Prices — the supply side solution
That is obvious after a resort to tight fiscal policy has failed to produce results. Instead of bank credit to the private sector becoming rather stable or shrinking, it has increased by Rs290 billion in the last ten months of this financial year and the total bank credit has risen to Rs2,077 billion. With that much money flooding the market along with the $4 billion received as home remittances, the prices are bound to rise when the supply is limited.
High economic growth targeted at seven per cent is usually inflationary and the government and the governor of the State Bank of Pakistan Dr Shamshad Akhtar do not want to do anything that hinders the economic growth. The public sector development programme for 2006-07 of Rs415 billion is in fact inflationary, though essential, as its fruits will become available later.
So, the prime minister has directed the chief ministers at the National Economic council meeting to exert themselves to the utmost to bring down the prices to the level to which the people can afford and enable the masses to benefit by the development programmes.
He has urged the provincial governments to seek the cooperation of the district governments as well. The prime minister has spoken of a new price regime for essential commodities while continuing the old subsidies to hold down prices.
Dr Salman Shah who addressed a joint pre-budget press conference with Omar Ayub Khan has said that low income groups would be given price stability through production and supply side improvements.
He has added that the production should be increased so that more goods could be available for distribution instead of less being sold at fair prices through pressure or official vigilance.
He could have as well added another word- imports. More of the essential items in short supply could be imported from India, for example, by streamlining the supply line and ensuring that these are sold here at fair prices, though the import of a million tones of sugar does not seem to bring down prices really.
The government has budgeted Rs402 billion more spending for the next financial year and to that extent, the demand pressure on the market will increase. In the current year, the total budget expenditure is Rs1098 billion and next year that expenditure will rise to Rs1.5 trillion. The budget deficit will be Rs370 billion unless reduced by additional taxation.
Any new government spending that is not the result of tax revenues or domestic savings, borrowing from commercial banks or foreign aid in goods and services is inflationary as that makes additional demands on the market. The government’s income through printing of currency notes is utterly inflationary. And it is easy to print more money now when the Rs5000 currency notes are in vogue now.
Increasing the salaries of the almost five million government employees including provincial and local government employees and raising the pensions of millions of pensioners, however essential, will add to the pressure on the market and push up prices, particularly for the lower income groups. So if justice has to be done to them and to others, the supply side of the economy should be improved radically. Otherwise the government will be hurting those whom it wants to help and other citizens.
The Rs100 billion subsidy to the electricity consumers and users of fertilizers will continue so as to reduce the hardships of the power consumers and farmers.
The government has not spelt out what specific measures it intends to bring forth to stabilize prices and increase the supplies. Dr Shah spoke of giving incentives to the dairy and livestock sectors. Incentives given to them so far have not produced any results. The price of milk is going up and up while the quality is going down and the prices of mutton and beef have also been rising. And the chicken farmers are said to have lost Rs20 billion in three months of flu fears. The effort to import live animals from India has not been a large success.
The prime minister has been stressing that every major city should have more than one wholesale vegetable and fruit market, but enough efforts are not being made in that direction. While some efforts are under way to improve the supply side of the essential goods, including through the import of a million tones of sugar, nothing much is being done to reduce conspicuous consumption or mindless waste.
While some resource-less persons are punished for serving wedding dinners, the real rich and powerful are free to have very elaborate dinners and call them receptions or ‘mehndi’ functions. The less fortunate imitate them and add to the waste of food items.
Despite a few consumer protection societies, conspicuous consumption and even more conspicuous waste continues unchecked. Feudal values prevail and multiply the waste.
In a country with small exportable surplus, we ought to save more to enhance export instead of consuming more and keeping the exports modest.
A country which spends one fifth of its total budget on defence has to use its resources carefully instead of on excessive ostentation of the rich and the corrupt.
We ought to increase the production of vegetables and fruits through the use of kitchen gardens in the rural and the mufassil areas. Of course that can’t be done in the cities as there is shortage of water except for golf courses and other luxury uses.
A country with a population of 155 millions cannot afford to consume too much or waste too much with nearly twenty five per cent of the people officially admitted as poor. If the poor do not find solution to their problems, many more may opt for suicides and violent means.