The Hindu Business Line : Soft on inflation?

The UPA Government wants to convince the nation that it has both recognised the dangers of creeping inflation and that it intends to rein it in. The first part is easy; the second is not. Ever since the inflation rate breached the Reserve Bank of India's `tolerance level' of 5.5 per cent and New Delhi admitted to the dangers it was fraught with, all that it has done is to rely on the apex bank. Barring some half-hearted import of grains to dampen prices, the impression that the Finance Ministry has given is that inflation is largely a monetary problem; ergo, the RBI must raise interest rates and skim off liquidity to curb runaway demand for credit.

Several hikes later, inflation still rages but North Block and Mint Street want the nation to believe that the fire is under control. From a high of 6.7 per cent the inflation rate has dropped to 5.66 per cent; now, the Finance Ministry has announced measures to bring it down further. Typically, the steps are monetarist in nature — sterilisation of capital inflows, raising again the Cash Reserve Ratio, and perhaps some more repo rate hikes. So sanguine are policymakers of bringing inflation back to safe levels that the RBI Governor recently spoke of raising the tolerance bar to around 4 per cent as if by doing so prices would obediently fall in line. Dr Y. V. Reddy did mention that India's inflation level had to get closer to the inflation rate of 1-2.5 per cent that is acceptable in the developed world. Since the 1990s, many countries (not the US) have set explicit inflation targets that their central banks have to maintain. India has not followed this approach — first introduced by the Bank of New Zealand in 1990 — probably because it mandates fiscal prudence. Typically, India follows the soft option, settling for inflation tolerance instead of targets and a fiscal management act that almost every ministry other than the Finance in the present government is tempted to violate.

Perhaps the RBI ought to harmonise further by resorting to the Consumer Price Index (CPI) as a barometer of inflation, as developed nations do, rather than the dubious, average Wholesale Price Index that fails to capture the full extent of price escalation. RBI data on various CPI range between 7 per cent and 10 per cent. The WPI's yearly variations for individual essentials, often over 30 per cent, are not only higher than the CPI's but would also be considered intolerable by any developed-country standard. New Delhi must act now lest the prices of onions and grains figure in next year's general elections