07/04/2008 (The Navhind Times) - Inflation seems to have raised its ugly head again. Unlike in the recent past, this time the price rise is not attributable to only food items or any specific sector; rather, it is more wide spread across commodities and industries and therefore the challenge is greater.In fact, non-food items have contributed in greater measure to rising prices. Now, it is almost certain that it will adversely impact the high GDP growth rate of 9 per cent. The wholesale price index (WPI) has already touched 7 per cent the highest in three years, and has posed, perhaps the biggest threat to the government. With elections to the Lok Sabha just a year away, the government at the Centre is trying all that it can to arrest the rising trend.
There is little doubt that inflation is a worldwide phenomenon today and is causing greater damage to the developing nations. But that gives little comfort to the government, which is gearing up to face elections.
It is amazing how quickly the economic scene changes both within as well as outside the country.Â Just a little over a month ago, when the budget was presented, there was talk about how to put more purchasing power in the hands of the people.Â Now, the raging inflation is forcing the government to think in terms of crediting the salary arrears of Sixth Pay recommendations in to the employeesâ€™ GPF accounts!
The government has tried everything; it has tried to â€˜talkâ€™ down the prices by major producers, for example, steel; major producers have agreed to lower the prices by Rs 2,000 per ton. It has taken the oft beaten track of banning forward trading especially in food gains. It has banned exports of edible oil and certain other commodities. The government has also cut duties on palm oil. Whereas all these measures may show some results after a time lag, it is certain that these policy responses are inadequate.
The cut in duties on palm oil has not resulted in any reduction of imported prices; instead, the exporting nations have jacked the prices as soon as the duty cuts were announced. Not only has the government lost revenue, the beneficiaries have been the farmers in those exporting countries, instead of the large numbers of home consumers.
Similarly banning forward trading in selected commodities has not brought about any desirable effects on the price front. Further, banning exports is meaningless. For instance, we import around 5 million tons of edible oil, as against exporting small packs of branded oil of no more than 12,000 tons to nations where there is higher presence of Indian diaspora.
Perhaps, the government is aware of the limitations of these measures; but it would still play to the gallery (or to itâ€™s constituents partners?) in the hope that it will be seen as being serious about controlling inflation.
Here in Goa, the local government thinks that it is only the vegetable prices that are rising and hence need to be subsidized. However, even after the subsidizing, it is offering vegetables at prices that are generally above market prices in the state!
Admittedly, governments have limited options. It is not certain whether the RBI would agree to monetary tightening to reign in inflation. In any case, it would not be desirable as the economy is already facing prospects of a slow down. The supply side of economics is what is driving up prices. But you cannot create additional supply overnight.
Perhaps, the government could cut more domestic duties and taxes, wherever possible, and hope to curtail burgeoning prices. The thrust should be on creating additional demand that can spur both investment and production. There are still too many supply-side bottlenecks that need to be removed in quick time. Where more than one-fifth of the population lives below poverty line, generating demand should not be a problem.
One of the anti-inflation strategies is to cut all wasteful government expenditure. If all governments do this vigorously, it will have a sobering effect on general prices much faster than any other measure. After all governments, even individually, are very big spenders.
The silver lining is that the global commodity prices are showing signs of cooling off. The recession in US is now confirmed news. China is taking measures to ensure a soft landing from its break-neck growth of recent years. Hence global inflation may take care of itself in the course of time. Though that should have a favourable impact on India, it may not, by itself, bring about a desirable rate of domestic inflation.Â