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Arresting inflation on war footing

By: K Parthasarathi
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The steep rise in inflation with the whole sale price inflation touching 7% is causing concern. This sudden spurt in prices has thrown household budget of the common man into total disarray and the poorer sections are the hardest hit with the prices of food items like wheat, oil, pulses, and vegetables having gone up substantially. The manufactured items like steel, cement, coal have also gone up bringing in its wake all round escalation in prices. It is not that government is impervious to the unwelcome development but its response has been slow to the locomotion of events. There is now pressure on the government to take steps to control the inflationary spiral. It has already taken some fiscal measures like scrapping import duty on crude edible oils and banning export of edible oils and pulses to arrest the upward movement of prices although the effect of these measures would manifest only after sometime. The incentives for exports of steel, cement and some minerals have been removed to make larger availability within the country and thus favourably impact on lowering prices. The steel producers have also been persuaded to reduce the prices of steel that they recently increased.

As Asian Development Bank had remarked the Indian governments ability to control prices can only be limited as India is not alone in the region where inflation is rising and global commodity prices are also on the upswing. The mischief does not lie in food items alone, it is the all round price rise in non-food primary articles and basic metals that have contributed to inflation. These commodities are in short supply across the world and prices naturally have moved up. Although the price of crude has gone to very high level with no indication of coming down, its impact on local scene is not felt that much due to the administered price and subsidy. The ADB warns that that the inflation is expected to spike in 2008 and could hit a decade long regional high. According to World Bank economist, the higher commodity prices are not likely to ease up making it necessary for government to take right measures to reduce the burden on the poor. According to him the elevated prices level in metal, food and oil would remain for long period with no abatement. The importance of fiscal rectitude by the policy makers have been emphasized to tide over the difficulties.

It is not enough for the ministers, politicians and economists explaining the whys of this price rise. The poor folks are neither interested to know the reasons there for nor are they impressed with such explanations. They would like the prices to be reined in quickly and made to remain stable at the affordable levels with the value of their static income not eroded unduly. Things can perhaps be managed only to some extent with mild monetary measures and by reducing the rates of customs duties on capital goods, cement, steel, edible oils, larger import of food grains and edible oils. Banning of futures trading on a food items also helps. It is not certain whether these mild measures would yield quick results in combating inflation. It is always the case that consumer price inflation for industrial workers is always lower than that for agricultural and rural labourers. The burden on the silent majority of poor labourers would be the highest. If the inflation continues to rise even after implementing the measures that are talked about, RBI would be compelled to resort to drastic measures to slow down credit growth and make borrowing costs stiffer.

It has often been left to the central bank to intervene and take such monetary measures as is possible to contain the inflation. But RBI has its limitations. Drastic measures would be frowned upon as that would stifle the growth. As a result it keeps increasing the repo rates in small dosages at regular intervals. The idea is to mop up the excess liquidity caused by the inflows from abroad and to squeeze the growing credit in risky areas. The extension of credit from the banks sees no signs of abatement.It should set for itself the goal to bring down the inflation" as close as possible to 5.0% and should employ all the available policy instruments, including the CRR, to bring desired changes in liquidity depending upon the situation as it evolves. Policies like higher provisioning requirement, increase in risk weight age in specific sectors, reduction of interest rate ceiling on NRI deposits etc have all been employed in the past. When things become unmanageable stiff increase in bank rates would be inevitable slowing down the economy and bringing down the growth rates.

There appears to be no quick fix solution from the government judged by the remarks of Congress spokesman that it has no magic wand to curb the inflation. He could not indicate any specific time frame to bring down the prices to bearable levels indicating a lack of clue of how things would turn out. The thinking in the government perhaps is that while global factors and increasing demand may partially explain the inflation, the constraints on the supply side are the main culprit. One view could be view that the economic growth was being driven both by an increase in consumption and in investment with the rising demand causing supply constraints stoking inflation. Emphasis may be immediately given to remove the supply side constraints.
One also shudders at the thought of the great harm the implementation of 6th Pay Commissions recommendations along with tthe disbursement of arrears to be inevitably followed by state governments too will do to the cause of containing inflation.The waiver of not-so-poor farmers loans and the money available in their hands is another worry.There will be freebies in concealed form in the run up to the polls adding to the fiscal profligacy.Till such time inflation is brought under check, the government should proceed cautiously.

Whatever the reasons may be, the government should get its act together and cannot allow the people to suffer. Indias agriculture has been much neglected area thanks to a minister who considered it as a part time job. India should increase its production of food grains and pulses to the full capacity. Food security should rank high in its priority and the PM should ensure this is not compromised in any way. People have not forgotten the sorry figure cut by the agriculture ministry in importing inedible wheat at exorbitant prices while denying the indigenous farmers reasonable and remunerative prices for good quality wheat.Agriculure is a key portfolio needing full time attention and should be entrusted to someone who can devote his undivided attention.

With elections around the corner, the government would be keen to to contain the rising inflation on war footing. It cannot politically afford to allow the prices of essential items to escalate beyond the reach of poorer sections. Even if the monetary and other measures needed for this purpose would dampen the growth of economy, the government has no choice but to safeguard the interests of the common man. Growth is secondary only to this imperative of keeping the poor from hunger and hardship. Nevertheless prudent balancing of conflicting stands thro multi pronged strategy should ensure that inflation is curtailed and growth remains unhampered.

K Parthasarathi

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