The Hindu Business Line : Changing tack on inflation

A day after the Reserve Bank of India raised repo and reserve money rates, the Finance Minister, Mr P. Chidambaram, justified the move as an attempt to control aggregate demand. That has been the basis for monetary policy adjustments the central bank began over a year ago to control the general price rise. Just how effective it has been time will tell but using policy to effect changes or shifts in demand is a crucial weapon in the war on inflation. The unfortunate part is that policy-makers have not used it enough to shift demand preferences and consumer choices. Now is the time to do so.

The RBI’s increasing hardening of interest rates has affected demand for credit, as is evident in declining growth rates from a high of around 30 per cent two years ago to around 20 per cent. The underlying premise can be used to alter demand preferences for high-cost energy. During the first oil shock in the 1970s, western governments encouraged conservation of expensive fuel and alternative energy consumption. While it is true that recently, neither China nor the US, both high users of fuel, have shown any initiatives — apart from the US encouraging production of bio-fuels and so inadvertently contributing to higher wheat prices — India surely can take the lead and serve up a range of initiatives to meet the challenge of rising energy prices head-on. Three State governments have offered subsidies and tax exemptions to an electric car manufacturer; more can be done by sitting across the table with auto majors on shifting to less expensive energy use and larger production of mass transport vehicles. This Budget, the excise duties on buses and chassis were cut to 12 per cent; perhaps there is a similar case for using tax policy to give a leg up to non-conventional sources of energy that could potentially lead to technology improvements to a point where they begin to challenge the economics of hydrocarbon-based energy.

There is potential for savings elsewhere, too. While the Finance Ministry assures the nation of “very satisfactory” food supplies, the leakages that occur in the public distribution system are legendary. Three months ago the Public Accounts Committee found the PDS leaking like a sieve, with more than 40 per cent of the grain frittered away; the largest food PDS in the world was able to feed just 57 per cent of the below-the-poverty-line households. More than inflation, that must hurt the most.

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