The cure for food and non-food inflation does not lie just in monetary policies and measures. What is more important is to remove supply constraints and raise the output of industrial and agricultural products steadily. Luckily the UPA Government could tackle high food inflation with liberal use of the large buffer stocks and intensified procurement of fine cereals. In spite of a fall in rice yield in the 2009-10 agricultural season of 12 million tonnes, procurement in the marketing season has been satisfactory so far at 30 million tonnes.
As for wheat, the position has eased significantly as three successive rabi crops have enabled massive build-up of buffer stocks. At one stage the Agriculture Ministry had to increase supplies to State governments apart from selling wheat in the open market at a fixed price. Additional storage space had to be created as procurement of rice will commence in a big way from October this year. As the prospects for the wheat crop also are promising availability of fine cereals will remain comfortable. But a drop in the food inflation rate to low levels is feasible only if open market prices of pulses, vegetables and other articles come down to reasonable levels. If prices for pulses, sugar and other food items in world markets soften, food inflation will not be bothersome.
Softening inflation
The Prime Minister has hinted at a decline in general inflation rate to around 6 per cent by December while the Reserve Bank of India has forecast a drop to around 6 per cent by March next. If the reference is to food inflation rate the prospects are quite encouraging. Apart from the notional drop arising out of a rising base last year, select prices may decline in absolute terms much to the relief of consumers. After the significant drop in food inflation rate by 3.08 per cent to 12.92 per cent in the week ended June 19 there has been a fresh drop of 2.80 per cent to 9.67 per cent in the week ended July 17. This downtrend is likely to stay as kharif prospects are quite bright.
Higher GDP growth
Non-food inflation however has tended to rise recently with the surfacing of hidden inflation due to price adjustments for controlled petroleum products and other items. It has of course been pointed out that a growth in non-food supplies and softening trend in world markets in some directions will have a sobering effect.
With steady improvement in industrial output, satisfactory performance of the services sector and expectation of increased agricultural production by 4.5 per cent in the current season, the growth in GDP is estimated at 8.5 per cent plus. The monetary authorities too have taken an optimistic view of the outlook for the economy and revised their earlier estimate of 8 per cent to 8.5 per cent.
With exports also tending to rise, (a 20 per cent rise is anticipated for the current year) the current account deficit too may not rise unduly, thanks to a likely larger inflow of net invisible receipts. Even after covering the CAD it may be possible to augment foreign exchange assets modestly in 2010-11 and more impressively in 2011-12. In the event, the emerging stringency in the money market may get relieved.
It has actually been hinted by the monetary authorities that the deficiency in resources as a result of slower rise in bank deposits and the absence of significant net additions to forex assets so far has been overcome with additions to the pool of resources in many ways. This has been done through a reduction in commercial investments of banks, better use of the facility provided by the RBI and distinct improvement in the ways and means position of the Central Exchequer.
It remains to be seen whether the Finance Ministry will reduce its net borrowing through market loans and prune the fiscal deficit to below 5.5 per cent. However, the improved ways and means position may allow the Exchequer to step up Plan expenditure on projects in the infrastructure sector and also absorb any unexpected increase in non-Plan revenue expenditure, particularly food subsidies.
While the Finance Ministry may not be keen on such an approach the monetary authorities should desist from raising key interest rates and contracting money supply. Even during the 12 months ended July 2 the surge in demand for funds could be met only by utilising the fat from earlier years.
Without scope for augmenting the pool of revenues, the situation may become unmanageable at particular stages. The Finance Ministry has to make a success of disinvestment programme for securing Rs. 40,000 crore while enterprises in the infrastructure sector will have to mobilise huge resources through tax free bonds and other means. It is not as if the monetary authorities are unaware of the need to help step up Plan outlays and enable enterprises in the private sector also to secure their funds.
Yet because of the stiff resistance from the Opposition parties even in the face of a dip in food inflation the Reserve Bank Governor has raised the repo rate by 25 basis points to 5.75 per cent and reverse repo rate by 50 basis points to 4.75 per cent. The cash reserve ratio is understandably left unchanged at 6 per cent.
New challenges ahead
With an abatement of food inflation and the prospect of increased forex inflows there should be circumspection when taking decisions to make money costlier and contracting money supply. The Planning Commission and the UPA Government have to make a success of the projects in the XI Plan period as creation of additional capacity in the industrial sector and a step-up in production are vital for eliminating bottlenecks.
On account of the slower growth in the earlier period of the XI Plan, it is now estimated that the average growth in GDP in five years will be only 8.1 per cent against the target of 9 per cent.
It has been indicated in the Mid-Term Appraisal that the emphasis will have to be on augmenting the pool of resources and executing mega projects without time lag or overruns.
Much will depend on the progress achieved in 2011-12 and subsequent years as the growth in GDP will have to be above 9 per cent in 2011-12 and in double digits in subsequent years.
