An Introduction To Factors On The Supply Side Affecting Prices
Factors on the supply side affecting prices generally operate through their effect on the cost of production. But in a non-competitive market, producers often try to maximize their profits by creating artificial scarcities. In India, where production has not increased at the desired rate, hoarding of essential commodities and the government’s price support policy have also contributed to the price rise. Main factors on the supply side affecting prices in India are as follows:
Table of Contents
1. Erratic agricultural growth: (Factors on the supply side affecting prices)
The Indian agriculture has remained largely dependent on monsoon over the years and thus crop failure due to droughts have been a regular feature of agriculture in this country. In the years of scarcity of foodgrains, not only the prices of food articles increased, but the general price level also rose. Whenever the agricultural output declined in this country, market arrivals of agricultural products also declined. In many years, the decline in market arrivals was much more than the decline in the agricultural output and caused immense rise in agricultural prices.
Since the weight allotted to agricultural products in the Index Number of Wholesale Prices is fairly high, a rise in agricultural prices automatically gets reflected in the rise in general price level. Moreover, under the pressure of rising prices of foodgrains, industrial workers who spend a major part of their incomes on food have forced their employers to raise their wage rate. Consequently, the prices of industrial goods have also risen in periods of falling agricultural production.
2. Hoarding of essential articles: (Factors on the supply side affecting prices)
Failure of crops always encouraged big farmers and the wholesale dealers in agricultural products to indulge in hoarding with the expectation that the prices of these commodities would rise. This behaviour of producers and middlemen is in clear conflict with the interests of the society.
Hoarding, when production goes down in the country, aggravates scarcity conditions and pushes up the price level. Hoarding has been a common phenomenon in India throughout the period of economic planning. In recent times, hoarding of onions, oilseeds and pulses has caused steep rise in the prices of these commodities.
3. Agricultural price policy of the government: (Factors on the supply side affecting prices)
In order to provide incentives, particularly to farmers with marketable surplus, the government has been pursuing a policy of price support for about five decades. This entails announcing higher MSPs (minimum support price) year after year to ensure that farmers get remunerative prices for their agricultural produce that not only cover their cost of production but also provide some profit margins. Some economists have argued that hiking MSPs year after year is one of the main causes of food inflation in India.
4. Inadequate rise in industrial production: (Factors on the supply side affecting prices)
Industrial production increased at the rate of only 4.1 per cent per annum over the period 1965 to 1976 and at the rate of only 6.1 per cent per annum over the period 1974 to 1979. The year 1979-80, in fact, recorded a negative growth of -1.6 per cent. Because of this deceleration in industrial sector, there was a shortage of industrial goods and this created inflationary pressures in the economy. During the economic reform period (the period since 1991) , there has been market fluctuations in industrial production which has created conditions of instability and uncertainty.
In such type of atmosphere, inflationary pressures are bound to continue. Industrial growth rate was just 1.4 per cent per annum in the Twelfth Plan according to IIP (base year 2004-05=100) and 3.7 per cent per annum according to IIP(base year 2011-12=100).
5. Upward revision of administered prices: (Factors on the supply side affecting prices)
There are a number of important commodities for which price level has been administered prices are for commodities produced in the public sector. The government keeps on raising administered prices from time to time in order to cover up losses in the public sector which often arise due to inefficiency and unimaginative planning. Obviously the right policy would be to reduce costs by improving the efficiency in the public sector enterprises.
This, however, requires great efforts, and therefore, the government prefers the easier alternative, that is, raising administered prices. This policy results in what is known as the cost push inflation. During the last two decades, administered prices of petrol, petroleum products, coal, iron and steel, non-ferrous metals, electricity and fertilizers were raised at regular intervals.
Over the years, the import prices of petroleum products have increased steeply, and their contribution to the domestic price rise is more than that of any other commodity. On the other hand, the governments, both at Centre and the State levels, have relied heavily on indirect taxes for raising revenue. These taxes have invariably led to price rise.