The Hindu Business Line : Inflation control

Inflation hurts but inflation control measures should not hurt. Food distributed through public distribution systems provides a great opportunity to provide subsidised food to the consumer by increasing the subsidy without having to bring down farmers realisation for their produce.

On the other hand, cement and steel prices need to be brought down only by policy interventions as it is not possible to selectively subsidise these products for the economically weaker section.

However, what the Government has done is just the opposite by banning exports of agricultural produce bringing down farmers realisation even further. Sunflower seeds have dropped by Rs 500 / bag or by 16 per cent; similarly cotton seed has dropped by over 12 per cent. If farmers are allowed to get international prices for their produce, there would be no need for loan waivers at all in the long run.

In order to reduce inflation the government seems to be looking at making the poor poorer while no decision has been taken to bring down the prices of steel and cement. Interest rate hike is traditionally considered a way to curb inflation.

While we are thinking in terms of raising CRR or SLR, there is no talk on banning non-automatic route of ECBs which are today bigger than the automatic route of ECBs .

ECBs make money available to large borrowers at 3-3.5 per cent, whereas the SME borrower has to pay over 11 per cent and yet it is this interest rate that is proposed to be hiked. Thanks to the classification of micro-credit under priority sector without fixing any maximum rate for lending, many of the micro-credit firms have turned village money-lenders, charging a very high rate of interest.

Once again, the controls hurt only those who are already hurt — those who are paying high rates of interest will be asked to pay even higher rates, and the $2-3 billion per month that is making its way into our country as ECBs will continue to be available to the large borrowers at 3-3.5 per cent interest.

Manikam Ramaswami e-mail

Runaway inflation

Inflation has gone up to 7 per cent, the highest in the last year and a half. The poorer sections of society are the worst hit by the spurt in food prices. The government has resorted to a series of measures, such as ban on export of certain items and reduction of import duty on others, but none of these have had the desired impact.

Our food security is at risk and galloping inflation has emerged as a major macro-economic issue requiring focussed addressing. If left unchecked it may even threaten and disturb the economy’s fiscal equilibrium.

The fast rise in prices of food-grains, pulses, edible oils, vegetables, etc., coupled with unprecedented rise in prices of such commodities as steel and cement, have pushed inflation to a new high.

The real cause is the mismatch between demand and supply, not only in India, but globally. The government must take measures to contain inflation at a reasonable level and apply a combination of measures while firming up long-range strategies.

Prudent fiscal measures and a balanced monetary and credit policy are vital for this purpose. Capital market in India has almost fully dried up or is on the verge of becoming so. Also there is a near complete stoppage of inflow of cheap funds from international sources. Cost of bank credit has gone up.

All these have adversely affected production and manufacturing. Thus, at this juncture, what we need is a cheap money policy.

The RBI must have, on earlier occasions, reduced interest rates by cutting CRR or other rates, like repo, etc. But the central bank seems to have forgotten the supply side completely.

The RBI policy, particularly the high rate of interest, has discouraged production of all commodities. Now we need to focus on augmenting supplies of all articles — food and non-food. Abundance has to be created and mismatch between demand and supply eliminated. For this, the RBI must adopt a cheap money policy, as inflation has not been demand-driven but has its genesis in short supply.

Both the government and the RBI must initiate supply-side interventions and adopt prudent fiscal and credit policies. The accent must be on agriculture and production of more and more foodgrains. For this, the focus should be on providing farmers bank loans at affordable rates, improving farm productivity and removal of transport and other logistics related constraints. Inflation control needs concerted and constant efforts by all concerned — the Centre, States, and the apex bank.

K. K. Ammannaya Udupi

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