The Hindu Business Line : More bad news on inflation

The bullish price outlook for a large number of essential commodities — agricultural, metals, energy — is a cause for serious concern, especially in the backdrop of high rates of inflation — currently 6 per cent plus — for several months now. Despite a number of anti-inflationary measures — banning of exports, allowing imports and reducing or eliminating import duties on a number of commodities — the price situation remains stubbornly beyond the Government's control. As if consumers have not had enough, the emerging price picture offers little cheer.

The crude oil market is turning hot. Besides the tightening fundamentals, accentuated by the beginning of the driving season in the US, geopolitical concerns arising out of Iran's nuclear programme and the latest Security Council sanctions are likely to propel the energy market higher. Some base metals — notably copper and nickel — have started on their northward journey, thanks to the continuing robust Chinese demand for construction and infrastructure development. If base metals rise, steel cannot be far behind. Strong bio-fuel demand is seen lifting agricultural commodity prices to new highs. With acreage in the US poised to shift to corn (maize, from which bioethanol is made), that country's usually large export surplus of soyabean, cotton and wheat is set to shrink in 2007-08. The conditions are ideal for speculators and hedge funds to move into commodities. The level of fund flow and the game-plan of fund managers have important implications for market participants. As India integrates with the global market, external influences cannot be wished away. The country needs to brace itself to face the inflation onslaught.

Internally, the conditions are far from rosy. The Rabi 2007 harvest of grains and oilseeds is nothing much to talk about. Combined with lower output, a sharp increase in the wheat procurement price is sure to push open-market rates to a new season-opening high. As oilseed production is considerably lower than last year's, additional imports of vegetable oils of 8-10 lakh tonnes (over and above last year's 45 lakh tonnes) and a minimum import of 30 lakh tonnes of wheat have to be arranged to augment supplies and rein in prices. Pulses imports have to continue as usual.. About the only silver-lining is that the global wheat market may soften by 10 per cent in the coming months, making imports that much less expensive; an internal sugar glut may keep prices consumer-friendly. A major determinant of market sentiment would, of course, be the forecast of the South-West monsoon and the onset of rains. Weather uncertainties can skew the market. In terms of demand and supply management, there is little the Government can do from here on as it has already exhausted most of its damage-control instruments. New Delhi is forewarned.