The Hindu Business Line : Inflation – tough, uncertain times ahead

Mumbai, May 23 From recent statements by key policymakers, it is becoming increasingly clear that the Government is buying time on the inflation control front. This has given rise to speculation over the Government’s ability to rein in prices quickly. If anything, inflation remains untamed and indeed, threatens to soar higher on the back of spiralling crude prices.

Each Friday brings a new inflation number, more scary than the previous one.

Cautious response

The series of initiatives – fiscal, monetary and administrative – in the last several months have failed to dampen the price sentiment. Export bans, export duties, zero-tariff imports, storage restrictions, credit squeeze and administrative measures that persuade producers to voluntarily reduce prices have not yielded much.

The Government is on the back-foot. No wonder, brave statements that the price spiral would soon come under control have now given way to cautious response. The standard line now seems to be that price rise will be contained in about four months; that is sometime mid-September.

September happens to be the month when the kharif crops – rice, coarse grains, pulses, oilseeds, cotton – get ready for harvest. If the country enjoys a good monsoon and in turn a satisfactory agricultural output, there would be a slight change in market sentiment. Driven by supplies of harvested crop, food prices can be expected to ease. It would have nothing to do with government measures, though.

But such expectation pre-supposes a good southwest monsoon with satisfactory temporal and spatial distribution of rains between June and September. It is also an admission that the plethora of restrictive measures have failed to produce tangible results; and only a good monsoon-driven harvest is going to dampen the buoyancy in food prices.

If the government were to raise the minimum support price for various kharif crops – a good possibility considering elections – it would actually add to the inflationary spiral without any guarantee of higher farm production.

But even here, while high food prices may be contained because of the next harvest four months away, inflation caused by high fuel prices (crude soaring to unprecedented levels with no sign of a major let up) and metals facing an upside price risk can bring to nought all expectations of a downturn in price movement.

Weakening rupee

Importantly, the rupee is weakening, pushing import costs higher. At Rs 42.50 to a dollar, the domestic currency is at least 6 per cent down from levels closer to the Budget.

All imports would be so much more expensive – energy products, vegetable oil, pulses and so on; and effect of duty reduction nullified.

Through administrative measures, the Government may have succeeded in effecting a reduction in steel prices; but production costs are set to soar as a result of rising energy prices (crude, coal), higher transportation costs and labour costs.

Sooner, rather than later, the informal price controls will have to give way. Far from reducing duties and taxes in order to bring down petrol and diesel prices as demanded by the Left parties, the Government is currently toying with the idea of raising the prices.

It will probably have no choice. Will any such move lead to a political crisis? One needs to wait and watch. Simply put, times ahead are uncertain. Continued high level of inflation is sure to create political risk for the Government. In its fight against inflation, New Delhi has exhausted most of the weapons in its armoury.

The poor continue to reel under the twin burden of high prices and limited access to food and other necessities of life.

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