The Hindu Business Line : Trading palliatives

Stung by unabated inflation and continually pressured by political allies, New Delhi had no choice but to ostensibly take some action. The effect of the flurry of measures — fiscal and administrative — of recent weeks is not reflected in the inflation numbers, though. Whether they would have a lagged effect and by how much is now a matter of conjecture.

The latest is that as of April 26, inflation actually rose to an uncomfortable 7.61 per cent, a new 3 ½-year high, propelled principally by higher prices of metals and tea.Steel producers have been ‘persuaded’ to voluntarily reduce the price; but how long they will be able to hold the price line is anybody’s guess given rising global crude and coal prices. A weakening rupee is sure to make all imports — energy, food and metals — so much more expensive.

Inflation expectations are still intact. The government is aware of the simmering discontent among large sections of people; but its freedom to deliver is being gradually curtailed. Indeed, at this rate, the policymakers run the risk of running out of ideas and weapons to calm the market. The widening ideological chasm between the UPA and the Left parties is sure to exacerbate the already murky political climate. The markets will have to reckon with emerging uncertainties, where political risk for the government will translate to policy risk for businesses. When viewed in this overall context, the decision to suspend futures trading in four more commodities — soyabean oil, chana, (gram), rubber and potato — should surprise none. The Finance Minister himself had hinted at such a move a day earlier while in Madrid. The four commodities do not have high weightage in consumer price index. So, the ground level price effect of the latest suspension could be next to nothing. The cosmetic move was probably intended to placate the vociferous Left. Farmers growing soybean would be least affected because the bumper crop (over 90 lakh tonnes) harvested as far back as October 2007 has been fully marketed. The Forward Markets Commission chairman went on record that the suspension was a precautionary move and would be lifted in four months’ time. It is a palliative best avoided.

Ideally, the suspension should be reviewed by early-October by which time the next kharif crop conditions would crystallise. With the monsoon due in less than three weeks, it is time the Centre got cracking to ensure a robust agricultural performance. The country cannot afford a less-than-satisfactory harvest. State governments must assign top priority to timely supplies of quality inputs. A contingency plan must be put in place in the event of weather aberrations. Pre-monsoon sowing will soon commence in several regions. Yet, there is no sign of minimum support price announcement for the kharif 2008 crops. So much for our commitment to agriculture.

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