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Inflation Amidst Recession: Nepal’s Paradox
Prof. Dr. Mahendra Singh
 

The recession in the US is unprecedented. It has come as a terrible blow to its economy. In some respect, it is like a natural disaster hitting the U.S. economy. Credit institutions are behaving like dried-up wells than reliable lenders of money and finance. A big company like the Lehman Brothers has collapsed and other big companies and banks are facing threats of closure. Economists say that the U.S. economy is trapped in a vicious circle of dwindling credits, a collapsing housing market and financial meltdown.

Negative inflation

The government of President Obama has described the economic crisis in America as ‘devastating.’ Although the current recession is purely an American phenomenon, it is not confined to America alone, the whole world is going to be adversely affected by it because of its pervasive nature. We are hearing murmurs of a recession in adjoining India also. At present, inflation in India is 5.6 per cent. There are predictions of a near zero inflation rate, while fears are looming large that it could slip into the negative zone by the middle of the year due to decreasing commodity prices.

Paradoxically, at a time when most of the countries in the world are bracing themselves to face the challenges of the crisis, Nepal is experiencing an all time high inflationary situation. This is extremely worrying. If the figures published by Nepal Rastra Bank (NRB) and the survey carried out by the World Food Programme in collaboration with other institutions are to be believed, prices are not only high but rising rapidly at the rate of 14.4 per cent. Because of the pervasive nature of inflation, its harmful effects are being felt to some degree by every citizen and in every corner of the economy.

According to a survey of the market, coarse rice is being sold at Rs. 40 per kg, pulses at Rs. 85 and edible oil at Rs. 150 in Kathmandu and food items are costlier in the remote districts of the country. However, inflation affects different groups differently. Those who can create inflation do not get hurt in this. A few people from the upper income groups have been able to do this in Nepal. They are reaping gains from an upturn in the prices.

Actually after Jan Andolan II, the general public had anticipated a corruption-free economy and price stability. However, the NRB, in its latest report, says that prices are still on the rise. No survey conducted so far has been able to assure the people that prices for the coming months would remain at least the same. Real inflation over the last 18 months has given the people little basis for expecting anything positive. Consequently, it will rob the poor while allowing the rich to get richer.

Economists hold the view that this happens because the rich during inflation increase their income and the market value of their wealth faster than the price rise. On the contrary, the poor people who are unable to increase their income suffer a great loss. Fixed income groups are the worst sufferers because their wages or salaries lag far behind the rising prices. In our context, inflation has unquestionably been especially hard on the majority of the people with low or fixed income because much of the rise in prices have been on foodstuffs on which the poor spend a large part of their small income.

Anybody who is somebody in the government can no longer ignore the hardships of the general people. Of the many questions that are being asked about the current upward trend in the price level, perhaps of great importance to the Ministry of Finance is knowing the cause behind this excessive rise in the prices of food and beverage items. For to understand the cause of something is a prerequisite for taking appropriate action.

A sizable segment of the general public, excluding, of course, the profiteers, believe that the existing rising prices are the result of a syndicate formed by the transporters and a cartel imposed by specific groups within the economy. They exercise their market power over the transportation costs and prices of essential commodities. Businessmen involved in such practices, in their drive for greater profits raise the transport cost and prices of commodities more than necessary to offset any cost increase caused by the bandhs and chakkajams.

Thus the popular view is that the current situation of price rise is primarily a problem of the poor and middle class, and it has been created by profiteers and hoarders. The general public hopefully expects the government to do something to offset the increased cost of food items and other materials.

Meanwhile, the business community is urging the government to provide them a safe and secure atmosphere in which to conduct their business smoothly. They very much deserve it. It is a commitment enshrined in the Interim Constitution. But at the same time, the question arises, what do the businessmen want their business to be free from? Freedom only from barriers to business or freedom also from malpractices adopted by a few profiteers in the markets? Or, even freedom from responsibility for their actions.

Social responsibility

The primary task of the government is to maintain law and order. Peace and security should be the overriding concern of the government. But business leaders cannot escape from their social responsibility towards the society. A specific way in which they can help the society is to keep tab of their friends who are engaged in irregularities.

The common people should not be forced to pay artificial prices for the commodities they need. Taking into account the ill effects of price rise, the government should also employ different measures to wring inflation out of the economy.

(The author is a senior Rural Economist)

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