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A continuing worry

Concerns over the rise in inflation that have dominated the monetary policy discourse for long have now become the single major macroeconomic issue, with obvious political ramifications. On January 31, while releasing the third quarter review of the monetary and credit policy, the Reserve Bank of India said it was according top priority to the maintenance of price stability. The small increase in the fixed repo rate announced at that time accorded with the pattern of inflation-combating measures the central bank has been adopting over the past two years. Clearly monetary factors have had a major role. There has been a surge in liquidity primarily caused by dollar inflows into the stock market. All monetary indicators such as broad money supply and credit disbursements by banks have been running ahead of their targets this year too. Bank credit has been growing by more than 30 per cent over the past two years. As against the RBI's target of 5-5.5 per cent, the wholesale price inflation (WPI) went past 6 per cent in early January and touched 6.58 per cent in the week ended January 27. The sharp escalation in price level cannot be contained by monetary measures alone. Among policy makers there is near unanimity that the resurgent inflation is being driven more by supply-side constraints and higher aggregate demand than by fuel prices and excess liquidity, although the latter two will remain potent factors.

Inflation, in effect, imposes a tax on the poor, who bear the brunt of the price rise in articles of everyday consumption. According to the recent data, prices of wheat have surged by 11.74 per cent, pulses by over 22 per cent, and edible oil by 11.60 per cent. There has been an increase in the prices of manufactured goods too. The government has already responded by slashing import duties on capital goods, project imports, chemicals, steel, and edible oils and by banning futures trading in urad and tur. Duty free imports of wheat, pulses, and sugar continue from last year along with a ban on their exports. Over the long term, domestic production of sensitive items such as wheat and cereals will have to keep pace with the rising demand. Imports of these may not be the ideal solution when global commodity prices are hardening as they are now. However a more liberal import policy of capital goods and manufactured items might help in creating more competitive conditions at home. That would be particularly relevant at a time when most firms across sectors are operating at full capacity and, as corroborated by their corporate results, earning bumper profits. A multi-pronged strategy alone will help in containing the price rise.

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