Reining in Inflation in India: Options for a Developing Economy

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Long-term impairments in the farming sector further aggravated the situation. The share of agriculture in the GDP had been declining decade after decade and had declined to around 14% by 2010-2011 from over 55% during 1953-54. Even though contribution of agricultural output to the national GDP had been falling, the population dependent on agriculture for a livelihood remained high at about 50% in 2011. The disproportionately high population dependent on agriculture was subjecting the sector to tremendous stress and any shortfall in production was followed by sharp increases in prices...

The influence of international prices on domestic inflation was observed. The global economy slipped into recession during 2008-2009, inducing governments across the globe to ease fiscal and monetary policies besides coming up with huge fiscal stimulus packages. According to the Food and Agriculture Organization (FAO) of the United Nations, the prices of most agricultural commodities increased significantly in 2008 and 2009. The FAO Food Price Index averaged 236 points in February 2011, up by 34.09% compared to February 2010. The index of that level was reported to be a record in real and nominal terms since 1990. Major factors responsible for the increase were supply and demand imbalances in key producing nations and the weakening of the US Dollar. By February 2011, food prices increased nearly by 100% compared to the beginning of 2005, according to the World Bank's index of real global food prices. According to analysts, the loose monetary situation across the globe coupled with the increased demand in the developing nations had led to a surge in international commodity prices. Energy (crude oil, natural gas, and coal), metals (copper, aluminium, and iron ore) and food (cereal and meat) prices increased significantly...

The United Progressive Alliance (UPA) government was severely criticized by economists for its 'popularist policies.' Since coming to power for its first term in 2004, the UPA had embarked on social welfare programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) to ensure inclusive growth. The MNREGS was designed to provide 100 days of work per year to rural laborers, who were living under $1.2 a day. Under the program, any villager could approach a government office and enroll himself/herself for building roads, digging wells, or creating other rural infrastructure.

According to the scheme, laborers would be paid a minimum of Rs. 125 ($2.5) or more depending on the State of residence. The largest welfare scheme in India costing 1% of GDP, it was designed to protect the 500 million rural poor. While the idea of the scheme was to guarantee employment for the rural population, farmers across the country complained that the scheme had deprived them of agriculture laborers...

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