Grappling with Inflation

by - Ashok Handoo, Freelance Journalist

One has reason to draw some comfort from the fact that the inflation rate has been falling, though marginally, for the second consecutive week. That is because one has been witnessing a consistently rising rate of inflation for about eight months now. The curve has started to bend, but it is too early to rejoice.

As the Finance Minister Shri P Chidambaram put it, it is too early to draw conclusions on the possibility of falling prices. The Government however is confident that the measures taken by it to control inflation will begin to show results soon.

Fall in commodity prices during the last two weeks is the major reason for inflation showing moderation. Out of the 98 primary articles taken into account for measuring the annual inflation rate, prices of 18 essential commodities have declined by 0.4%. These include rice, pulses mustard oil etc. But the manufacturing sector is still holding on with a marginal increase of 0.2 %.

The new Governor of the Reserve Bank of India Dr. D Subba Rao has set his priorities very clearly. “The immediate priority will be to manage inflation and inflationary expectations,” he declares. The question now is will the new Governor continue with the tough monetary measures adopted by his predecessor, or he will relax it a bit. Since monetary policy is seen as the first line of defense against inflation by any government, it is unlikely that he will loosen his grip on it in the near future.

The United Nations Conference on Trade and Development (UNCTAD) report released recently predicts a high volatility in food prices during the year. But that is more in the context of global situation. India is better off as far as food prices are concerned. The Prime Minister’s Economic Advisory Council, in its Economic Outlook Report for 2008, is of the view that coordinated policy action can bring down the inflation rate down to 8-9 % by March 2009.

For the Prime Minister, Dr. Manmohan Singh, inflation continues to be a major concern. At the same time, he wants to ensure that while dealing with it, growth is not hurt. He hopes that the country will still be able to have 9 per cent growth in the 11th Plan, but this requires increased production in all sectors. “Produce more to beat inflation,” is his mantra. So the focus now has to be on the supply side. The stress on the supply side has to be eased to beat the inflation monster. That is what the Government is now looking at.

As of now, the growth rate slipped to 7.9 % in April- June period compared to 9.2% in the same period last year - the slowest in any quarter in the last three and a half years. This happened primarily because of RBI’s hard anti-inflation measures like increase in interest rates and Repo rates. So it is on expected lines, particularly when the RBI itself had projected a growth rate of 8%. PM’s Economic Advisory Committee had pegged it at 7.7%.

The fact that farm sector growth this year was only 2.6% ending March 2008, compared to 3.8% last year, is a pointer towards calls for better attention to the farm sector. About 60 per cent of our population subsists on farming, but it accounts for only 1/5 th of the GDP. What is of concern is that only 15% of bank credit is going to this sector. Unfortunately, floods are bound to affect the production of the agricultural sector.

The falling international prices of crude oil, which is now hovering around $100 a barrel, is one silver lining. But here too, one cannot expect an immediate fall in domestic oil prices, since the present petroleum prices in India are heavily subsidised and that the oil companies have accumulated huge losses during the last one year. When international crude prices rose to about $150 a barrel, the Indian government continued to bear the brunt without passing it on to consumers for a long time.

At the end of the day, there is every reason to hope for a further fall in the inflation rate in due course of time. But one has to keep in mind the gestation period that is always there for whatever measures the government takes. The effort should be to reduce this period to the minimum, so that people can heave a sigh of relief from the burden of inflation.
Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB