intensely than the WPI. The year of 2009 was characterized by a significant rise in the food prices along with the massive decline in the prices of manufacturing goods on an average. Since in the WPI the food items get lower weightage and manufacturing goods have higher weightage therefore despite a significant rise in the food prices the WPI has shown negative inflation during June, July and August. On the contrary the CPI in its all variants have shown an inflation of around double digit due to higher weightage to food items than the manufactured items. In the last three months of 2009 the gap between the WPI and the CPI declined because of rise in the prices of some of the manufactured goods. During December 2009 the WPI reached as high as 7.31%. Despite several measures by the government inflation continues to be high during

first five months of 2010. The average inflation from January to May remained above 10%. Although there has been slight lowering of food inflation from 18.4% in January to 16.5% in May, nonetheless, the rise in the prices of food items remained the basic factor for overall high and persistent inflation during this period also. Some of the major contributers of food inflation are sugar, pulses, rice, vegetables, milk and tea. These items have shown a significant rise in prices over the entire period of time. The estimated areas under sugarcane and sugarcane production declined significantly from 200708 to 2009-10. According to the provisional estimates, sugar production fell from 263 lakh tonnes in the 2007-08 sugar season to 146 lakh tonnes in the 2008-09 sugar season. The sugar industry is expecting production of sugar of 160 lakh tonnes in 2009-10 sugar season. However, the demand of sugar is estimated to be around 230 lakh tonnes during the same year. Therefore one third of the demand of the sugar shall not be met with domestic production and this happens to be the most important factor behind rise in the price of sugar. Moreover, high international price of sugar has been the other important factor that puts pressure on sugar price. Furthermore, high level of divergence of sugar for other uses
YOJANA August 2010

such as production of gur etc. has also contributed significantly in the rise of sugar price. Similarly, kharif pulses after touching high level of production of about 6.4 million tonnes in 2007-08, declined to 4.78 million tonnes (fourth advance estimate) in 2008-09 and again to 4.42 million tonnes ( first advance estimate) in 2009-10. Therefore increasing demands with declining production is the major factor behind the rise in the prices of pulses in the recent period. In the same line, the production of rice fell by 12.93 million tones during the period 2008-09 to 2009-10 with ever increasing demands of rice across the vast areas of the country. This has resulted in the rise of the price of rice in the recent period. Among vegetables similar pattern is visible in cases of potatoes, onions, tomatoes, peas and brinjal which contributed to the significant rise in the food inflation. Moreover, segmentation of agricultural markets has played a very important role in making price a poor reflector of demand and supply conditions. The prices of various food grains substantially differ across regions. The price of rice in local market in eastern region has been much lower than that of in the southern region. And similarly, the prices of various vegetables also differ in a very significant manner across regions. The prime factor behind
YOJANA August 2010

this segmentation of markets has been the lack of storage and transportation facilities across the production areas. Indeed, the role of poor infrastructural facilities has remained central to this problem. The role of government procurement policies has also played an important role in distorting the prices of different food grains. This is so because of two reasons:- firstly, procurement of specific food grains at minimum supporting price raises the demand for food grains during the procurement period and leads to the rise in market prices after the shortage of available grains in the market. Short term squeezing of surplus food grains through government procurement, and frequent hoarding of food grains by many of the intermediate businessman result in an artificial rise in prices. Since the release of food grains through Public Distribution System takes place on a regular basis with certain interval of time , the artificial rise in demand and prices continue for a longer period of time till the season of new harvest. Secondly, since the procurement of food grains under the government has been quite unequal for different regions, it also contributes in further segmentation of agricultural market in India. Even though farmers in backward regions are ready to sell their products at a lower rate and sometimes much lower than the

prescribed MSP in absence of government procurement, it is not able to counter the problem of artificial rise in prices due to the entire benefits accrued by the middleman. So, they hoard substantial amounts in order to get higher profit and therefore an artificial rise in demands and hence price can not be avoided in this situation. The prevalence of food inflation is a matter of major concern for several reasons. Firstly, the governments ability to control inflation has remained limited in case of rise in food price. This is because, the rise in the food prices comes from supply side bottlenecks of Indian agriculture. With a given level of infrastructure it is very difficult to raise the production of food grains in a short period of time. Secondly, any monetary approach such as tightening of money supply through the raising of the various reserve ratios have very limited or even negligible impact on the lowering of the demand of the food items as they face almost inelastic demand. Thirdly, food inflation in almost all circumstances affects poorer section of the society the most and it is one of the biggest obstacles in achieving food security in the country or even in making an attempt towards it. Fourthly, it is a problem having more implications for future than the present. This is because of the fact that there is very little
39

possibility of increasing the area under cultivation, given the pressues of urbanization that recent years have witnessed. Moreover, the demand for food will continue to grow as income levels rise. In recent years, the government of India has taken several initiatives to overcome supply bottlenecks like the initiation of Rashtriya Krishi Vikash Yojana with an allocation of Rs 25000 crores during the period of the 11 th Plan for the purpose of raising the level of infrastructure in the agricultural sector as a whole and the National Food Security Mission which has the targets to raise the production of rice, wheat and pulses by 10, 8 and 2 million tonnes by the end of 11th Five Year Plan. The merit of the latter scheme is that it takes area approach and measures based on local conditions which are essential for making effective implementation of the scheme. Several immediate measures have been taken in order to control food inflation. Some of them are reduction in import duties to zero for rice, wheat, pulses, edible oils, and sugar, reduction of import duty on many processed foods, releasing foods to a certain extent from the Food Corporation of India, subsidy on imported pulses, banning of the export of several food items such as non basmati rice, edible oils and pulses, suspension of future trading in rice, urad, and
40

sugar etc. However all these efforts though necessary and effective, lack completeness and sufficiency. A long term approach to eliminate supply side bottlenecks in agriculture along with certain short term measures are needed to be undertaken on a priority basis. Several other crops such as sugarcane, vegetables,etc should be included under the National Food Security Mission in order to raise the production of these items to match the demand in near future. Other crops such as coarse cereals including jwar, bajra etc should be given emphasis in order to enhance the production so that a substitute for main food grains should be available in sufficient amount. Urgent steps are required for increasing agricultural productivity. A time bound and extensive irrigation system needs to be built on a priority basis. Techniques for dryland farming need to be developed. Agricultural research needs an urgent augmentation of funds. In order to break the segmentation of the agricultural market in India, a massive investment in the rural infras tr u ctu r e s u ch as development of road, railways, communication system, and provision of storage facilities etc. should be undertaken on a greater scale. This should

be accompanied with more rationalization of government food grain procurement policies in terms of balanced regional approach. There is a need to develop skill of farmers in such a way that they can improve their techniques of production as they usually lack the knowledge of appropriate proportion of seed, fertilizer and timing of various methods used in the farming processes. Further, as there is continuous rise in the cost of production in agriculture any curtailment of subsidy given to them without prior provision of enhancing the productivity would further raise the prices of the products. Hence any policy in this regard needs proper attention. Finally, small scale agro-based industries should be promoted at localized levels so that with vertical integration at the local level there would be a check on the prices of processed food with simultaneous provision of higher quality employment in the rural areas. Ta rg e t i n g f o o d i n f l a t i o n should not be viewed only as a matter of price stability but also in terms of food security for all, particularly for those who are still in vulnerable despite a high and sustained growth rate of national q income.
(E-mail : avanindra.cesp@gmail.com) YOJANA August 2010

INflATION
DEBATE

Measuring Inflation
Shivkumar Biradar

CPI inflation is more important from the point of view of controlling inflation, especially in a country like India, where the existence of the unorganized sector and incidence of poverty is reasonably high

NFLATION REFERS to percentage change in the price of a set of goods and services over a period of time; it represents change in overall price level in the economy. If the inflation for a particular week is say 8%, it means price level has increased by 8% against the same week during previous year. Inflation is basically of two types- Cost-push inflation and demand-pull inflation. Demand- pull inflation refers to increase in the price level due to demand being in excess of supply in the short run. Cost-push inflation is due to autonomous increase in the cost of components, including labour and material costs.

and interest rate, because higher rate of inflation leads to negative returns on saving. It has severe impact on poor through unequal distribution of income & wealth. Higher inflation increases the cost of money and makes it difficult to maintain the competitiveness of domestic industry in a liberalized trading era. Measures of Inflation in India: The issues of measurement of inflation has got a lot of attention in India. Presently, there are different primary measures of inflation - the Wholesale Price Index (WPI) and four measures of the Consumer Price Index (CPI) - the CPI for Industrial workers (CPI-IW); CPI for agricultural labourers (CPI-AL); CPI for rural labourers (CPI- RL) and CPI for urban non-manual employees (CPIUNME). In addition to this, Gross

When overall price level rises, it erodes the purchasing power of income, causes rise in the cost of living and lowers the values of savings. Savers and investors closely track the link between inflation

The author is on the Faculty of the ICFAI National College, Solapur. YOJANA August 2010 41

Domestic Product (GDP) deflator provides implicit economy-wide inflation. Inflation based on WPI is considered as representative figure for the whole economy.

Pt-1] * 100

Inflation Rate = [(Pt

- Pt-1) /

Where P t = price indices of current year Pt-1 = price indices of previous year Wholesale Price Index (WPI) As its name suggests Wholesale Price Index (WPI) tracks wholesale prices in India. WPI is the weighted price index of a basket of goods consisting of 435 commodities,

which are categorized under three major groups: i) Primary Articles; (98 commodities) ii) Fuel power, light and lubricants; (19 commodities) iii) Manufactured products; (318 commodities). These three are again divided into smaller sub-groups. WPI is compiled on a weekly basis. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. Table 2: shows inflation by on overall series of WIP and groups of WPI series. More volatility is found in fuel group based inflation followed by primary article group as compared to manufacture products group.

Consumer Price Index (CPI) Consumer Price Index is measured on the basis of the change in retail prices of a specified set of goods and services on which a particular group of consumers spend their money. It reflects the cost of living index condition for a homogenous group based on retail price. It actually measures the increase in price that a consumer will ultimately have to pay for. India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation. CPI = (Price of basket in current year) / (Price of basket in base year) * 100

Table - 01: Relative importance of commodities in wPI basket Commodity Name I Primary Article (A) Food Articles a. Food Grains(Cereals+Pulses) b. Fruits & Vegetables c. Milk d. Eggs,Meat & Fish (B) Non-Food Articles a. Fibres b. Oil Seeds c. Other Non-Food Articles (C) Minerals a. Metallic Minerals b. Other Minerals II Fuel Power Light & Lubricants (A) Coal Minning (B) Minerals Oils (C) Electricity
Source: http://www.mospi.gov.in/cso 42 YOJANA August 2010

weight 22.03 15.40 5.01 2.92 4.37 2.21 6.14 1.52 2.67 1.95 0.48 0.30 0.19 14.23 1.75 6.99 5.48

Commodity Name III Manufactured Products (A) Food Products (B) Beverages Tobacco & Tobacco Products (C) Textiles (D) Wood & Wood Products (E) Paper & Paper Products (F) Leather & Leather Products (G) Rubber & Plastic Products (H) Chemicals & Chemical Products (I) Non-Mettallic Mineral Products (J) Basic Metals Alloys & Metals Products (K) Machinery & Machine Tools (L) Transport Equipment & Parts All Commodities

weight 63.75 11.54 1.34 9.80 0.17 2.04 1.02 2.39 11.93 2.52 8.34 8.36 4.29 100.00

Table-02: Inflation based on groups of WPI series Year INFLATION RATE BASED ON wPI SERIES 8.0 4.6 4.4 5.9 3.3 7.2 3.6 3.4 5.5 6.5 4.4 5.4 4.6 8.4 INFLATION RATE BASED ON PRIMARY ARTICLES (wPI) 8.2 8.4 2.7 12.1 1.2 2.8 3.6 3.3 4.3 3.6 2.9 7.8 7.5 10.2 INFLATION RATE BASED ON FuEL POwER LIGHT & LuBRICANTS (wPI) 5.1 10.4 13.8 3.3 9.1 28.5 8.9 5.5 6.4 10.1 9.5 5.6 1.0 7.5 INFLATION RATE BASED ON MANuFACTuRED PRODuCTS (wPI) 8.5 2.1 2.9 4.4 2.7 3.3 1.8 2.6 5.7 6.3 3.1 4.4 4.9 8.1

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Source: http://www.mospi.gov.in/cso

CPI inflation rate = [(CPIt CPI

) / CPI t-1] *100 t-1

Where CPI t = consumer price index of current year

CPI t-1 = consumer price index of previous year

Table-03: Divergence between CPI and WPI Inflation SR. PERIOD INFLATION RATE BASED ON wPI SERIES 4.5 5.3 7.5 8.0 8.9 11.8 12.4 12.8 12.3 11.1 8.5 6.1 INFLATION RATE BASED ON CPI - Iw 5.5 5.5 7.9 7.8 7.8 7.7 8.3 9.1 9.8 10.5 10.5 9.7 SR. PERIOD INFLATION RATE BASED ON wPI SERIES 5.0 3.5 1.2 1.3 1.4 -1.0 -0.5 -0.2 0.5 1.5 4.8 7.3 INFLATION RATE BASED ON CPI - Iw 10.5 9.6 8.0 8.7 8.6 9.3 11.9 11.7 11.6 11.5 13.5 15.0 43

1 2 3 4 5 6 7 8 9 10 11 12

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

13 14 15 16 17 18 19 20 21 22 23 24

JAN-09 FEB-09 MAR-09 APR-09 MAY-09 JUN-09 JUL-09 AUG-09 SEP-09 OCT-09 NOV-09 DEC-09

YOJANA August 2010

As mentioned earlier there are four measures of CPI. Set of goods and services for each CPI measure is different based on the consumption pattern of the particular group. For example, for CPI for industrial worker (CPI-IW), a basket of 260 commodities is tracked; for urban non manual employees (CPIUNME), 180 commodities, for agricultural labours (CPI-AL), just 60 commodities. Here again, each commodity is given a different weightage. For example, the CPIAL would give a greater weightage to food grain than the CPI-UNME, since a greater proportion of the income of this group would go towards the purchase of food grain. CPI-IW has got a broader coverage of set of goods and services than others measures of CPI. That is why CPI-IW is extensively used as cost of living index in organized sector. CPI is available on two monthly basis because of difficulty in data collection for various categories of goods and services from organized and unorganized

markets for the various measures of CPIs. Divergence between CPI and WPI Inflation There is found to be divergence between the CPI and WPI based Inflation figures, as shown in the Table 3 and Chart 1. This divergence is due to the following reasons : F o o d a r t i c l e s g e t l a rg e r weightage in CPI, varying from 46% in CPI-IW to 69% in CPI-AL, but it has only 22.03 % weightage in WPI series. Hence, the CPIs are more responsive / sensitive to changes in prices of food articles. Price of services - such as, education, transport and communication, medical care, cable TV, house rent, recreation and amusement services, etc. has considerably higher weightage in CPI-IW The fuel, power light and lubricants group has got a significantly higher weightage

in the WPI (14.23%) than the CPIs (5.5 to 8.4%). Therefore, changes in international crude oil prices have a greater influence on WPI than on the CPIs. Base-year effect is also different for the two since base year for CPI-IW is 2001 where as for WPI series it is 1993-94. It is noted that, CPI-IW has recorded very similar trend as the food articles series of WPI despite the divergence of the overall series of WPI in the recent period (Table-4 and Chart 2).

Many economists today feel that WPI does not actually measure the exact price rise that a consumer has to bear, since it tracks wholesale prices. Further, the basket of commodities included for WPI computation were worked out in 1993- 94, and many items have become irrelevant since then since they are not used by consumers any more. Revision of base year is not being done as frequently as it should be done in an economy

Source: http://www.mospi.gov.in/cso 44 YOJANA August 2010

SR.

PERIOD

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

Table-4: Co-movement of Inflation Based on WPI (Food Articles) and CPI-Iw INFLATION RATE INFLATION RATE INFLATION RATE BASED BASED ON CPI-Iw BASED ON wPI FOOD ON wPI PRIMARY ARTICLES ARTICLE 5.5 2.1 4.9 5.5 3.4 7.3 7.9 5.9 9.9 7.8 5.5 8.9 7.8 5.7 9.5 7.7 5.9 10.6 8.3 6.0 10.8 9.1 6.9 11.4 9.8 7.7 11.6 10.5 9.9 12.4 10.5 10.3 12.1 9.7 10.0 11.1 10.5 11.0 10.7 9.6 9.4 6.9 8.0 7.5 5.2 8.7 8.6 6.6 8.6 8.4 6.3 9.3 10.9 6.5 11.9 14.2 7.6 11.7 14.1 8.0 11.6 14.2 8.4 11.5 13.0 8.7 13.5 16.7 11.8 15.0 19.2 14.9

Source: http://www.mospi.gov.in/cso

YOJANA August 2010

45

that is changing so fast. It also does not include services. In spite of this, India continues to use WPI for measuring inflation because there is only two week time lag in reporting WPI numbers whereas measuring the four kinds of CPI indices involves a huge time lag of about two months. GDP Deflator: The GDP deflator can be another means of measuring inflation. It is a measure of the level of prices of all new, domestically produced, final goods and services in an economy and is calculated as a ratio of Nominal GDP (GDP at current prices) to Real GDP (GDP at constant prices.) It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. It does not depend on a fixed basket of goods but covers the level of prices of an entire range of economic activities including domestically produced, final goods and services. The GDP deflator is calculated quarterly with a lag of two months since 1996. If the value of price deflator is 300 it means that the current-year price is three times the base year. wPI Inflation and GDP Deflator: Table 5 shows the long term relation between Inflation based

o n C P I - I W, W P I a n d G D P Deflator Suggestions Reconstruction of wPI series: Series of goods which are used for WPI as representative should be revised . It should cover significantly higher number of commodities from both organised and unorganised sectors. There is also a need to supplement the new series of WPI with a service price index to improve its overall coverage. In addition to that, adoption of common base year for Gross Domestic Product (GDP) and WPI series would help to reduce gap of inflation data. Comprehensive CPI: A consumer price index (CPI) is a measure estimating the cost of living conditions of different homogenous group of the population rather than the total population and is calculated on the basis of retail price changes of constant set of goods and services as per the spending pattern of the group of the population. However a wide based CPI for the country as a whole, including both goods & services, has greater relevance for monetary policy formulation. It is advisable to implement the suggestion given by the National Statistical Commission in 2001 to form a single comprehensive

CPI by reshuffling the prevailing four CPIs. This would improve the accuracy of computing inflation data and help policy making and track price movement. As per IMF statistics only 24 countries use WPI as measure of inflation, while 157 countries use CPI as a measure of inflation as it catches the price change experienced by the consumers. On this background RBI had taken a step forward and prepared a document on CPI (Rural) and CPI (Urban) which could be a representative CPI for the country. Conclusion: The wholesale price index provides an idea about the average price level of goods traded in wholesale market whereas the consumer price index (CPI) measures the final cost paid by consumers. CPI inflation is more important from the point of view of controlling inflation, especially in a country like India, where the existence of the unorganized sector and incidence of poverty is reasonably high. Obviously, both the indices have their own merits and demerits. However, from the conduct of monetary policy point of view, right tracking of inflation for the country as a whole with limited time lag is important. In that sense CPI scores over WPI that is why 157 countries out of 181 countries use CPI for tracking inflation. Inflation figures quoted by government or RBI with regard to WPI do not reflect the real picture - the real inflation as felt by the consumer would be significantly higher. q
(E-mail : shiv21biradar@gmail.com) YOJANA August 2010

Table-05: Long relationship of WPI Inflation, CPI-IW and GDP Deflator Sr. No. 1 2 3 Decades 1981-82 to 1990-91 1991-92 to 2000-01 2000-01 to 2008-09 wPI 7.1 7.8 5.2 GDP Deflator 8.7 8.1 4.6 CPI-Iw 9.0 8.7 5.3

Source: http://www.rbi.in 46

COMMuNITy DEVElOPMENT
A STuDy

NSS for Social Asset Creation

P V Basheer Ahammed

Services, Government of India in the year 1969-70 as a student centered programme. An associa t i o n o f s t u d e n t s , irrespective of caste, creed, colour, gender and politics, it provides a common platform for them to work with and among people, to encounter social realities, to develop a sense of social and civic responsibility, to acquire leadership qualities and democratic attitude, to develop competence required for group living and sharing of responsibilities etc. It fosters a creative interaction between

HE NATIONAL Service Scheme was launched by the Ministry of Education and Youth

institutions of higher learning and the community. As part of its activities, NSS conducts a special camping programme of about seven to ten days in some adopted villages or other areas. During this period the programme officer and about fifty senior volunteers camp in the selected site and carry on projects like construction, repair and renovation of roads, canals, dams, houses, water reservoirs, play grounds, gardens, etc. They also engage the local people in discussions on topics of current relevance, organize talks, street plays and workshops on issues relating to life style diseases, yoga, palliative care, entrepreneurial programmes, AIDS awareness, and other

Apart from personality development of the volunteer, these projects seem to be economically and socially viable, and can be encouraged as a means for creating community assets

The author is Lecturer, P G Department of Commerce, P S M O College, Tirurangadi, Kerala. YOJANA August 2010 47

Table 1 : Profile of the sample units District Name of College Providence Womens College Kozhikode zamorins Guruvayurappan College Govt. Arts & Science College Farook College Wayanad St. Marys College, S. Bathery PSMO College, Tirurangadi Malappuram MES College, Valancherry NSS College, Manjeri MEASS College, Areacode Palakkad Thrissur Total Table 2: Major Activities NSS College, Ottappalam Mercy College, Palakkad Christ College, Irinjalakkuda MES Asmabi College, Vemballore No. of NSS units 2 2 3 3 3 4 3 2 2 1 2 4 2 33 unit Code 15, 116 18, 108 17, 107, 155 21, 109, 140 14, 159, 160 26, 74, 99, 131 91, 105,114 29, 78 73, 174 36 6, 34 20, 49, 70, 147 53, 95

Items Road Check Dam Water Reservoir (No.) House (No.) School Playground Veg. Flower garden

kms. 11 1 1

Construction Projects 2004-05 2005-06 units units kms. engaged engaged 16 16 24 1 1 3 1 2 2 Renovation Projects
No. of units engaged 2004-05 2 4 2 2005-06 4 -8 4 2 -2 -2 2

2006-07 units Kms. engaged 11.5 16 1 2 3 5

Items Canals Roads Water tank, ponds, etc. Premises of: School IPM Juvenile Homes Hospital (PHC) Colonies Panchayath Office 48

2006-07 2 4 3

2 2 2 YOJANA August 2010

relevant issues. The programme thus leads to creation of some form of social asset . A special camping programme by one NSS unit costs the public exchequer Rs.15000. With more than two million volunteers and 20,000 units in the country, the total expenditure on this account will come to around Rs.30 crores. The present paper tries to assess the worth of the social assets created by some of the major projects (construction, renovation and reclamation works) done by selected NSS units during their special camps for three years in terms of cost

involved and benefit derived. The study covers the special camping projects of the NSS units under the University of Calicut, spread over five districts Kozhikode, Wayanad, Malappuram, Palakkad and Thrissur during the years 200405, 2005-06 and 2006-07. Table-1 shows the distribution of sample units drawn from the colleges in the five districts under the jurisdiction of the University of Calicut. Table-2 shows the major projects undertaken by these units. In order to estimate the worth of the assets generated, these

assets are presented in their equivalent rupee terms, valued on the basis of PWD schedule of rates prevailing then. In the case of construction of roads, the earth work in hard soil is valued under three segments i.e., Earth cutting @ Rs.756/10m 3 , Earth filling @ Rs.1028/10m 3 and Sectioning and consolidating @ Rs.60.50/10m 2. In the case of renovation of old defunct roads, they are valued at the rate of sectioning and consolidation rate only, i.e., @ Rs.60.50/10m2 (m3 = length x width x height in metres, m 2 = length x width in metre). In the case of water reservoir,

Table 3: Major Project Construction of Road 2004-05 No. of units 3 No. of volunteers 120 Length of roads in kms 2 Estimated worth (Rs) 2,95,740 Cost involved 15000pu 45,000 Benefit/ Incremental cost ratio benefit/head (Rs) 6.57 2165 (722%) 2051 (684%) 2617 (872%) 740 (247%) 1705 (568%) 1669 (556%) 1759 (586%)

Name of Colleges

Farook College

Govt. Arts & Science NSS, Manjeri

131

3,07, 980

45,000

6.84

100

2,91,660

30,000

9.72

MES, Valanchery

150

1,56,030

45,000

3.47

PSMO, Tirurangadi

250

3.5

5,01,225

60,000

8.35

NSS, Ottapalam

72

1,41,750

15,000

9.45

Total

16

823

11.5

16,94,385

2,40,000

7.06

YOJANA August 2010

49

Table 4 : Other Major Projects 2004-05 Name of College No. of units Nature of work Area Estimated worth of Asset (Rs.) 60,000 Cost Benefit/ Increinvolved @ cost ratio mental Rs.15000 pu benefit (Rs.) (Rs.) 30,000 2:1 129 (43)

Providence Womens College, Calicut Christ, Irinjalakuda St. Marys, Sulthan Bathery NSS, Ottappalam

Removal of weeds, wastes and cleaning the premises of Institute of Palliative Medicine Sectioning and consolidation of surface of old roads Making water reservoir for local people and wild life Construction of a tiled house for a widow Cost of Asset created by Volunteer input @ 40%

10 Acres

4000 metres 800 sq. metres 500 sq.ft.

72,600

60,000

1.21 : 1

63 (21) 103 (34) --21 (7) 115 (38)

60,480

45,000

1.33 : 1

1,25,000 50,000

Nil* -30,000

--1.12 : 1

MEASS, Areacode Total

Renovation and cleaning the surface of canals

3000x1.5 metres

@ Rs.75/10m2 = 33,750 2,76,830

12

1,65,000

1.68 : 1

Figures in bracket indicate percentage incremental benefit per volunteer Table 5 : Major Project Construction of Road 2005-06
Name of College No. of units Length of engaged road in kms 3 3 3 2 3 4 2 4 24 2 1.5 3.5 2.5 1.2 3 .75 1.5 16.00 Total Estimated worth (Rs.) 2,87,580 2,13,645 5,11,425 3,59,475 1,95,038 4,31,370 1,10,903 2,21,805 23,31,241 Govt. Expenditure @ 15000 per unit (Rs.) 45,000 45,000 45,000 30,000 45, 000 60,000 30,000 60,000 3,60,000 Benefit/ Cost ratio 6.39 : 1 4.75 : 1 11.36 : 1 11.98 : 1 4.33 : 1 7.19 : 1 3.70 : 1 3.70 : 1 6.48 : 1 Incremental benefit (Rs.) 1912 (637) 1511 (504) 3110 (1034) 3295 (1098) 1000 (333) 1857 (619) 640 (213) 809 (270) 1699 (566)

Farook College, Calicut Govt. Arts & Science, St. Marys, Sultan Bathery NSS Manjeri MES Valanchery PSMO Tirurangadi MEASS Areacode Christ Irinjalakuda Total

Figures in bracket indicate percentage incremental benefit per volunteer 50 YOJANA August 2010

Table 6 : Other Major Projects 2005-06 College No. of units Nature of work Area Estimated Cost @ Benefit/ Incremental worth of Asset Rs.15000 Cost ratio benefit (Rs.) per unit (Rs.) (Rs.) 1,68,000 30,000 5.6 1749 (583)

Providence Womens

Removal of weeds, wastes and cleaning the premises of Juvenile Home, Vellimadukunnu Renovation and clearing the surface of canal, Wyanad

28 Acres

zamorins Guruvayurappan Total

3000 x 1.5 mtr.

33,750

30,000

1.13

63 (21)

2,01,750

60,000

3.36

853 (284)

Figures in bracket indicate percentage incremental benefit per volunteer

Table 7 : Major Project Construction of Road 2006-07 Name of College No. of units Length of engaged road in kms Estimated worth (Rs.) Govt. Expenditure @ Rs.15000 pu (Rs.) 30,000 Benefit / Cost Ratio Incremental Benefit (Rs.)

Providence Womens College Govt. Arts & Science College NSS Manjeri MES Valanchery PSMO, Tirurangadi MEASS, Areacode

1,35,630

4.52

1224 (408) 2361 (787) 3315 (1105) 1260 (420) 1712 (571) 2117 (706) 1929 (643) 63 (21) 1541 (514)

3 2 3 4 2 16

2 2.5 1.5 2.5 2 11.5 4 15.5

2,79,420 3,61,515 2,34,045 4,02,315 2,87,580 17,00,505 72,600 17,73,105

45,000 30,000 45,000 60,000 30,000 2,40,000 60,000 3,00,000

6.21 12.05 5.20 6.71 9.58 7.09 1.21 5.91

Christ, Irinjalakuda Total

4 20

Figures in bracket indicate percentage incremental benefit per volunteer YOJANA August 2010 51

Table 8 : Other Major Projects 2006-07

College No. of units 3 Nature of work Estimated worth (Rs.) 62,000/Cost @ Rs.15000 pu 45,000 Benefit/ cost ratio 1.38 Incremental benefit 113 (38)

St. Marys, Sulthan Bathery

Construction of playground 4000 sq.m. cutting soil : 1000 sq.mts. @ Rs.756/10m3 + Sectioning 4000 sq.m. @ Rs.60.50/10m2 = 37800 + 24200 Construction of two concrete houses @ 500 sq.ft. plinth area each, estimated cost Rs.350000, NSS input Construction of a pond for water conservation 12m x 4m x 4m @ Rs.756/10m3

Farook

1,50,000/-

45,000

3.33

771 (257)

zamorins Guruvayurappan

14,515/-

30,000

0.48

-163 (-54)

Total

2,26,515/-

1,20,000

1.80

272 (91)

Figures in bracket indicate percentage incremental benefit per volunteer it is valued at the hard soil cutting rate, i.e., @ Rs.756/10m3. Removal of weeds, wastes and cleaning the premises, valued at the rate of Rs.1.50 per square metre. Construction of tiled house is valued at Rs.250 per sq. ft. and the volunteer contribution in the form of labour is estimated @ 40% of the estimated cost. Construction of concrete houses are valued @ Rs.350 per sq.ft. and the volunteer contribution @ 40% of the estimated cost. Renovation and cleaning the surface of canals are valued at a rate slightly higher than the rate
52

of sectioning and consolidation of roads. i.e., at the rate of Rs.75/10m 2. Tables 3, 5 and 7 shows the detail in case of road construction for the years 2004-05, 200506 and 2006-07 respectively and Tables 4, 6 and 8 show the same for other projects in these respective years. FINDINGS The major findings of the study are: In 2004-05, 16 units engaged in construction of village

roads with a total length o f 11 . 5 k m s . T h e t o t a l estimated worth of the asset is Rs.16,94,385, leading to a per unit contribution of Rs.1,05,274. The benefit/ cost ratio is 7.06:1 and the percentage increase in the incremental benefit per volunteer is 586%. 12 units were involved in other major projects for 2004-05, the total worth of assets created was Rs.2,76,830, leading to a per unit contribution of Rs.23,069. Benefit / cost ratio 1.68:1, percentage
YOJANA August 2010

increase in the incremental benefit is 38%. In 2005-06, 24 units constructed new roads with a total length of 16 kms with estimated worth of around Rs.23,31,241, contributing Rs.97,135 per unit. Benefit / cost ratio 6.48: 1, percentage increase in the incremental benefit per volunteer is 566%. For other major projects four units contributed to an asset creation of Rs.2,01,750, resulting in a per unit contribution of Rs.50,438. The benefit/cost ratio is 3.36:1 and the percentage increase in the incremental benefit per volunteer is 284%. In 2006-07 16 units constructed new roads of a total length of 11.5 kms, worth Rs.17,00,505, contributing Rs.1,06,750 per unit. 8 units created assets worth Rs 2,26,515/ The government expenditure for sixteen special camps comes to Rs.2,40,000 only and hence, the overall benefit / cost ratio is 7.09:1. NSS College, Manjeri has the highest benefit/cost ratio

12.05:1 and Providence Womens College, Calicut has the lowest 4.52:1. The Christ College, Irinjalakuda which renovated old roads, has a benefit / cost ratio of 1.21:1 as its valuation is at low rates, compared to construction works. The incremental benefit per volunteer on an overall basis is Rs.1,929 and the percentage increase of incremental benefit over cost per volunteer (Rs.300) is 643%. The highest incremental benefit is Rs.3315 (1105%) and lowest Rs.1224 (408%) for NSS College, Manjeri and Providence Womens College, Calicut, respectively. The overall benefit / cost ratio of these projects is 1.80:1, the highest being that of Farook College 3.33:1 who constructed two concrete houses of 500 sq.ft. each and the lowest 0.48 : 1, that of zamorins Guruvayurappan College who constructed a pond for water conservation where the apparent worth of the asset is calculated at low rates when compared to other construction works.

The remaining units engaged in the renovation and reclamation of ponds, construction of check dams, cleaning of colonies, workshop on jam and squash preparation, awareness programmes, medical camps, etc. These projects, due to practical difficulties, are not quantified in rupee terms.

Conclusion National Service Scheme aims at personality development of the volunteer. Community service is only a means by which the volunteer acquires skills and expertise for the development of his personality. Hence, it is purely a student centered programme where the major focus is the student and his personality and the benefits to the society is only a by-product of the process. Even so, the study proves that the benefit derived from the NSS projects far outweigh the cost involved in them. That is, apart from the personality development of the volunteer, these projects seem to be economically and socially viable, and can be encouraged as a means for creating community assets.
q

(E-mail : pvbaman@gmail.com)

YOJANA August 2010

53

NREgS
RESEARCh

Livelihood for the Marginalised

J Cyril Kanmony

The National Rural Employment Guarantee Scheme has brought in a silent revolution in the rural areas by providing stable employment to the vulnerable and marginalised
54

HE MOST fundamental of all human rights is the right to life. Every person has the right to live a dignified life. A life of dignity cannot be ensured by providing free food, clothes, medicine and other necessities but by providing a means of livelihood. The various employment generation programmes of the government, culminating in the present Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) is a recognition of this fact. The MNREG Scheme is the largest employment programme in the human history (Shah, 2008). Though the scheme was initially introduced in only 200 districts, it is now functioning in all the districts of the country. It has been introduced in a phased manner, phase-I, 200 districts (2006-07), phase-II, 130 districts (2007-08) and phase-III, all the remaining districts (April 2008).

employment programme, demand driven, universal, participatory planning and implementation, good governance and more female oriented. The NREGS is providing livelihood security by providing 100 days of employment within 15 days of application to all people, who have applied for wage employment. If no work is provided within 15 days of application, the applicants will be eligible for unemployment allowance. The work should be given within 5 km radius from the applicants residence and the work site should have all basic facilities. The payment for the work must be made within 15 days. The workers are also eligible for medical aid. The scheme has guaranteed wage employment to 4.47 rural households. During the past 3 years 19.49 lakh works have been taken up under this scheme. The thrust areas of work under the scheme are water resource development and water conservation. It is, further, reported that 75 per cent of the works are irrigation related and so it will certainly enhance the productivity in agriculture.

Impact of Overview

NREGSAn

The salient features of NERGS are livelihood security, right based

The author is Professor of Economics at Scott Christian College, Nagercoil YOJANA August 2010

The increase in productivity will eventually increase the dependency of people on agriculture and reduce the dependency on government sponsored employment schemes. It is also estimated that the additional flow of income is Rs.18,155 crore (Lakshman, 2009), (Prasad, 2009), (Roy, 2009), (Singh, 2009). Swaminathan (2009) points out that the employment generated is over 450 crore person days and the wage payment is over Rs. 35,000 crore while, Prasad, (2009) asserts that through this scheme, the government is pumping about Rs.30,000 crore every year into the rural economy Above all these, it is found that of these man days of employment generated, the major share is enjoyed by women and dalits and adivasis. The most benefited because of this scheme are the poorest and most marginalised communities particularly SC/ST or people below poverty line. The scheme has not only raised the scale of employment, but has also put an end to the exploitative practice of private contractors. India is experiencing employment growth after the phase of jobless growth during the 1990s only because of NREGS .Thanks to the programme, every week a huge purchasing power is being pumped into the rural economy. There an increase in the social capital as most of the work is directed towards assets creation It also increases saving of the people particularly the rural poor to a great extent. According to Mathur (2007) 2.10 crore households were given employment to the extent of 90 crore person days in the year 2006. The total number of households sought employment was 2.16 crore. It means that 97 per cent of households which sought employment got wage employment on an average of 45 days in the year.
YOJANA August 2010

Khera and Nandini Nayak (2009) say 71 per cent of persons working under the NREG are SC/ST and 82 per cent are illiterate women against 52 per cent uneducated men. The minimum wages fixed in different states are different and so the wage payment under NREGS also differs from state to state. The highest wage, Rs.175 is paid in Mizoram. It is followed by Kerala, Rs.121, West Bengal Rs.104, Andhra Pradesh Rs.86 and Rs. 80 in Tamil Nadu . Apart from these impacts the NREGS has also a strong positive impact on the social structure (Narayanan, 2008). High caste people are working along with dalits and tribals. They are working even in the lands of dalits as the land development works cannot be carried out in the lands of high caste people before the development works in the lands of dalits and tribes are exhausted. Thus, the National Rural Employment Guarantee Scheme not only provides livelihoods to the marginalised people but also

removes caste discrimination to a certain extent. Performance of NREGS in Tamil Nadu and Kanyakumari District In Tamil Nadu, 10 districts were covered with NREGS in the first phase and another 10 districts in the second phase. The remaining 20 districts including Kanyakumari district were covered in the third phase. The details regarding job cards issued, the person days of employment generated, total attendance, individuals employed and expenditure on water resources up to 01.03.2010 are given in Table No. 1 From the Table 1, it is seen that in Tamil Nadu, in total 1978.99 lakhs person days of employment were generated up to 01.03.2010. Of the total employment generated, 58.10 per cent is enjoyed by the SC/ST persons and women constitute 78.72 per cent. Certainly these are very encouraging aspects of the NREGS. However, only 7.68 per cent of the

Table 1:- Households, Individuals Registered and Individuals Employed in Tamil Nadu up to 01.03.2010 Category Number Households Demanded Employment 3616920 Households Provided Employment 3616920 Total Number of Households 10074512 Job Cards Issued 6212511(61.67%) SC/ST 2595065(41.77%) Person Days Generated 1978.99 lakhs SC/ST 1149.77 lakhs (58.10%) Women 1557.91 lakhs (78.72%) Total Attendance (all) 1387.53 lakhs Completed 100 Days 65.88 lakhs Completed Above 100 Days 40.66 lakhs Employment Completed 100 Days 132.79 lakhs Total Availability of Fund 216824.88 lakhs Total Cumulative Expenditure 138306.53 lakhs (63.79%) Expenditure on Water Resources 105958.21 lakhs (77.61%)
Figures in brackets are percentages to total. Source: www.nrega.nic.in, Tamil Nadu & Report, NREGS, Tamil Nadu 2008

55

Table 2:- Households Total and Registered, Individuals Total and Registered in Kanyakumari District up to 01.03.2010 Category Number Total No. of Households 158889 No. of Households Registered 90053 (57%) Total Population 580021 No. of Persons Registered 120128 (20.71%) SC/ST Persons Registered 11727 (9.76%) Minorities Registered 46792 (38.95%) Women Registered 77333 (64.38%) SC/ST Women Registered 7241 (61.75%) 120128 (100%) Job Cards issued
Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010

and average wage paid are given in Table 3. Table 3 clearly depicts that only 45.59 per cent of the total amount released is spent and only 30.74 per cent of the works sanctioned is completed so far. It is very important to indicate that the person days of employment generated in the district within one year and eleven months are 13,42,633. The average wage paid daily is Rs. 76 for the whole period. However, the average wage paid daily is only Rs. 73/- for the year 2009 and for the year 2010 (January 2010 to February 2010) it is Rs.88/-. From the facts and figures discussed above it is very clear that the National Rural Employment Guarantee Scheme has brought in a silent revolution in the rural areas by providing stable employment to the vulnerable and marginalised. In Kanyakumari District, it generated wage employment to the extent of 13,42,633 person days and on an average the number of days of works given in a year is 76 and the average wage paid is also Rs. 76/-. Thus, a person who works under NREGS is able to earn an income of Rs. 5776/- per annum. Certainly, it increases the standard of living of the marginalised people. Though there are some defects in the implementation of the Rural Employment Guarantee Scheme, it helps to remove poverty from the rural areas, provides stable income to those who are ready to do manual work, grants some relief during the period of unemployment and under employment, avoids migration of workers from rural areas to town areas. In short, it is easy to infer that, the NREGS provides not only food security but also financial security to the rural masses particularly the poor and the q marginalised.
(E-mail : cyrilkanmony@ymail.com)

households have completed 100 days/above 100 days of work and only 63.79 per cent of the fund available is spent. Further, it is also estimated that 76.67 per cent of the total expenditure incurred is on water resources development and water conservation programmes. As a whole, the performance of the NREGS is good in providing employment and livelihood. In Kanyakumari District NREGS has been implemented from April 2009 and very successfully so. The details regarding the expenditure made and households applied up to 01.03.2010 are given in Table 2. Table No.2 shows that the job cards have been given to all those who registered for the wage employment. The share of persons

registered constitutes 20.71 per cent of the total population. It is a welcoming fact that 11,727 SC/ ST persons and 46,792 minority persons have registered themselves under the NREGS. The respective percentage is 9.76 and 38.95. The percentage of SC/ST persons registered (9.76%) is more than the percentage of SC/ST persons to the total population (4.36%) while the percentage is less for minorities (44.47%). The number of women registered is 77,333. It constitutes 64.38 per cent of the total persons registered. The share of SC/ST women to total SC/ST persons registered constitutes 61.75, in absolute term it is 7,241. The details regarding expenditure, works approved and completed, person days generated

Table 3:- Amount sanctioned and spent, works carried out, person days generated and average wage paid in Kanyakumari District up to 01.03.2010 Category Amount/Number Released Rs.2225.81 lakh Amount Spent Rs.1014.69 lakh (45.59%) Works Approved 462 Works Completed 142 (30.74%) No. of Persons days Generated 1342633 Average Wage Paid Rs. 76/Figures in brackets are percentages to total. Source: The Report, NREGS-Kanyakumari District-2010

56

YOJANA August 2010

ENVIRONMENT
fOCuS

Biodiversity and its Conservation

Arvind Singh

Conservation of biodiversity is the need of the hour for food, fodder, fuel, timber and medicinal requirements and also for the agricultural production, ecological balance, and mitigation of environmental pollution
YOJANA August 2010

IODIVERSITY OR Biological diversity refers to the variety and variability among genes, species and ecosystems. There are three levels of biodiversity namely genetic diversity, species diversity and ecosystem diversity. Genetic diversity is the genetic variation within species, both among geographically separated populations and among individuals within single population. This genetic diversity is the result of different modes of adaptation in different habitats, which provides organisms and ecosystems with capacity to recuperate after change has occurred. Species diversity denotes the variety of species on earth from acellular viruses to single celled microorganisms like bacteria, mycoplasmas, actinomycetes etc. to multicellular plants and animals. For proper functioning of particular community

or ecosystem the species diversity is very essential. In a community the survival of all species are interrelated to the existence of other living organisms. Ecosystem diversity refers to variations in the biological communities in which species live, the ecosystem in which communities exist and interactions among these levels. Ecosystem diversity is reflected in diverse biogeographic zones such as lakes, deserts, coasts, estuaries etc. Significance of biodiversity Biodiversity plays a crucial role in the life of man. Biodiversity fulfils the need of food, fodder, fuel, timber and medicines. It is estimated that more than 25 per cent of all medicines available today are derived from tropical plants. Plants are important source of grazing for cattle and other herbivores. Flesh of animals is an important source of food for human beings.

The author is an Ecologist associated with Department of Botany, Banaras Hindu University, Varanasi. 57

Biodiversity helps in increasing the agricultural production and also in developing disease resistant varieties. It was evident in the early 1970s when an epidemic called grassy stunt disease of rice caused by virus destroyed more than 160,000 hectares of the crop in Asia. A resistance gene borrowed from wild rice variety of Central India named Oryza nivara controlled the disease. It was the only known genetic source of resistance to the grassy stunt disease. Biodiversity plays an important role in protecting the water resources. The natural vegetation cover in water catchment helps in maintaining hydrological cycles, regulating and stabilizing water runoff and acts as buffer against natural disasters like flood and drought. Vegetation facilitates the percolation of water into the ground, thus helping in maintenance of ground water table. The standing mangrove vegetation along the sea coast serves as a shield against natural disasters like cyclone and tsunami. Biodiversity plays significant role in soil formation and its protection. The vegetation improves the soil structure, increases the water holding capacity of the soil and also raises the nutrient level of the soil. Biological diversity plays important role in nutrient recycling. It is the sink and source of nutrients. Microbes in the soil, facilitating the nutrient return to the soil decompose the dead plant parts and animals.
58

Biodiversity helps in elimination of environmental pollution. Breakdown of the pollutants and its absorption is a feature of many plants. The plant Vinca rosea (Sadabahaar) has the ability to degrade Trinitrotoluene (TNT) like explosive. Several strains of microorganisms have been found useful for the purpose of cleaning up toxic wastes. Some plant species thrive on soils that are rich in heavy metals. Several plants have the ability to hyperaccumulate metals like copper, nickel, cadmium, chromium, cobalt and mercury. They can be planted on toxic waste sites where they remove the toxic metals from the soil. The Indian mustard (Brassica juncea) has the ability to absorb cadmium and chromium from the soil. Aquatic plants like Eichhornia crassipes, Lemna minor and Azolla pinnata are used for disposition and extraction of metals like copper, cadmium, iron and mercury from water. Forests comprising diverse group of plant species are the major sinks of carbon dioxide. The latter serve as a green house gas causing global warming. Thus ecologically diverse forest ecosystems help in mitigation of global warming. Biodiversity provides stability to the ecosystem and maintains the ecological balance. Plants and animals in ecosystem are linked to each other through food chain and food web. The loss of one species in the ecosystem affects the survival of other species. Thus the ecosystem becomes fragile.

Ecologically diverse forest ecosystems are home of wild-life and tribals. The forest of surrounding areas fulfils all the needs of the tribals. Due to constant association with the forest environment tribals have evolved a curious knowledge of plants and their utility for them. Many of the uses for which plant tribals employ products are not known outside their restricted community. Biodiversity of India With 2.4 per cent of the worlds land, India contributes 8 per cent to the world diversity. It has, therefore, been designated as one of the 12 megadiversity regions of the world. India is recognized as a country uniquely rich in biodiversity because of its tropical location, varied physical features and climate. Indian biodiversity is estimated to be over 45,000 plant species contributing 8 per cent of the worlds flora and about 80,000 animal species constituting 7 per cent of the worlds fauna of which 33 per cent flora and 62 per cent fauna are endemic (found nowhere else in the world) to India. Among the plant species, the flowering plants have a much higher degree of endemism, a third of these are not found elsewhere in the world. Of the estimated 45,000 species of plants about 5,000 species of algae, 20,000 of fungi, 1,600 of lichens, 2,700 of bryophytes, 600 of pteridophytes and 15,000 of flowering plants have been identified and described so far. Indian flowering plants represent 15 per cent of the flowering plants
YOJANA August 2010

of the world. Among flowering plants orchids have high species diversity (1,082) found mainly in North-eastern Himalaya. Apart from the high biological diversity in Indian wild plants there is also great diversity of cultivated crops. The traditional cultivar includes 30,000 to 50,000 varieties of rice and a number of cereals, vegetables and fruits. The highest diversity of cultivars is concentrated in high rainfall areas of the Western Ghats, Eastern Ghats, Northern Himalayas and the North-Eastern hills. As far as faunal diversity is concerned, India is home for 67,000 species of insects (including 13,000 butterflies and moths), 4,000 of molluscs, 6,500 other invertebrates 2,000 of fishes, 1,200 of birds, 540 of reptiles, 200 of ambhibians, and 500 of mammals, in which 62 per cent ambhibians and 32 per cent reptiles are endemic to India. Among lizards, of the 153 species recorded 50 per cent are endemic. Among the larger animals 79 mammals, 44 birds, 15 reptiles and 3 amphibians are threatened today and 1,500 plant species belong to endangered category (the species which are in danger of extinction). Indian sub-continent alone has given the world nearly 320 species of wild animals, whose centre of origin lies in India. Livestock diversity is also high i.e. 27 breeds of cattle, 40 breeds of sheep, 22 breeds of goats and 8 breeds of
YOJANA August 2010

buffaloes are available in the country. However, today many of these are standing on the verge of extinction due to the increased use of exotic breeds. Jersey and Holsteins have largely replaced indigenous breeds of cattle. India has contributed 167 species of cultivated plants along with their 320 species of wild relatives and land races and several domestic animals. Rice, sugarcane, jute, jackfruit, ginger, turmeric, black pepper, bamboos, camel, mithun and water buffalo have originated in India. India is extremely rich in Ecosystem diversity as well. According to Wildlife Institute of India the country has 10 biographic zones: (i) Trans-Himalayas (ii) Himalayas (iii) Desert (iv) Semiarid (v) Western Ghats (vi) Deccan (vii) Gangetic Plain (viii) NorthEast India (ix) Islands; and (x) Coasts The North-East, the Western Ghats, Western and North-Western Himalayas are rich in endemism. At least 200 endemic species are found in the Andaman and Nicobar islands. Hot spots are the regions of high biodiversity with massive threat to flora and fauna due to high biotic pressure. Of the 18 biodiversity hot spots of the world 2 belong to India. Western Ghats and Eastern-Himalayas are the hot spots of biodiversity in India. The Andaman and Nicobar islands are extremely rich in

species, and many subspecies of different animals and birds have evolved here. The islands alone have as many as 2,200 species of flowering plants and 120 species of ferns. Out of 135 genera of land mammals in India 85 (63%) are found in the north-east. The north-eastern states also have 1,500 endemic plant species. A major proportion of amphibian and reptile species, especially snakes, is concentrated in Western Ghats, which is also habitat for 1,500 endemic plant species. The Coral reefs around the Andaman and Nicobar islands, the Lakshadweep islands and the Gulf areas of Gujarat and Tamil Nadu are biologically diverse ecosystems and are often called tropical rain forest of the ocean. Causes of loss of biodiversity The fundamental causes of biodiversity loss include: 1. Unsustainably high rates of human population growth and natural resource consumption. 2. Introduction of exotic species associated with agriculture, forestry and fisheries. 3. Economic systems and policies that fail to value the environment and its resources. 4. Inequity in ownership and access to natural resources, including the benefits from use and conservation of biodiversity. 5. Inadequate knowledge and inefficient use of information.
59

6. Legal and institutional systems that promote unsustainable exploitation. Conservation of Biodiversity Conservation of biodiversity refers to planning and management of biological resources in a way so as to secure their wide use and continuous supply, maintaining their quality, value and diversity. The World Conservation Strategy has suggested the following steps for biodiversity conservation: 1) Efforts should be made to preserve the species that are endangered. 2) Prevention of extinction requires sound planning and management. 3) Varieties of food crops, forage plants, timber trees, livestock, animals and their wild relatives should be preserved. 4) Each country should identify habitats of wild relatives and ensure their protection. 5) Habitats where species feed, breed, nurse their youngs and rest should be safeguarded and protected. 6) International trade in wild plants and animals be regulated. For the conservation of biodiversity the immediate task will be to devise and enforce time bound programme for saving plant and animal species as well as habitats of biological resources. Action plan for conservation, therefore must be directed to : i) Inventorization of biological resources in different parts of
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the country including the island ecosystems. ii) Conservation of biodiversity through a network of protected areas including National Parks, Sanctuaries, Biosphere reserves, Gene Banks, Wetlands, Coral reefs etc. iii) Restoration of degraded habitats to their natural state. iv) Reduction of anthropogenic pressure by cultivating the species elsewhere. v) Rehabilitation of the threatened and endangered species. vi) Protection and sustainable use of genetic resources/germplasm through appropriate laws and practices. vii) Conservation of microbes which help in reclamation and rehabilitation of wastelands and revival of biological potential of land. viii)Control of over-exploitation through Convention on I n t e r n a t i o n a l Tr a d e i n Endangered Species (CITES) and other agencies. ix) Rehabilitation of tribals displaced owing to creation of protected areas. x) Protection of domesticated plant and animal species in order to conserve indigenous genetic diversity. xi) Multiplication and breeding of threatened species through modern techniques of tissue culture and biotechnology. xii) Maintenance of corridors between different nature

reserves for the possible migration of species in response to climate, or any other disturbing factor. xiii)Restriction on the introduction of exotic species without adequate investigation. xiv)Support for protecting traditional indigenous knowledge and skills for conservation. xv) Discouragement of monoculture plantations. There are two main categories of biodiversity conservation: Ex situ conservation and In situ conservation: 1. Ex situ conservation : This is conservation outside their habitats by perpetuating sample population in genetic resources centres, zoos, botanical gardens, culture collection etc. or in the form of gene pools, and gamete storage for fish; germplasm banks for seeds, pollen, semen, ova, cells etc. In this type of conservation, plants are maintained more easily than animals. Seed banks, botanical gardens, pollen storage, tissue culture and genetic engineering have been playing important role. India has done commendably well as far as ex situ conservation of crop genetic resources is concerned. Gene banks have collected over 34,000 cereals and 22,000 pulses grown in India. It has also taken up such work on livestock, poultry and fish genetic resources. However, there is need to develop facilities for
YOJANA August 2010

long and medium term conservation through : i) Establishment of Genetic Enhancement Centres for producing good quality of seeds. ii) Enhancement in the existing zoos and botanical garden network. iii) Seed-gene banks. vi) Tissue culture gene banks v) Pollen and spore banks vi) Captive breeding in zoological gardens; and vii) I n v i v o a n d i n v i t r o preservation 2. In situ conservation : This is the conservation of genetic resources through their maintenance within natural or even human made ecosystem in which they occur. This type includes a system of protected areas of different categories, m a n a g e d w i t h d i ff e r e n t objectives to bring benefit to the society. Strict Nature Reserve/ Wilderness Area, National Parks, National Monuments/ Natural Landmark, Habitat/ Species Management Area, Protected Landscapes and Seascapes, Managed Resource Protected Area, Wildlife Sanctuaries and Biosphere Reserves belong to this type of conservation. Protected Area Network in India The protected areas in India includes National Parks, Wildlife Sanctuaries and Biosphere Reserves.
YOJANA August 2010

National Parks : These are areas dedicated to conserve the scenery, natural objects and the wildlife therein. In these areas, all private rights are non-existent, forestry operations and grazing of domestic animals are prohibited. Certain parts of the parks are developed for tourism, enjoyment and study in such a way that it will not disturb or scare the animals. The boundaries of the National Parks are circumscribed by legislation. There are 89 National Parks in India, occupying nearly 4.1 million hectares (1.25%) of the land area of the country. Wildlife Sanctuaries : These are dedicated to protect the wildlife, and their boundaries are not limited by state legislation. In a sanctuary, killing, hunting or capturing of any species of birds and mammals is prohibited except by, or under the control of the highest authority in the department responsible for management of a sanctuary. Forestry and other usages are permitted to the extent that they do not adversely affect the wildlife.. India has 500 wildlife sanctuaries occupying about 12 million hectares (3.6%) of land area of the country. Biosphere Reserves : These are multipurpose protected areas which are meant for preserving genetic diversity in representative ecosystems by protecting wild populations, traditional life style of tribals and domesticated plant/ animal genetic resources. Each biosphere reserve has following zones:

i) Core zone : where no human activity is allowed. ii) Buffer zone : Limited human activity is allowed. iii) Manipulation zone : Human activity is allowed but ecology is not permitted to be disturbed. iv) Restoration zone : Degraded area for restoration to natural or near natural form. Nilgiri Biosphere reserve was the first biosphere reserve of India established in 1986. Today there are 15 Biosphere Reserves in India, three of which i.e. Sunderban, Gulf of Mannar and Agasthymalai Biosphere Reserves have been improved as World Biosphere Reserves by United Nations Educational, Scientific and Cultural Organization (UNESCO). Conclusion In a biodiversity rich developing country like India the fast growing human population has put tremendous pressure on biological resources. Hence unsustainable use of the biological resources has resulted in the loss of biological diversity of the country. Besides this, introduction of exotics have also substantially contributed to the loss of biological wealth of the country. Therefore, conservation of biodiversity is the need of the hour not only for the fulfillment of food, fodder, fuel, timber and medicinal requirements but also for the enhanced agricultural production, ecological balance, mitigation of environmental pollution and natural q calamities.
(E-mail : arvindsingh_bhu@yahoo.com)

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ShODh yATRA

Retrofitted Car for the Physically Challenged

The principle consists of modifying the driving actions so that the controls are transferred to hand by use of leverage, wires and linkage mechanism
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UJIB KHAN, born in January 1974, is an automobile mechanic f r o m J a i p u r. A childhood attack of polio has left his lower limbs weak and only partially functional. Being handicapped himself, he has encountered problems that any disabled person faces, when it comes to mobility and has developed a technique to retrofit any car with attachments, making it disabled friendly.

this small 5 by 5 workspace, he did all types of work on two wheelers including repairing, tinkering and painting. It was in this workshop where, after a lot of trial and error, he developed the hand-operated car and showed disabled people the way to be independent. This made Mujib a hero of sorts and a role model for the youngsters in his area. People watch in disbelief as they see Mujib, stop and get out of his car on crutches. It is difficult for them to imagine a man with impaired limbs, drive on the main highway! Genesis Though they had a Maruti van at home, which was used by his father and brother, Mujib regretted the fact that due to his disability he could not drive around. Hiding from the family, he started his work on the car. After initial experimentation, he attached a rod to be able to operate brake and accelerator and drove the car in the absence of his parents.
YOJANA August 2010

Mujib faced a tough childhood due to his disability, but he was not a man to sit at home and rue his fate. In the 1990s, he started his business of making bedsheets on order and selling them to exporters. As the export market became dull, and objections rose over use of certain dyes in the material, he had to change his line of work. With his keen interest in mechanical things, he then started a scooter and motorcycle-repairing workshop. In

Once he had completed his initial modification, he slowly started to learn to drive the vehicle. In about a couple of months time, he had perfected his driving. No body helped him at any stage and he learnt all by himself. Then he took his van to his workshop to incorporate a system wherein both normal and modified mode of driving could be fitted. He worked on it for six months, still the modifications in the car were looking like jutting intrusions and not blending with the vehicle dashboard, facia and controls. However, slowly people started acknowledging his efforts, the process of evolution continued, and he started making the attachment commercially. After modifying dozens of car, he at last became successful in developing such a retrofit, which perfectly blended with the car interiors. He modified the existing Maruti 800, Mahindra Scorpio, etc. to make it suitable for people with lower limb impairments. The modifications were made in brakes, clutch and accelerator. All these controls were modified in such a way that hands can operate these.

For the person with one leg, the clutch remains at its original position while the other controls are modified to be operated by hands. These modifications were made in such a way that a normal person could also use the cars in the conventional fashion. Innovation The innovation lies in the modification to accelerator, brake and clutch arrangement for operation by hand. Comfort, simplicity and ease of operation are other features embedded in the controls. There are references in literature for modifications in cars to suit handicaps. Most of them have the telescopic mechanical members for actuating brake and accelerator pedals. Mujib has used parallel system for hand-operated controls, which enhances safety. The principle consists of modifying the driving actions so that the controls are transferred to hand by use of leverage, wires and linkage mechanism. Brake pedal is activated either by mechanical arrangement made of linkages or by using an additional hydraulic cylinder arrangement.

Using the push-pull type switch, installed on the dashboard, the accelerator gets activated through a wire connecting it to the engine. The clutch wire is connected to a semi circular hand steering element, which is connected through the steering assembly to the clutch plate to operate the clutch. Currently the design is adapted for Scorpio and Maruti, and has to be standardized for any other vehicle. The innovator wants to modify the kit to meet the needs of physically challenged users with one hand and one leg and reduce the cost. This kit is especially important, as many car companies have discontinued the expensive custom solutions that they had earlier introduced for physically challenged people. Mujib works on a single car at a time and it takes him around 3-4 days to work on it. The price of attachment varies from model to model. The kit for a Maruti 800 costs around Rs. 10,000 while a similar one for a Honda City could cost anywhere between Rs. 1500020000. His first commercial kit was made for Mr. Chandra Pal Singh, SMS Hospital, Jaipur in the year 1995, who was really satisfied with his work and helped him get orders to modify another 15-20 cars. Now after modifying around 70-80 cars, his kit has blended ubiquitously with the existing car interiors like an invisible presence in the cars that help physically challenged people with q non-functional limbs.

The modification to accelerator, brake and clutch arrangement for operation by hand.

(E-mail : campaign@nifindia.org, www.nifindia.org) 63

YOJANA August 2010

BEST PRACTICES

Education for All : A Lesson from Jagjagi Kendras

Sujata Raghavan

w
They will go on to various fields and professions and reflect what education really signifies, a journey from darkness to light

HILE RTE is poised to make education universally accessible to all sections of society, the Jagjagi Kendras in Sitamarhi district of Bihar, set up under Mahila Samakhya Programme as a part of the Bihar Shiksha Pariyojana stands out as a precursor. It arose as a response to the situation on the ground, where hundreds of little girls were simply left out of the school system. The reasons were stero-typical, an unholy mix of poverty and the entrenched mind-set which sees girls education as totally dispensable, probably antithetic to their only perceived role in society, as home-makers. There are today some 230 Kendras across the 13 blocks in Sitamarhi, practically in each village, bringing the light of knowledge through Jagjagi, literally meaning the twinkling of lights!

The Kendras do not have a building, which in a sense opened up doors within the community for them. Often it would be a Panchayat Bhavan, or someones home or simply an open safe space. This very naturally led to a sense of ownership and involvement of the community, taking the learning in the Jagjagi Kendras beyond, to actually chip away at old prejudices and medieval mindsets. The Kendras are entitled to receive a fixed amount under various heads from the Bihar Shiksha Pariyojana. A one-time payment of Rs.2075 to cover infrastructure costs like durries, glasses, water jugs; another yearly amount of Rs.3075 for running costs of educational aids like blackboard, chalk, colour pencils and chart paper. The teacher, one per Kendra is entitled to Rs. 1,000/- . Within this princely amount, the kendras have functioned and made optimum use of not only their resources

The author is Manager, Programs & Editor, Charkha Features. 64 YOJANA August 2010

but also an intrinsic creativity, which marked their approach to education. The Jagjagi Kendra is unique in a sense; it did not suffer from any grandiose vision or plans, but addressed the needs of girls who had crossed their formative childhood years without basic schooling. Girls whose parents, mostly agricultural labourers did not pause to think before condemning them to a life of domestic chores, looking after younger siblings, cutting grass and tending to cattle. While the boys invariably were encouraged to go to school and there are several primary and middle schools in the area, it was common to see girls reaching adolescence, unlettered and growing much like the wild grass around their village. Instead of adopting the conventional approach to teaching, these Kendras developed an organic way which would link learning with the natural environment of these girls. This was actually a finely evolved system but broken down to words, symbols, associations and linkages with common everyday things in their lives. A creative combination of learning by alphabet and by association. For instance the term ghar parivar. Literally it means home-family, figuratively it denotes a somewhat larger concept of rules of the household, authority of elders, role of each member, coexistence, mutual respect as part of the learning. The girls are taken through this, through interactive sessions to provoke response. At a more basic level, the actual
YOJANA August 2010

term ghar parivar is taught as alphabets, each of the starting alphabets like g and p are taken up to make other words, again with an active participation by the girls. In essence, learning is imbibed by correlating it with their lives, it becomes a discipline or study, which corroborates or strengthens what they already know. The beauty of this form of teaching lies in the fact that it is not based on some esoteric or unviable principles which exist in a vacuum but seeks very concertedly to mainstream the girls into the education system. The system takes in these girls from literally zero and to the level of Class V, after which they have acquired the knowledge and skill required for entering Middle School. Renu Kumari of Ashogi Got village, now 18 years old, is a living testimony to how this actually works. One of 6 siblings of Ram Bharose, who used to works as an agricultural labourer, little Renus education simply did not figure in the familys priorities, until a day when she was 12 years old, another village girl who had joined the Jagjagi Kendra excitedly shared her experience and as only children can do, urged her parents to allow Renu to join. Initially both these girls took Renus mother to the Kendra and after convincing her, worked on the brothers and father, all who were ranged against the very idea initially. However they too relented and a brilliant new chapter unfolded in Renus life, the darkness of ignorance slowly yielding way to the lamp of knowledge.

A promising student, Mahila Samakhya program coordinators nurtured the spark in Renu. She was given the task to supervise the Mid Day Meal schemes running in village schools. Today Renu is in the last year of school and her eyes are set on acquiring a BA degree and then sitting for the Railway exams or taking to teaching. Today she is the only educated person in her family. The respect that is accorded to her, the responsibilities she undertakes in all family matters is of a value that stems only from education. Renu and hundreds of little girls in Sitamarhi live a transformed life, they have an identity, which allows them to craft their lives and bring about change in their environment. It is through them, that the role of Jagjagi Kendras and indeed the vision of Mahila Samakhya shines through. According to Renu Mahila Samkhya has opened up the path of learning for me. I have the desire and will to stand on my own feet now . The Jagjagi alumni is also doing the institution proud. The girls are enrolling for B.A, M.A after passing out of the school system, the entry into which it was unthinkable left to their natural environment. They will go on to various fields and professions and reflect what education really signifies, a journey from darkness to light. It is also in a sense a journey from exclusion and deprivation to being masters of ones own destiny. q
(Inputs Lata Kumari, Sitamarhi, Bihar)

Charkha Features 65

DO yOu KNOW?
uNIquE IDENTIFICATION PROJECT
what is the objective of the unique Identification Project ? Establishing ones identity is a major problem that people face in India. As on date , there is no single document that can be used for identifying a person and people are forced to carry multiple documents to be used for different purposes. Thus every time you wish to avail of a service like opening a bank account, obtaining a passport, mobile connection etc you are forced through a rigmarole of providing different sets of identity documents. Further, the present sets of identity documents being used today do not provide migrants with a mobility of identity, nor do they include the poor and marginalized people. The UID project aims to provide each person in the country with a unique identification number which will become a single source of verifying his identity. This would not involve issue of any identity card. The basic identity of a person will be linked to his biometrics and stored in the UID database. Whenever there is a need to establish the identity of the person, the same can be provided through his UID through an online authentication process. will it be compulsory to get a uID number ? It will not be compulsory to get a UID number, but certainly most beneficial. Any person who is a temporary or ordinary resident of India is eligible for, and should get a UID number as this would spare them the hassle of repeatedly providing supporting identity documents each time they wish to access some service. The UID will also facilitate entry for poor and underprivileged residents into the formal banking system, and the opportunity to avail services provided by the government and the private sector and also give migrants mobility of identity. How will the uID database be created ? Creation of the UID database, will involve a network of institutions at largely three levels. At the point of first public interface there will be Enrolling Agencies who will enrol people into the UID database. These Enrolling Agencies will be monitored by a network of Registrars which would include government and private sector agencies who already have the infrastructure for public interface for eg banks, insurance agencies, LPG distribution companies, NREGS etc. Outreach Groups working among women, children, underprivileged persons etc will also be engaged. At the central level there will be a Central Identity Data Repository which will manage the central data and the network of Registrars. How will a uID number be issued ? A resident will first have to apply before an Enrolling Agency and submit the required form, with information asked for, documents, photograph and biometric elements like all ten fingerprints, both iris scans. This information will be sent through the Registrar to the UID central database. There it will go through a process of de-duplication. This means that if he will be issued a UID number only if his details are not already in the database. If his details are already there in the database, his application will be rejected. De-duplication makes his UID number really unique and also serves to prevent frauds. In case wrong information is fed into the data base or a person wants to change some information about himself, this will have to be done in accordance with the laid down procedure. The policy will also take into consideration disabled persons and the biometric standards prescribed will ensure that these groups are not excluded. In the case of people without hands/ fingers only photo will be used for identity determination and there will be markers to determine uniqueness. Children will be required to get their biometric information updated every five
YOJANA August 2010

66

years till they are 18 when their biometrics stabilize. How will authentication be done ? The process would provide for an online authentication of the biometrics of the person. A one to one online match will be run between the biometrics of the person and his biometrics as present in the UID database. The reply to an authentication process will be given in a Yes or No. How will inclusion of the underprivileged be ensured under the project ? Inclusion of the underprivileged is one of the major objectives of the UID project, as it is these

persons who find it most difficult to prove their identities and are forced to forego benefits and subsidies. To ensure that every such needy person gets a UID number the project will work through its network of registrars who already have a presence at local levels and have the infrastructure for public interface. In addition the project would be involving outreach agencies like civil society working among women, children and underprivileged sections of the society. How secure would the database be? The UID database will be guarded both physically and electronically by a few select

individuals with high clearance. It will not be available even for many members of the UID staff and will be secured with the best encryption, and in a highly secure data vault. All access details will be properly logged. what is the institutional set up under which this project is being implemented ? The government has constituted a Unique Identification Authority of India as an attached office under the Planning Commission. The Authority is headed by Shri Nandan Nilekani, its first Chairman. The Authority will develop and implement the legal, technical and institutional infrastructure for the project. q

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YOJANA August 2010 67

J&K WINDOW
NEw GERM PLASM TO INCREASE SAFFRON CuLTIVATION IN VALLEY

oncerned over decline in area and production of saffron in the Valley, the government is contemplating introduction of new germ plasm to deal with the problem. According to Official sources in past ten years there has been steady decline in saffron production in the Valley. In 1998 the crop was grown on 4161- hectares which came down to 2880- in 2002. The production in 1998 was 65.25 quintals. Interestingly, in 2004 while the area under saffron was increased to 3025 hectares and the production didnt rise beyond 48.34 quintals. In 2008-09 the area under saffron cultivation was 2667 hectares and the production was 56.13 quintals. The yield rate of saffron has been highest in 2007 at 3.75 kg per hectare. Officials attribute the decline in saffron production and cultivation to lack of adequate irrigation facilities and increasing diversion of agricultural land to urbanization and industrialization particularly in the Valleys saffron belt in Pampore. Besides, monoculture of the same germ plasm for centuries, poor cultural practice, reluctance of saffron growers of investment in improving their own infrastructure facilities, unprecedented drought like conditions from 99 to 2002-03 and in 2008-09 and incidence of corm rot disease have led to decrease in the production and apathy of growers towards its cultivation. A plan has been prepared to increase the production and the farmers would be given seeds, fertilizers, borewells for irrigations, the plan has been prepared by the Agriculture Department in collaboration with the Sheri Kashmir University of Agriculture and Sciences. The government would try to fix the problem by replacing the existing corms through the introduction of a new variety of germ plasm. The worlds best saffron is grown in Pulwama and Budgam districts of the Valley. In Jammu its cultivation is limited to district Kishtwar in Chenab Valley. q

J&K uSHERS IN DAwN OF CLOuD REVOLuTION

rivate companies in India may have lagged behind in adopting cloud computing. So it's the government now which has decided to act as a beacon. In one of the first cloud pilots in the country, Jammu & Kashmir has successfully used computing services offered by Madhya Pradesh to roll out citizen services within 60 days at zero initial cost. If two or more states start sharing IT infrastructure, it may save the exchequer almost 50% of the Rs 1,378 crore allocated for state data centre projects. The centre is pushing other states too to use the cloud model which enables sharing of resources (like software and hardware) already possessed by one state with others through a pay per use model. In one of the first pillots, the J&K government is all set to successfully roll out its ration card and recruitment services automation from a data centre based in Madhya Pradesh, in a few days. The pilot spanning 60 days has been completed successfully and MP will get revenues from J&K on a per transaction basis. According to the ministry of IT and Communications, Cloud services are going to become mainstream, and the ministry is encouraging other states to share applications and data centres, as successfully demonstrated by these two states. The SDC (state data centre) project is part of the Rs 27,000 crore National e-Governance Plan rolled out in 2005. So far, only 13 states have been able to roll out their data centres. The remaining 22 states and union territories are yet to commence rollout. This pilot can change the paradigm of citizen services delivery. Some states which are already rolling out data centres can act as cloud providers. Once established, the data centres will house data on citizens' property, transport, tax etc apart from hosting applications for running police stations and state government portals. Citizens of those states which launch e-governance later might not have to suffer since states can use data centres of other states on a pay per use basis. For running data centres, states also have to spend money on power, cooling solutions and security software but innovative models like Software as a Service or cloud computing can reduce costs. If states start adopting cloud computing many tech majors which would be building separate applications and data centres for each state might have to be content with fewer contracts. The cloud market is at a nascent stage in India at $110 million. q
68 YOJANA August 2010

Macroeconomic and Monetary Developments in 2009-10

Overall Assessment With the improving growth outlook, monetary and fiscal exit measures have started. While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth. In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses. Highlights Global Economic Conditions Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery, however, remains significantly divergent. The projections for global output for 2010 generally point to consolidating recovery, led by the Emerging Market Economies (EMEs). The WTO projects world trade to stage a strong recovery in 2010. The risks to the overall global macroeconomic environment have, however, increased because of large public debt in advanced economies, on the back of concerns relating to reduction in potential output, high unemployment rates, impaired financial systems and premature exit from the policy stimulus. With stronger recovery in EMEs driven largely by domestic demand, improving exports and return of capital flows, EMEs face the risks of inflation and asset price build up. Indian Economy Output The Indian economy exhibited clear momentum in recovery, and despite the impact of a deficient monsoon on agricultural production, GDP growth for 2009-10 has been estimated at 7.2 per cent, up from 6.7 per cent recorded in 2008-09. Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector. Survey data suggest pick up in capacity utilization levels in recent months, which still remain below the previous peaks. Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normal monsoon. Support for sustained momentum in growth can be expected from all three major components, viz., agriculture, industry and services. Aggregate Demand Final consumption expenditure remained subdued during 2009-10, as growth in both private final consumption expenditure and government final consumption expenditure decelerated. Investment demand, particularly gross fixed capital formation, however, showed a gradual recovery during the year. While the momentum in investment demand is expected to continue, pick-up in private consumption demand could drive the recovery in growth. Growth in corporates sales, after remaining significantly depressed over four consecutive quarters, staged a strong recovery in Q3 of 2009-10, indicating improving private demand conditions. The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary. External Economy Indias external sector position improved alongside the recovery in the global economy. After declining for 12 consecutive months, exports recovered in October 2009. Similarly, imports recovered in November 2009 following a phase of decline. Despite a lower trade deficit, the current account deficit widened during AprilDecember 2009, as compared with the corresponding period of the previous year. This is attributable to a fall in invisibles, particularly on account of business services. During 2009-10, foreign exchange reserves increased by US$ 27.1 billion, comprising mainly of increase in gold holdings (US$ 8.4 billion), SDRs (US$ 5.0 billion) and foreign currency assets (US$ 13.3 billion). The bulk of the increase in foreign currency assets was on account of valuation. Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management.

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Monetary Conditions Reflecting the stronger recovery in economic activities, growth in broad money (M3) and flow of credit to the private sector exceeded the Reserve Banks indicative projections for 2009-10. While the increase in CRR effected by the Reserve Bank in its Third Quarter Policy Review of January 2010 led to some moderation in excess liquidity, overall liquidity conditions remain comfortable as reflected in the daily reverse repo operations. The banking systems credit to the government was the prime driver of monetary expansion during the year. The flow of resources to commercial sector distinctly improved from both bank as well as non-bank sources. Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation. Financial Markets With market activity returning to the pre-global crisis level, volatility in the domestic financial markets was much lower during 2009-10 than in the year before, when the crisis erupted. Despite considerable stability and the commencement of exit, markets faced concerns emerging from large government borrowings and the increase in inflation. This affected yields in the government bond market. The transmission of lower policy rates to the credit markets improved, albeit, slowly. Asset prices increased at a relatively faster pace in the recent months, reflecting optimism about the economys prospects as well as easy liquidity conditions. With the revival of capital inflows, nominal exchange rate appreciated. Given higher domestic inflation, the appreciation in real terms was even higher. Inflation Situation Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10. The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised. This is evident from the acceleration of inflation in non-food manufactured products from -0.4 per cent in November 2009 to 4.7 per cent in March 2010. Inflation, as measured by consumer price indices (CPIs) also remained high, though there was some moderation in February 2010. These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Banks policy focus to anchoring inflation expectations. Risks to Growth Apart from monsoon-related uncertainty, there are downside risks to growth: First, private consumption demand needs to improve significantly to support the growth momentum. Second, global recovery, despite gaining strength, is expected to remain fragile, which has implications for exports. Third, the exit from fiscal stimulus and the growth-supportive monetary policy, unless calibrated carefully, could impact the growth process. Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings. This has adverse implications for the potential growth of the economy. Reserve Banks Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent. Inflation Outlook Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are, however, upside risks to inflation: First, international commodity prices, particularly oil, have started to increase again. In several commodities, the import option for India to contain domestic inflation is limited, because of higher international prices. Second, the revival in private consumption demand and the bridging of the output-gap will add to inflationary pressures. Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation. q (RBI Release)

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YOJANA August 2010

North east diary

wORLD BANK TO ASSIST RuRAL PROJECTS IN NORTH EAST

he World Bank will provide Rs. 5 billion to four north eastern states-Mizoram, Nagaland, Sikkim and Tripura to create self-employment opportunities for the tribals and poor people living in rural and remote areas. The Bank would provide the assistance for the North East Rural Livelihood Project (NERLP), starting this financial year (2010-11). The pilot project of the NERLP would be implemented in two districts each of the four north eastern states aiming to generate livelihood of those people who are yet to get any assistance from any medium or major scheme. The NERLP has four components-social empowerment, economic empowerment, partnership development and management, project management. NERLP would play a vital role in transforming rural economy, eradicating poverty and providing viable employment opportunities by utilising local and natural resources. It is aimed at socio-economic development of tribals and other backward people. The Development of North Eastern Region (DoNER) ministry in consultation with the Department of Economic Affairs and World Bank has finalised the NERLP. It would be implemented through a society registered at Guwahati. The NERLP is based on the IFAD (International Fund for Agricultural Development) assisted North Eastern Regional Community Resource Management Project (NERCRMP) which has been successfully implemented in two districts each of Meghalaya, Assam and Manipur. IFAD ia a specialised agency of the United Nations and its mission is to enable the rural poor to overcome poverty. 32,000 self-help groups (SHGs) have been formed in Tripura and the state government has been providing Rs. 50,000 to these under the Tripura Support Scheme (TSS). The SHGs are producing and marketing more than 250 products. q

SuCCESS AFTER SHIFT FROM SHIFTING CuLTIVATION

jhumia, one who does jhum clutivation, has turned progressive rubber planter thanks to the initiative of the Soil and Water Conservation Department. The Department's 2009- 10 annual report reveals the success story of lenggan M Sangma of Doldenggare under dalu C&RD block. Sangma, the Nokma (headman) of his village, was a jhumia and owned assets including a paddy field, three hectares of cashew nut and one hectare of areca nut plantations. The Nokma was finding it tough to look after his family of eight till 1986-87 with a meagre income. The Soil and Water Conservation Department came forward to sponsor him to cutivate rubber in a one hectare area. He was also sent to Kerala by the Department for a study tour on rubber cultivation. Impressed with his efforts, the Department again offered him two hectares of land.

The Soil and Water Conservation Department has been making efforts to prevent soil erosion in the hilly state by encouraging farmers to go for alternative livelihood by doing away with jhum cultivation or shifting cultivation for which huge patch of forest land is cleared every year. J Sangma now plants a mixture of rubber clones of RRIM 600 and RRIM 105 besides other. With the existing number of 1200 standing rubber trees, the average yield per hectare is 800-900 kg per year. He grows 1200 kg of paddy in his 32.5 bigha plot of land and about 50 quintals of cashew from an eight acre plantation per year. q

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