Can THIS Cause Inflation ??

I guess inflation is the word which is equally understood by the rich and the poor, the educated and the uneducated, and whatever other combinations you can think of. As most of us know, it’s a man-made phenomenon, and generally works to the disadvantage of the commoners, or better, the consumers. Who would like to get smitten by the prices of the daily use items that burn BIG holes into your pockets? Although the inflationary pressures have been brought down a bit and is currently hovering around 10.15% (as of 25/11/2010), still one can't forget that it reached to as high as 16% in the current fiscal year itself.

What Government Says..

The Government of India has smartly given its opinion that the food inflation is not because of supply - demand factors, the Classical Supply-Demand theory of Economics known to one and all. I would like to agree with that, and I am sure (as well as hopeful) that it would be lowered further on account of good monsoons (Now even that is under scrutiny - more than expected rains is being attributed to Climate change!!)

Why are you Reading This!!

I have a different take on this topic, and a weird one too. I believe that the food inflation is because of the Supply-Demand Factors, not relating to the food supply directly, but to that related to Labour- again one of the favourite topics  of Classical Economics. I think most of us must be aware of the Government Scheme called NREGA. All the Indians are gaga over this scheme, and believe that it would be one of the prominent pillars for the upliftment of the poor. I completely agree with this, but somehow I feel that it’s doing some bad as well - like two sides of the same coin.

Some GYAN

Consider this - A farmer in the village needs some helping hand on his fields, as he can't do all work by himself. Yes.. Even the Indian farmer is implementing the world famous "Outsourcing Model" - does what is his core competency, and outsources the remaining activities. Kudos!! The labourers that work in the fields consider themselves to be very lucky if they are able to earn as much as Rs 20-40 a day, depending on the type of work. 

Next day, to the dismay of the farmer and the happiness of the unskilled/semi-skilled labourers, NREGA scheme gets launched in the same village. It promises Rs 100 per day to a worker. Now, it’s a human tendency to get attracted to higher income (all the employees would vouch for that). Hence, now the same labourers would want to leave the farmer, and go for NREGA, as it would give him at least 2.5 times his daily income. He has common sense, after all. Therefore, here we see the classic case of supply-demand factors acting on the labourers, wherein the demand has increased, but the supply would not get increased in the same proportion (or even remain constant, who knows).

Now, the farmer is facing the issue of labour crunch. He either has to increase the pay of the labourers or else look for new helping hands which is a huge task of its own (considering the rate at which young people from villages are leaving their villages for finding greener pastures in the cities). Even the labourer understands that NREGA would be there in the village only for a limited period; after that, he would again have to fall back on the same farmer. So, here come some Management concepts as well!! In order to maintain his Long Term Relationship with the farmer, he would ask the farmer for some hike in his pay. Let’s assume that under pressure, the farmer has to increase the pay of the labourers by 10%. Now comes a Supply Chain Concept :)

We all know that the price which the consumer pays for a commodity is much more than the price at which the supplier sells it. So, taking a conservative approach, let’s say the farmer simply increase his selling price by only 10%, which gets magnified as it changes hands (all the players in the distribution channel), and finally, the end consumer, that is us, have to pay 20-25% more for the same quantity of the commodity.

Government's Two-Pronged Strategy

This is quite interesting. On one hand we are paying more for our daily use products, and as we saw, the reason why this all started was the NREGA scheme - that is, the Government. On the other hand, the RBI has been increasing the base rates every now and then (a total of 5 times this year), thus making the loans costlier as well. So, the Government is impacting both our long term goals (say, a house loan) as well as short term necessities (our day to day consumption of food items).

Conclusion

To conclude, I'd like to say that this is just my perspective, and I am not sure how much impact my deductions can have on the inflation. It might be tiny or a mighty part of the pie. The purpose of this article is just to point out that NREGA scheme can be having negatives (apart from the negatives pointed out by the politicians). What Say??