The Hindu Business Line : Deflating prices

The inflation fire rages on. In the latest round of numbers, food, fuel and industrial metals have contributed to the price rise as inflation reached a 40-month high by end-March 2008. The series of policy actions in the form of bans and restrictions on commodity trade — domestic and, importantly, exports — are yet to show tangible results in the marketplace. The latest to join the ‘ban’ bandwagon is cement. Steel could be the next casualty. While global commodity market dynamics are still uncertain, there are early signals on how prices of food, fibre, metals and energy products could behave in the coming months. Given the extreme tightness in global crude market fundamentals, no big relief can be expected any time soon. If anything, there is an upside risk because of supply uncertainties and geopolitical concerns. The outlook for metals has so far been mixed.

The latest OECD composite leading indicators suggest that a slowdown in economic activity lies ahead. While data indicate a weakening outlook for the seven major OECD economies, there is likely a downturn in China and India, and a slowing expansion in Russia and Brazil. Given the correlation between global economic growth and metals consumption, softer metal prices can be expected in the coming days. As for food crops, the combination of harvest pressure in the southern hemisphere and positive planting intentions in the northern hemisphere should bring some relief in the months ahead. In particular, wheat forward prices (July 2008 onwards) have begun to ease in anticipation of a rebound in global output. The vegetable oil market too has peaked and a correction is under way.

That brings us to conditions within our country. The ongoing Rabi harvest is helping move wheat, pulses and oilseeds into the market, while imports will augment availability. However, we have to reckon with high cost of procurement and/or imports. Hopefully, the effect of recent policy actions on prices will kick in soon. In particular, the impact will be felt on prices of foods such as edible oil. While it is necessary to clip the speculators’ wings, it is equally important to disabuse the consumers’ minds of the psychosis of shortage. For poor people, currently, the public distribution system seems to be the best bet, notwithstanding its weaknesses. A telling difference in prices can be brought about if, in addition to wheat and rice, edible oil and pulses are supplied under PDS. Instead of leaving it to the discretion of each State government, a Central initiative from New Delhi would send the right signals to the market. On the monetary side, restricting the flow of easy money — commodity financing — for speculative activity and allowing the rupee to appreciate may contribute to a further control of commodity prices.