Government may have to pay high price for rising prices (Commentary)

May 4th, 2008 - 2:07 pm ICT by admin  

A file-photo of Manmohan Singh
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

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