The need of systems that’ll help tackle a crisis rather than deny it

Synopsis: There is a frequent economic crisis in India like coal, onion, petrol, etc. This needs immediate attention for preventing it.

Introduction

India has a history of economic crisis. For instance, In 2006-07, India had a wheat crisis, onion and tomato crisis appeared almost every year. The prices increase in horticulture directly impacts the Consumer Price Index (CPI).

The auto sector has been buffeted by a global shortage of chips. Then there is a constant issue associated with the crude oil prices.

Why the coal crisis is unique?

The coal story is quite unique. India has one of the highest reserves of coal and theoretically, India can mine as much as the country want. But when there is a shortage, it is not just about the price of coal going up, it will also cause collateral damage to the Wholesale Price Index. The problem can also translate into a power-generation crisis as companies run out of feedstock.

But ever during the crisis, the economy did not have any major shock and inflation targets are met constantly.

How the inflation targets are met without any major economic impact?

This is due to a lot of fine-tuning done by the Reserve Bank of India (RBI), and having a monetary policy review every two months ensures constant monitoring.

Similarly, under the Budget and its implementation, there are certain departments that track revenue and expenditure to spot deviations and ensure there are no economic shocks at the end of the year.

Why did RBI and government fail to spot the economic crisis?

There is not enough attention to prior detection of the crisis. For instance, before the escalation of the supply crisis in coal, the government and RBI failed to realise that the monsoon rains are not favourable for the industry.

The same holds for horticulture also. The horticulture department does not detect prior that the late withdrawal of the monsoon is deleterious to the onion crop.

What has to be done to prevent an economic crisis?

Not import only when there is a significant shortfall: There should be economic thresholds in place for ministries to fast-track imports automatically based on availability rather than cost. That threshold should be used again to bring back import restrictions automatically.

Improve market intelligence capability: All ministries should formally have an intelligence cell that monitors minute developments on a regular basis and put plans in place for corrective action before a crisis gets entrenched.

Market intelligence and import mechanisms can be combined by the government to make sure that no situation of scarcity goes out of control.

Source: This post is based on the article “The need of systems that’ll help tackle a crisis rather than deny it” published in Live mint on 21st October 2021.

Terms to know:

• Wholesale Price Index (WPI)
• Consumer Price Index (CPI)