The Hindu Business Line : RBI applies repo brakes

The Reserve Bank of India decision to raise the reverse repo and repo rates for the second time this calendar is an admission, if any were needed, that inflationary pressures are indeed building in the economy. The RBI and the Finance Ministry have forecast a 5 per cent rate of inflation for the current year, but this is based on the oil price hikes and does not take into account other, more threatening, price movements in the economy. To that extent the move to increase by 25 basis points each the reverse repo and repo rates will not end the present danger. The previous fiscal witnessed three hikes, the last in January 2006, but they were more of cautions to the banking system; signals to banks to exercise prudence in retail lending in particular. Inflation was more the backdrop. Now it has moved center stage.

With the hikes in repo rates, the RBI will appear just a little less unpopular than the Government that raised fuel prices for reasons beyond its control. The real danger to stable prices however lies elsewhere; for the last three months, prices of essentials items, primary articles, mineral oils, foodgrains have been rising alarmingly. Averaged out in the general rate of inflation, these price trends are pointers to what the government must do if inflation has to be kept in the 4-5 per cent range. They are also clues to the strategy that the Left parties, as the main coalition partners, must adopt if their concern for the poor has to move beyond sloganeering.

To start with, the Government must introduce steps to ensure a more efficient use of the costly fuel through conservation, economy and more efficient transportation. This requires an urgent scrutiny of the national highway policy and the progress of road connectivity. Equally imperative is the removal of bottlenecks that impede the flow of traffic and goods. Experts argue that in the West freight trucks can travel up to 800 km a day, against the India average of 200 km. Alongside, the Government must help extend the limits of current economic growth. The most undeveloped areas — the farm sector and infrastructure — are also the sources of inflationary pressures. So far there has been resounding silence on the progress of initiatives in these sectors Inflation control is not just fire fighting; it is about removing scarcity and raising productivity through intelligent policy initiatives.

The Left allies and the Opposition are right in protesting the Government actions on the price front but are wrong with their prescriptions. Demanding tax-cuts in the place of fuel price hikes is asking for higher fiscal deficits that could also lead to inflation. The Left parties should instead remind the UPA government of the goals they helped frame, the budgetary promises for rural development made over the last two years and demand actions from those in power that are time-bound and accountable.

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