The Hindu Business Line : Inflation pressures

PRICES IN THE economy are officially declared to be going up at over 7 per cent per annum and if the latest round of oil price hikes are factored in, the number would only be higher. Official numbers often mask the severity of the problem due to non-inclusion of the services sector in the measurement of price changes and the emphasis on prices at the farm/factory, as opposed to those in the market. But far more than an assessment of the past, of greater concern to the public is the immediate outlook.

Both global and local factors point to an upward bias in the inflation rate. International oil prices should continue to rule high with suggestions that the output of the Organisation of Petroleum Exporting Countries is now close to the maximum possible in the short term. The cartel therefore does not have the headroom to raise production and arrest the price rise. Also, with the Iraq situation rapidly spinning out of control, the much anticipated spike in oil supplies from that country is nowhere in sight. Most economies are continuing to grow, with China and, to a certain extent, India in the forefront of a global resurgence in output. This too is exerting pressure on prices of a range of industrial raw materials. Internally, the push on the Government to effect an upward adjustment in procurement prices of farm goods is not doing the fight against inflation any good. The behaviour of the monsoon is adding to the worries on the price front. Whatever the eventual number turns out to be for this fiscal, this much seems certain: The question of inflation and a policy response to the emerging situation can no longer be wished away with such empty platitudes as that it has `peaked' (suggesting that nothing more need be done) or that the `worst is behind us'.

The traditional monetary strategy of the Reserve Bank of India to combat inflation is making credit more expensive through such devices as a hike in bank and refinance rates. But considering the nature of the forces now acting on prices, this is not going to have much effect. Not only can such a move adversely affect business confidence, but it would also add to the cost of production causing a further mark-up in prices. The onus is clearly on the Government. It has to safeguard the interests of savers, who need real incentives to save, and at the same time not exacerbate the pressure on interest rates. This it can do by marginally hiking the interest rate on small savings and, particularly that offered on special deposits of PF accumulations. Even if the Government succeeds in bringing the rate of inflation down by a percentage point or two, it should ensure a reasonable reward on contractual long-term savings that incorporates a small liquidity premium to the real returns on such savings.

But, simultaneously, it must moderate the pressures on secondary market yields, which are hardening in sync with concerns on inflation. Reinforcing this is the impact of slowing down of international capital flows that provided significant additional liquidity in the economy. The only way out is for the Government to moderate its spending so that it needs less recourse to the market for funds. Rationalising the duty structure on petroleum products or toning up the tax collection machinery will not do its cause any harm either.