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Untamed inflation of over 7 per cent, bullish global cues, few prospects of a marked downward correction in prices and, above all, mounting pressure from both coalition allies and the Opposition. How can any Finance Minister tackle such a combination? Mr P. Chidambaram seems to believe that attack is the best form of defence. No wonder, in his latest fiscal action, he selected two important commodities that push up inflation — steel and cement. These are critical inp uts for the fast-growing housing and infrastructure sectors, and form a significant part (60 per cent) of the cost of any construction project. In recent times, government measures on cement have been controversial. The latest move to impose a 12 per cent ad valorem duty on cement bags priced Rs 250 or more (on top of a differential excise duty structure and export ban some time ago) may not do much to contain market prices. Currently, just about 10 per cent of cement sales are in bags priced above Rs 250; and as a result of the change in the tax structure,prices may actually rise rather than fall.

As for steel, at present steel and steel products contribute to over a fifth of inflation. To augment domestic availability and moderate exports, steel and products will henceforth be burdened with an export duty, while imports of steel, pig iron, sponge semi-finished HR coils, metcoke and zinc will be duty-free. Without doubt, in the short run, this combination of restrictive exports and liberalised imports is sure to have a salutary effect on domestic market prices. User industries reeling under high input costs may heave a sigh of relief. But the least the Finance Minister could have done was to have assured the producers that the restrictive measures would be reviewed from time to time and, if circumstances change, rolled back.

The lack of such an assurance must be unnerving for the producers and exporters concerned. Steel production in the country is on a rising curve and is expected to stay that way for several years. In addition to export of iron ore, the domestic steel market is gradually integrating with the global market, as seen in rising two-way trade in steel products (about 10 million tonnes). Producer-exporters with long-term export commitments and those with export obligations are sure to find the export duty onerous. Any further appreciation of the rupee will also hurt export possibilities. To stay in business, some companies may have to resort to differential pricing for the domestic and export markets.

Food, fuel and metals are currently driving the inflation numbers. While food prices are set to ease in the coming months due to natural causes, the latest measures to contain major metal prices too should yield some dividend soon. How the government is going to tackle fuel inflation remains to be seen.

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