Government moves to control Double-Digit Inflation

by - S. Sethuraman, Freelance Journalist

India is battling a double-digit inflation, like many other emerging economies, largely resulting from the surge in global commodity prices, chiefly oil, food, metals and fertilizers. Overall, the international commodity prices are yet to moderate to an extent that would help countries including India to arrest the steady uptrend in inflation, already in double digit, and stabilise domestic price levels. Moving in that direction, the Government has announced further measures to strengthen availability of essential articles of daily consumption. Supply management must have high priority along with demand control.

Progress in the anti-inflation strategy, however, would depend much on whether the recent downtrend in global oil prices and some softening in cereal prices would become durable. Oil prices dropped from an all-time high of 147 to around 120 dollars by mid-August though it is still double the 60 dollars in March 2007. Oil prices are influenced by geo-political tensions and the US dollar’s exchange rate.

Cereal prices also eased in the second quarter of 2008 and this should be of some relief. With maximum wheat and rice procurement and a good kharif crop to be harvested, India is better placed with its food economy.

How Long Double Digit?
Reflecting world prices and domestic demand pressures, the annual rate of inflation began surging and entered double-digit in the new fiscal year. At 12.63 per cent in the week ended August 9, the annual rate of increase in the wholesale price index for all commodities was the highest in a decade and a half, a matter of utmost concern to Government, which has been tackling inflation through an array of fiscal, administrative and monetary measures on a continuous basis. While inflation which hurts the poor the most has to be brought down as early as possible, Government’s efforts at the same time seek to ensure that there is no disruption in the growth momentum.

According to the Finance Ministry, the current rate of inflation has also to be looked at the “base year” effect as the wholesale price index is measured on an annual point-to-point basis. That is, if the rate of price rise was too low in the relevant week of the previous year, even a small increase in WPI of the corresponding week in the current year would show up in a larger rate of inflation point-to-point. While prices of some articles may have softened, there are also significant rises in some other commodities, on a year to year comparison.

The current expectations are for inflation to remain in double digit for some months to come but Government hopes that at least the rising trend could be halted by November, even if the annual rate does not revert to single digit before the end of the fiscal year, as predicted by economists. The Reserve Bank of India has been tightening lending rates in order to contain excessive liquidity and reduce aggregate demand.

Since monetary policy has a greater role in the present context to contain build-up of inflationary pressures and eventually to bring the rate of inflation down to single digit early in 2009, there could be further tightening of policy rates. This is to keep in check inflationary expectations, and additional demand pressures, emanating from salary increases to central government employees. Containment of inflation is imperative for macro-economic stability and sustainable growth but a dramatic improvement can come about only if domestic measures are complemented by a sustained fall in global oil and other key commodity prices, as pointed out by the Prime Minister’s Economic Advisory Council.

Supply-Side Measures
With a record procurement and build up of reserve stocks in excess of buffer stock norms, Government has decided to offload upto six million tonnes of wheat in the open ‘market at intervals. It would include additional allocation to states for the requirements of the ‘above poverty line’ population, retail sales and for meeting needs of bulk consumers like roller flour mills. It is one of the measures to enhance availability especially during the coming festival season when prices tend to rise in the open market.

The Government has extended the ban on export of rice, wheat and pulses till April next. Although India needs to import edible oils – a sensitive item in price rise – exports are banned. For consumer benefit, a scheme for the supply of edible oil with a subsidy of Rs.15 per kilogram has been introduced. Ten lakh tonnes of edible oil are being imported and would be distributed to states for public distribution. Also, an additional quantity of five lakh tonnes of non-levy sugar (ex-factory) is being released for the festival season. In addition, the Government proposes to supply four lakh tonnes of pulses, a commodity always in short supply, with a subsidy of ten rupees per kilogram.

Among manufactured products category, steel price rises have also contributed to the inflation flare-up. After raising prices in the first half of the year, in line with international trends and the rising costs of iron ore and other inputs, producers have agreed to restrain themselves and hold the price line for three months. Government had imposed export duty on steel to augment domestic supply and later withdrew it when steel manufacturers agreed on restraint. With global prices falling recently, they have been urged to reduce prices correspondingly.

Growth Outlook
Global economic slowdown and unprecedented levels of inflation are impacting on emerging economies including India, slowing their pace of growth. India had gone through a five-year phase of high growth averaging 8.5 per cent. The Economic Advisory Council has projected a 7.7 per cent growth in 2008-09 as against the 9 per cent last year with a possible return to above 8 per cent in the following year.

Growth in USA, European Union and Japan, among the major industrial economies, has considerably weakened this year in view of the continued financial market turmoils, tight credit markets, US housing slump and elevated energy and non-oil commodity prices. Stability in the global financial system is unlikely to be restored in 2008, according to US economists.
Relatively faster-growing Asian economies, notably China and India are well-placed to absorb external shocks though they cannot avoid some fall-out such as a possible decline in capital flows and in external demand for their products in 2008-09. Altogether, a major challenge for Government to bring down prices while keeping economic growth intact in a pre-election year.
Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB