Opinion
Government May Have to Pay High Price
for Rising Prices
by Sushma Ramachandran
With prices rising
relentlessly at the rate of over seven percent per annum, the United
Progressive Alliance (UPA) government led by Prime Minister Manmohan
Singh seems to have been gripped with an air of quiet desperation.
Virtually every day the prime minister and his Finance Minister P.
Chidambaram have been making statements in parliament and outside about
the way in which the war on inflation is being carried forward. The
latest news that airlines are jacking up fares has just added to the
gloom on the price front.
The Reserve Bank of India (RBI) also made some announcements in the
latest monetary credit policy about the need to firmly combat inflation
but the decision to raise the cash reserve ratio (CRR) of banks by 25
basis points is not expected to get the job done.
It must be conceded, however, that the central bank's policy measures
are supplementary to those of the government which has already announced
fiscal and administrative measures to curb price rise and is still
considering some more steps, according to the finance minister.
The RBI evidently feels the underlying cause of soaring inflation is the
supply side problem and this has basically to be tackled by the
government. At the same time, the central bank has not tinkered with
interest rates to ensure that the economy does not lose its growth
momentum.
RBI governor Y.V. Reddy is still looking forward to an 8-8.5 percent
growth rate for the current fiscal. It is also expecting inflation to be
contained at around 5.5 percent by the end of the year, an assessment
that appears optimistic now.
But Reddy is going by the performance of the last five years when the
economy managed to not only grow by over eight percent but with
inflation kept at a manageable 4-4.5 percent.
On its part, the UPA government seems rattled by the strident criticism
over inflation persisting at seven percent not just from the opposition
Bharatiya Janata Party (BJP) but also from the Left parties which have
even been organizing protests.
The prime minister himself appealed earlier this week to industry to
maintain the price line, but the corporate sector has rarely yielded to
such persuasion in the past. Steel is a case in point where the
government is scrambling to ensure that prices are kept down since this
is a key industrial raw material.
Rising steel prices will ultimately affect a wide range of the
manufacturing sector and give further push to inflationary pressures. No
wonder efforts are being made to curb steel exports and make imports
easier.
The other major area of worry is food, which has become a far more
complex issue owing to the global food crisis. The hysteria over rising
world food prices has reached the stage where US Secretary of State
Condoleeza Rice is actually attributing some of its cause to the current
scenario on the improved diet of Indians and the Chinese.
Clearly, the silly season is here. There is no doubt that the entry of
India and China into the world wheat and rice markets can lead to
significant price changes. But the current crisis is about global supply
and consumption as well as the impact of global warming on productivity
of food crops.
Former US vice president and Nobel laureate Al Gore's Oscar winning
documentary - "An Inconvenient Truth" - warns about the impact of
climate changes on food crop yields, which, some estimates suggest,
could fall by as much as 10 percent.
And the onus for that is on the developed world, especially the US,
which is not only the planet's biggest polluter but also the biggest
consumer. So perhaps the US secretary of state needs to look inward to
find the root cause of the crisis rather than at developing economies
where much of the population lacks the sufficient purchasing power to
buy their much-needed food supplies.
As far as India is concerned, however, the outlook is quite good this
year for foodgrains availability. Wheat procurement has already crossed
14.2 million tonnes as against only 11.1 million tonnes last year.
Current projections are that wheat imports may not be needed this year,
which is good news globally as well as locally.
On the other hand, import of edible oils and pulses have been growing
over the years, as domestic production has not kept pace with demand.
But if wheat and rice availability improves significantly, inflationary
pressures are bound to recede to some extent over the next few months.
The long-term issues relating to agricultural productivity, however,
will have to be tackled on a priority basis to ensure that the country's
food security is not jeopardized.
The issue of rising prices of fuels, however, will remain a worrisome
one as world crude oil prices are still at the astronomical levels of
around $116 per barrel. Even the basket of crude used by Indian
refineries is now costing over $100 per barrel. This is a political hot
potato since the government does not want to pass on this burden to
consumers but it has to ensure that domestic oil companies remain in the
black - once again, an issue that will have to faced squarely some time
in the future.
One has to wonder, though, how the government did not anticipate the
latest spurt in inflation given the success with which it has kept price
rise at 4-4.5 percent for the last few years. The steep rise to seven
percent apparently caught the policy makers off guard despite the fact
that the finance minister has repeatedly been warning about the need to
take care of supply side issues.
While the combination of fiscal and monetary measures taken recently may
help in bringing prices down to manageable levels in the short run, it
is clear that these steps should have been taken at an earlier stage.
For the ruling coalition, of course, this could not have come at a worse
time. After several years of 8-9 percent economic growth and low
inflation, it may have to face a lower economic expansion and higher
inflation this year. With the general election due soon, unless the
situation is brought under control and fast, the parties in power may
have to pay the price for rising prices.
(Sushma Ramachandran is an economic and corporate analyst. She can be
reached at sushma.ramachandran@gmail.com)
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