No more dreams: It’s harsh reality
By The Economist
The common man has awakened from the lovely dream of lower prices generated by election promises to the real world of rising prices. The dream has been transformed into a nightmare, especially after the diesel price increase.

Prices are now on an upward spiral. The common man knows, as much as the economist, that when diesel prices rise that not only bus fares increase, but the price of food as well. In fact, the price of nearly everything would soar.

The depreciating rupee would be a cause as well as an excuse to raise prices of imported goods. Even a common man's basket of basic foods has a significant component of imported items. Sugar, wheat flour, bread, tinned fish and milk are mostly imported.

For the poor the prices of a year ago were excessive, now it is unbearable. The affluent and the upper middle classes could absorb these price increases without much effect on their living standards. They can cope with them. To them, the price increases would be a small proportion of their incomes, especially the basic items of expenditure. In fact they can even readjust their style of living to not increase their living costs by much. They can curb the conspicuous consumption they indulge in somewhat. They can compare the Colombo prices with international prices and derive some comfort.

These are not options for the poor whose basic living costs would rise to unbearable levels. Beg, borrow or steal to live may be their option. The hard fact is that the government has no policy options. In fact the postponement of the price increases by cushioning it with subsidies may have aggravated the problem. Subsidies are not a realistic option for a government saddled with a large budget deficit and a growing public debt.

The Fiscal Responsibility Act that requires the government to keep expenditure within accepted parameters of budget deficits, make the task impractical. The inadequate revenues and already rising public expenditures compound these difficulties.

What then can be done? First of all it would be necessary to explain to the people that the price rises are inevitable owing to global conditions. They must be told that if the government were to reduce prices through government subsidies then the people would have to pay for these in some other ways.

The concept that "there is no such thing as a free lunch" must be explained. It must be explained not only to people but also to the highly intelligent ideologically bound constituent elements of the government. Taxing the rich to pay for the poor has serious limitations as the poor far outnumber the rich. Additional government expenditures invariably fall on the shoulders of the poor.

The low productivity in the economy accounts for both the high prices of domestically produced goods, as well as the difficulty in making a significant headway on exports. Increased productivity would enhance productivity, reduce unit costs and make exports competitive in world markets. Instead the panacea for poor export performance has been the depreciation of the rupee that brings in its wake higher import prices and higher costs of production. Better work ethics, better management practices and benefits associated with improved productivity could increase exports and reduce the strain on the balance of payments. Although the country's trade dependence, particularly the import dependence, and more specifically the price increases for crude oil, have been the fundamental and underlying reasons for the price increases we are facing, it should not be forgotten that fundamental weaknesses in the structure and performance of the economy are important determinants of the inflationary trends that we are facing.

Getting the economic fundamentals right is the real solution to the problem of prices. Providing incentives for agricultural production, reducing the costs of cultivation, reducing marketing margins and improving the technological skills are the means of improving small farm agricultural productivity. Such improvements could reduce food prices, a key element in the cost of living.

With oil prices increasing, the trade gap enlarging, reserves declining and the rupee depreciating, there is little hope of the price rises abating. The chaotic political scenario is hardly the environment for proper economic decision-making. The rich would be quite vociferous about the high costs of living. Yet they can cope with it. The poor would have to suffer. The real danger is that the distortions created by the inflationary trends would hamper economic growth and exacerbate the problem in the future.

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