The Hindu Business Line : Price tremors set to intensify, trouble Govt

Report card
Crude has gained about 10 per cent in the last few days.
The metals prices begin to move up.
The bullish sentiment in corn is affecting all grains including wheat.
Oilseeds and vegetable oils too are lifted by burgeoning demand for biodiesel.

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Mumbai Feb. 5 The Union Government is already totally in the defensive over raging inflation, while serious concerns over possible political backlash have gripped politicians and others. But the worse is yet to come. The Government of the day could potentially get into further trouble on the price front if signals from domestic and international markets are any indication.

Admittedly, a large part of the country's inflation is `imported' in the form of high-energy prices. Mineral oil market that recently corrected down to the delight of major importers and consumers seems to have changed direction.

Energy prices

Prices have resumed their northward journey. Crude, for instance, has gained as much as 10 per cent in the last few days. The oil market is tightening for sure, with the US crude inventories declining sharply relative to seasonal norms. Geopolitical risks that appear contained for the time being may erupt any time.

Metals

Globally, the market for base metals (mainly, copper and aluminium) had turned weak for a host of reasons including slowdown in consumption growth and rising inventory at the exchanges.

But the continuing strong Chinese growth story (GDP growth rate in excess of 10 per cent in 2006) and India's emergence as a rapidly expanding metals consumer means rather limited downside for base metals prices.

The market appears to have bottomed out and prices are beginning to move up.

Steel is no exception. Production cuts in the US have changed the price sentiment. The risk to the upside is evident.

Worse, the metals market is clearly vulnerable to supply disruptions. The danger that labour action in parts of the world can potentially disrupt supplies and lead to price spike is real.

Bio-fuel

In case of agricultural commodities, the price situation is far from consumer-friendly. Globally, the biofuels sector is changing the complexion of the market. Grains market is on a bull run, with corn (maize) leading the way following emergence of demand for bioethanol, largely supported by huge subsidies.

The bullish sentiment in corn is affecting all grains including wheat.

Vegetable oils

Oilseeds and vegetable oils too are lifted by burgeoning demand for biodiesel. Given India's growing dependence on imports — crude, wheat, maize, pulses, vegetable oil and to a lesser extent, metals — domestic market is sure to reflect international price sentiment.

Agriculture

Internally, agriculture continues to be a laggard, holding back overall economic growth prospects. In case of essential food crops, shortages are becoming increasingly chronic. In the current crop year 2006-07, following tepid kharif production, the ensuing rabi crop prospects are nothing much to talk about, although Government makes brave claims as is its wont.

If anything, the season may be marked by substantially lower oilseeds production as also lower than targeted wheat and pulses output.

Rising temperatures across northern India are already seen threatening wheat yields and output, despite record area of 28 million hectares. Whatever be the crop size, the country may be forced to import 3-4 million tonnes of wheat in 2007.

Kharif crop

The next kharif crop prospects will depend on forecast of southwest monsoon as also onset and progress of rains. The monsoon surely is not without uncertainties.

Such conditions create ideal playground for speculators. The Government needs to remain vigilant about speculative activities that rob the consumer but deliver little to the farmer.

It may be a good idea to spell out clearly a price band for major commodities that keeps all major stakeholders — the government, growers and consumers — in the comfort zone. The policymakers cannot spring surprises on the industry and trade by taking precipitate action.

Rabi prospects

The rabi crop is already made and getting ready for harvest. There is little anyone can do to influence the crop size.

We need to look ahead.

Whether New Delhi has learnt any lessons from price and market developments over last several months is unclear.

Uncontrolled inflation and worsening agrarian crisis can be politically suicidal.

It is time the Agriculture Ministry begins to plan for kharif 2007 season in association with the State Governments.

A concerted effort can produce beneficial results. Strengthening input supplies and ensuring credit delivery in addition to timely agronomic advise should get top priority.

According to the Reserve Bank of India, the overall stance of the monetary policy will be `to respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and growth momentum'.

How well it responds to the emerging situation remains to be seen.

Clearly, monetary policy alone will be unequal to fight the ravages of inflation.