South Korea has a lesson or two for India on how to avoid stagflation — the dangerous combination of a stagnating economy and high inflation.

The Reserve Bank of India (RBI) is unable to cut interest rates because, while the economy is slowing, inflation remains uncomfortably high and may even accelerate as insufficient monsoon rainfall pushes up food prices. Some months ago, Korea had a similar problem: inflation expectations were holding close to the top of the central bank’s two to four per cent target even though weak external demand threatened to take a toll on consumption and capital expenditure, necessitating a looser monetary stance.

Unlike New Delhi, Seoul anticipated the stagflationary risk and took timely action. A government task force headed by the ministry of knowledge economy recommended loosening the stranglehold of the four oil refiners – SK Innovation, GS Caltex, Hyundai Oilbank and S-Oil – on pump prices. By tying up gas stations in exclusive contracts, the entrenched players kept retail fuel prices – and their own profits – higher than they ought to have been. To break this cosy arrangement, Samsung Total Petrochemicals was allowed to sell its gasoline to state-run Korea National Oil Corp, which in turn agreed to give it to any “discount” station not affiliated with the four refiners. Lucrative tax breaks and easy credit terms were offered to entrepreneurs to expand the network of such independent pumps.

Sceptics said the plan would not work because Samsung Total, an equal joint venture between Korea’s biggest conglomerate and the French energy behemoth Total, can only meet about one per cent of the country’s gasoline demand. But competition is already having an effect. Local petrol prices fell 0.9 per cent from a year earlier in July. The presence of thrift stations is making refiners reluctant to pass on increases in global crude oil prices to final consumers, Barclays says. In conjunction with efforts to ease vegetable supplies, administrative measures targeting gasoline distribution have had an impact on the Korean economy.

Of late, Korea has started surprising the markets with data that suggest a steep deceleration in inflation. Prices rose just 2.2 per cent from a year earlier in June, allowing the Bank of Korea the room to cut interest rates in July. The most recent inflation reading is 1.5 per cent, suggesting yet more monetary easing may be on its way. Inflation expectations of Koreans are now at a 19-month low.

Yes, Korea’s export-dependent economy may cool quickly if global demand for electronics, auto and ships continues to disappoint. But at least the central bank will have the room to fight off the threat of a recession. In India, the RBI has its back to the wall because the inflation genie simply refuses to get back into the bottle.

The lesson for Indian policy makers is this: rather than talk vaguely about the myriad supply-side bottlenecks that make the economy inflation-prone, they need to find critical choke points that can be opened quickly. P Chidambaram, the new finance minister, would be obviously right in contending that there may not be many such opportunities in India because states control agriculture, and food has the biggest share in the consumption basket. Still, he must soldier on.

For instance, the Confederation of Indian Industry has suggested that, given the gravity of the inflation challenge, at least perishables like fruit and vegetables be struck off the list of items that must be sold through middlemen. That would be a good start. Clearly, the “ahrtiya” – commission agent – system has outlived any utility that it may have had in the 1960s and 1970s, when many states introduced their Agricultural Produce Marketing Committee (APMC) Acts that restricted farmers from participating in interstate commerce and from selling directly to food-processing companies.

As for states that have amended their APMC laws and made them less draconian, maybe it’s time to look into giving them the right kind of fiscal incentives so they can lure private investments and create cold-storage capacity and other missing elements in the food supply chain.

Passing the much-delayed goods and services tax should also be the highest priority because it will bring down prices by subsuming many local levies that tend to sit on top of one another, creating a cascading effect on final prices.

What Korea did to shake up oil retailing will be called a “reform” in India; and, therefore, it will be put in the category of things that must be done tomorrow. Today’s to-do list will only include steps that need to be taken urgently to ensure “stability”.

This dichotomy is now unsustainable. When reforms are ignored for a long time, they make the system less and less stable. The RBI will agree that the stickiness of the inflation challenge in India is, at least in the present climate, a supply-side headache; managing it with demand-containment tools like interest rate increases can only lead to poor growth outcomes.

Another example is the mess that governments have made of the power sector. The two recent grid failures got huge coverage in the world media. Should those be blamed on reforms ignored for decades or be seen as a mere blip in maintaining stability?

South Korea’s “reform” story has a postscript. After President Lee Myung-bak took personal interest in breaking the existing oligopoly, a group of eminent citizens came together and announced that they would set up a “people’s oil company”, which will sell its products a fifth cheaper than the established players, Platts reported. A man named Verghese Kurien did something similar in India – for milk – five decades ago at the behest of Lal Bahadur Shastri. When Prime Minister Manmohan Singh says he wants to revive animal spirits, is he also thinking beyond the Tatas and the Ambanis and the Adanis?

The writer is a Singapore-based financial journalist.

These views are his own