The Hindu Business Line : Import to douse inflation

WITH INFLATION RAGING at over 8 per cent and little prospect of a major downturn in crude oil prices in the near term, New Delhi seems to grabbing at any and every weapon to fight the price spiral. There have been fiscal reliefs for crude oil and steel. The Cash Reserve Ratio has been raised to suck out some of the excess liquidity. The Finance Minister has been talking of more measured steps to rein in inflation. The latest is that two agricultural commodities — sugar and edible oil — are under the scanner for corrective measures. Indeed, the demand-supply mismatch and the potentially explosive price situation in these two essential food items of mass consumption were known several weeks ago.

The Government cannot be ignorant of the fact that commodity markets move on the basis of expectation of future changes in demand and supply, rather than on current fundamentals. There is suspicion that precious time was lost to indecision and also because of political pressure from alliance partners against liberalising imports, especially sugar. Satisfactory rains in August perhaps lulled the Centre into complacency. It is mid-September now and time for the South-West monsoon to withdraw; yet several regions are facing serious moisture stress which can negatively impact the output of many kharif crops, and affect rabi planting to some extent. On the other hand, the demand for sugar and cooking oil rises manifold during the festival season between August and October. The market takes cognisance of such developments almost immediately. Large funds are flowing into the commodity markets with traders — both in cash and futures sections — building speculative positions. The Government cannot afford to lag behind in monitoring market conditions nor can it refrain from taking action to please alliance partners, if it is serious about achieving success in controlling prices.

In the case of sugar, never was there a doubt that domestic production would be significantly lower for the second year in a row, resulting in considerable drawdown of stocks. Raw sugar imports are now allowed duty-free with the obligation to export from domestic production within 24 months. Two lakh tonnes are expected to arrive over the next two months. In the case of oilseeds, the ensuing crop is expected to be much lower than last kharif's, with an estimated loss of 8-10 lakh tonnes in terms of edible oil. Prices are likely to remain firm at least until arrivals gather sufficient momentum and crushing starts. For imported oils, a reduction in tariff values in line with global prices, which now seems imminent, has been long overdue. Uncertainty over the change in tariff value has slowed imports. It is fortuitous that at a time when India's import needs of the two essential commodities are rising, world prices are ruling softer than they were at this time last year. Imports have to be encouraged, at least as a short-term measure, to control rising domestic prices and deny speculators any opportunity to make a killing at the cost of consumers. Allowing the rupee to appreciate vis-à-vis the dollar would lower the value of imports.

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