The Hindu Business Line : Fuelling inflation

The reputations of governments the world over and rates of inflation are inversely related, especially in developing countries including India. For decades, governments used administrative measures to dampen prices; for the Reserve Bank of India price stability was a prime function of monetary policy, sometimes even at the cost of growth itself. That singular concern with prices has continued to the present when the economy has moved considerably into the market place in which decisions on prices are determined more by demand-supply conditions than government fiat. Ironically, the most critical drivers of price movements in this country — food and fuel products — are still in varying degrees controlled by the government; it is hardly surprising, then, that the recent fuel price hike coming on the heels of a 25 per cent jump last year, have raised howls of protest from Opposition parties and the Left coalition partners. But most of all, it has raised the spectre of inflation across the board and for that reason alone, the Government may face brickbats from a more diffused populace than politicians.

Price data for the last three months do give cause for worry about a general price rise above the comfort level of 5 per cent. That is the forecast for the current fiscal by the RBI. Inflation, as measured by the Wholesale Price Index (WPI), hovered around 4.5 per cent in 2005-06 compared to 6.5 per cent in 2004-05; it was pegged at 4 per cent during the first three months of calendar 2006 largely because prices of manufactured goods remained subdued. The Government keeping petro prices low even in the face of global spikes in crude oil also helped. With the latter showing no let-up in price rises, the Government has now allowed the price of fuel to move up. The effect of such hikes on the WPI will show up later. But that is of little comfort because the inflation rate, as measured by the Consumer Price Index, is worrying as it reflects the failure of policy on various fronts. At 4.4 per cent in 2005-06, the inflation rate as per CPI is higher than in 2004-05, mainly on account of the rise in the food and fuel group of articles, which carry higher weights in the WPI and the CPI. Inflation in foodgrain prices, for instance, shot up from 0.62 per cent in 2004-05 to 5.23 per cent in 2005-06 and to 8 per cent in the first half of April. Electricity too rose from to 4.5 per cent in the three months up to April, up from 1.70 per cent in 2004-05.

The main causes for inflationary pressures lie here. It is no coincidence that the farm and power sector lagged in GDP growth rates. One is still under state control and both have been the most neglected in terms of change-incentives. The Government can learn from its own successes in other sectors and urgently implement those polices that boost productivity. That will be the best way to fight the global oil price rises that show no sign of reversing.

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