The Hindu Business Line : Inflation: Only a skirmish won

There is nothing to feel smug about the slight drop in the inflation rate in recent weeks. At the wholesale level, prices are said to have declined. But household consumers have little to cheer about because food product prices at the retail level have remained more or less where they were two-three months ago. Seasonal factors (mainly Rabi harvest of wheat, pulses and oilseeds) are at play. Importantly, a considerably stronger rupee has lowered the landed cost of such imported commodities as pulses and edible oils. But this somewhat cosy situation may not last long. At least for the near future, the potential for the rupee to strengthen further from current levels is rather limited. On the other hand, food supplies are likely to tighten in the coming months. Traditionally, after June, food prices begin to climb because of inventory drawdown during the monsoon season followed by a series of festivals (August-October) prior to the Kharif harvest. How the south-west monsoon pans out over the next four months remains to be seen.

Importantly, the global price outlook for major commodity markets (both agricultural and non-agricultural) continues to turn positive and producer-friendly. For instance, the already firm crude market has a strong upside potential due to tightening global oil fundamentals caused by unabated demand. Crude prices are forecast to rise during early part of Q3. Geopolitics continues to cast a shadow on this volatile market. Base metals and industrial metals still enjoy strong demand. Low inventories, strong Chinese demand and supply disruption are driving up prices. Further price gains are likely for copper, zinc and lead. There is no respite from strong demand for iron ore and steel. For agricultural commodities, the price situation is explosive. Huge demand for feedstock from the biofuels sector (into which massive investments have been flowing) has catapulted corn (maize) and oilseed prices to unprecedented levels, lifting the entire grains complex higher. Unabated speculative interest is evident in grains and vegetable oils. Palm and soya oils are already up by 30-40 per cent the last three months with further price rise not ruled out.

The Government must recognise that its fight against inflation is far from over. It must stay focussed and continue its efforts to augment supplies and rein in prices of essential food products. The recent measures of reducing Customs duty or allowing duty-free imports may have helped moderate inflation somewhat; but further challenges lie ahead. Having exhausted most of the weapons in the inflation-fighting armoury in recent times, the policy-makers must begin to think about tackling the potentially explosive price situation in the coming months. The south-west monsoon could come as a big saving grace; but to rely on it alone for relief would be risky. Poor people are the worst hit in times of inflation. Beyond some fiscal and trade measures, New Delhi must spare no effort to augment supplies of essential food products (including edible oil and pulses) through the public distribution system.