Inflation can be caused by both demand and supply side factors. Monetarists often give a view that cutting demand driven expenditure through reduction of supply of money into an economy can curb inflation. However, inflation is not only being driven by demand side factors. Bottlenecks in the supply of goods can reduce the good availability and can lead to a price increase. Supply of goods can also go down with a rise in the cost of production of the goods. Some of the factors that hinder supply of goods are production shortfalls, enhancement in the cost of inputs used for producing goods. This can further translate a rippling effect on prices of goods. Goods supply into markets can also be hindered if the distribution networks between sources of supply to markets via mandis, wholesaler, and retailer are not working properly. It might not work properly, if hoarding happens and prices are hiked up artificially by hoarding. This hike in price of goods arising from artificial hoarding and inefficient distribution networks can contribute to inflation.
People and agents can be engaged in this artificial hoarding to earn bribes and premiums from wholesalers, retailers who finally channel the goods into the market from where common people buy. Agents can harass buyers at certain points of the value chain like in mandis, wholesaling outlets to give money and get the goods at a higher price premiums by artificially raising prices at every intermediary stage of the total value chain.
This kind of rent seeking through artificial hoarding can be seen as a corrupt practice. It can be viewed as a corrupt practice by a group of people who does not supply adequate agricultural goods at the right, real prices for mass consumption. They are doing this for satisfying their own money and profit making greed through artificial hoarding even though there is enough supply of goods at the ground by the farmer. Further, if they ask for bribes and money from buyers at certain points of the distribution network to streamline the goods supply to market, it can be seen as a form of harassment bribe demanded by these agents.
Agents who demand these bribes in the economy can further collude to increase rent seeking over a period of time. However, fall outs of this rent seeking can be felt in the inflation and in the burning pockets of common individual who goes to the market and buys essential agricultural food grains for daily consumption. Having said all these, let us now look onto the mainstreaming of the above said points into the context of the Indian economy.
If we see the high rate of inflation in the Indian economy, one fact which immediately comes out is the contribution of high price of agricultural goods (arising from supply side factors) in the overall inflation. Data suggests that such contribution is high and owing to such a supply side contribution demand side factors and monetary measures are not the right means to tackle inflation. Once we pause back and ask why the price of these goods are rising in the Indian economy, we get some inconvenient directions.
In the recent past, we did not have a large amount of production shortfalls in pulses, food grains, agricultural goods (like sugar) but still their prices have been soaring high facilitating a double digit inflation. Then, why these prices are rising. Here we come to face the fact that how in Indian economy, hoarding of agricultural goods have artificially raised the prices. These hoarding practices suffer many times from the type of harassment bribes we have mentioned above. We also see large amount of food grains which are rottening in warehouses while the prices of those food items are soaring high. Seeing all this we can realize that distribution networks, agent behaviours in such distribution networks fraught by collusive, corrupt practices of rent seeking can be some of the major contributory factors.
It is over here, we have to think whether legalization of such harassment bribe will also lead to a reduction of corrupt rent seeking practices finally leading to lessening of inflation in the economy.
Lets say, we bring a law in our country to disclose information of the amount of rent premium earned by agents within the value chain of agricultural goods through artificial hoarding, collusion and any harassment bribes. People who will disclose the information will be given an incentive to keep a certain amount of the value of agricultural good which was hoarded or related to which which the harassment bribe was exchanged.
Will this ensure that these agents will disclose the value of hoarded goods with respect to which harassment bribes were exchanged? Once they disclose such information, can it be ensured that some amount of harassment bribe reduction will happen in the economy which will thereby free the artificially hoarded goods leading to better distribution of goods. Such supply side inefficiency decline can then contribute to a reduction in inflation. In reality, the mechanism might not be so simple as it sounds over here in this write up.
For realization of translation of reduction of this inflation from disclosure of information, institutions, warehouses, transportation infrastructure and distribution agents have to function effectively to ensure that the goods reach the wholesalers, retailers at the right point of time to reduce any artificial supply shortfalls and price hikes. An independent supervisory body has to regulate this functioning.
However, the regulatory body might not be able to control the political economy of the bribe creation, rent seeking business in the agricultural value chain of the Indian economy. It might happen that existence of rent seeking, harassment bribes within value chain of an agricultural good can be beneficial for the financial kitty of a political party. Elections, political parties and the business of running a political organisation can be funded through the money that comes out of the rent seeking activities within the agricultural value chain. So political parties might want to maintain the bribes, rent seeking activities even though it hurts the common people through rising prices.
If now we ask that – “Has this been happening in any agricultural goods”? Well there are no such empirical evidences, but situation of some sectors sometimes raise a feeling inside us that many such things are happening under the carpet in select agricultural goods. If they are happening, will not a capture of the regulatory body by the political party take place? If such a capture happens, then in such case even if there are information disclosure norms of harassment bribes, defined roles of regulatory bodies, reduction of inflation won’t happen. Or we will require another “Fasting” by social reformers to reduce inflation in food grains by checking corrupt practices in the value chain of the agricultural sector. I think, India’s strong democracy supported by probable and needed new set of reforms in our institutions determining domestic governance will find an answer before any such second round of fasting happens. And this time those reforms will be brought by players of our governance systems viz. politicians, bureaucrats, leaders at each and every level.