The Hindu Business Line : Pricing by persuasion

Moral persuasion by the government has brought about some reduction in steel prices. It may work in respect of cement and other commodities also. But the long-term solution which is most enduring will be augmentation of supplies through capacity expansion and augmentation of production. This is true of all commodities including agricultural goods and manufactured articles.

As rightly pointed in the editorial “Pricing by persuasion” (Business Line, May 10), for moral suasion to be effective, it must be supported by enabling legislation. But the amendments proposed such as Mining Act, Land Acquisition Act, etc are pending and would, perhaps, be taken up only in the monsoon session. By far, the most effective weapon to control inflation and price rise is to augment supplies and eliminate demand-supply mismatch.

When supplies are in plenty, producers and sellers will compete on the basis of prices to sell more. With acute competition among producers and suppliers, black marketing will be discouraged. . The focus must, thus, be on augmenting production of all articles and commodities. For this, bank credit at low rates of interest is vital. . The RBI can advise banks to increase credit for production of all commodities and credit for expansion of capacities and production of manufactured goods.

The central bank could even advise banks to curtail and even resort to rationing of credit for non-essential consumption. Such a strategy will help expand production, ensure growth and combat inflation simultaneously. For the present, a package approach may be required. But, in the long run, augmenting supplies and creating a situation of abundance is absolutely essential.

K. K. Ammannaya e-mail

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