The heightening of inflationary pressures mainly due to food inflation has been causing serious worry to the UPA government and the monetary authorities even though it was known in August-September last year that there would be a significant decline in the output of food and cash crops. Even with efforts to step up rabi yields contradictory statements were being made by those in different ministries.

However, the position in respect of fine cereals has not been as bad as feared earlier. Actually, the latest estimates indicate that the yield of rice would decline by only 10 million tonnes. The shortfall is due to Andhra Pradesh and other important rice producing regions affected by drought. On the other hand, Haryana and Punjab have maintained their rice yields around the previous season’s levels.

Buffer stocks helpful

The procurement of rice in the 2009-10 marketing season up to mid-December was 13.64 million tonnes against 13.28 million tonnes comparably. Since the outlook for rabi wheat is highly promising, the procurement of this cereal can again be satisfactory. Any increase in demand for rice can thus be met out of current purchases and the comfortable buffer stocks. The increase in open market prices in spite of a comfortable statistical position has been mainly due to speculation and high world prices.

However, in respect of edible oil, pulses and sugar, a rise in prices cannot be averted especially as foreign suppliers are keen to exploit the situation. The deficit in pulses is no new feature and imports were effected at reasonable prices. However, the situation in recent months has been vastly different. A new bid should be made to nearly double the yield of pulses and ensure self sufficiency in all primary products.

Wrong policies

The severe shortage of sugar is on account of the slump in output in the 2008-09 crushing season to 14.6 million tonnes from 26.3 million tonnes and 28.3 million tonnes in the two previous seasons. Even with sizable exports and increased domestic offtake, stocks were quite high at 10 million tonnes on September 30, 2008 against 3.6 million tonnes on October 1, 2006. These stocks have come in handy and domestic needs could be met though there was a ban on exports. As stocks at the end of the season were only 4.4 million tonnes, the prospects for the 2009-10 season also are depressing.

As a result of speculative operations and persistent shortages food inflation rose by 20 per cent at one stage and the retreat to 16.81 per cent in the week ended January 9 has not been sustained as the rate was higher at 17.40 per cent in the subsequent week. A different procedure is now being adopted for computing the composite inflation rate which has risen to 7.3 per cent in December from 1.5 per cent in October. It is now estimated by the RBI that the composite index would be around 8.5 per cent by the end of March.

The new measures aimed at augmenting supplies of rice and wheat to eligible customers for January and February and arrangements to import primary products in short supply may get reflected in a lowering of prices after the rabi harvest.

However, the inflationary pressures can be brought under complete control only if the prospects for 2010-11 agricultural season improve. It will thus be recognised that the accentuation in inflationary pressures is due only to shortages and not increase in money supply. Sharad Pawar, the Minister for Agriculture, has also observed that the rise in prices is not due to monetary factors.

Steep hike in CRR

However, RBI Governor Subbarao has adopted a cautious approach as apart from food inflation there are signs of a general inflation. It is therefore felt by the monetary authorities that there should be curtailment of money supply though opinion in this regard is divided among economic experts.

As it is agreed that the recovery process should not be retarded, the repo and reverse repo rates have not been changed. Only the cash reserve ratio of banks will be jacked up by 75 basis points to 5.75 per cent. The first tranche of 50 basis points will become effective from February 13 and the second tranche of 25 basis points from February 27. The amount immobilised will eventually be Rs. 36,000 crore.

This hike in CRR will not have any immediate adverse effect but with keener demand from borrowers in industry and trade in the coming months and the need to maintain costlier inventories of intermediate products and raw materials if world prices tend to rise, there may be a tightening of conditions in the money market later in the year. However, the Finance Minister Pranab Mukherjee should not attempt to formulate restrictive policies for curbing inflation and instead conceive the budget estimates for 2010-11 imaginatively.

Unlike in 2009-10 when there was a decline in revenues from indirect taxes and the budget estimate for gross tax revenues could not be realised, in the next financial year, there may be brisker collections even with no changes in direct and indirect taxes. This is because GDP growth is slated to rise by even 9 per cent. The estimate of GDP growth in 2009-10 has been revised upward to 7.75-8 per cent.

Need for sops

Indian tax payers will have to be provided the needed incentives and the bourses and capital market should be vibrant for mobilising the massive resources for implementing ongoing and new schemes as visualised. The expectations of implementation of many vital schemes will also be realised with required public private sector partnership. The economy can be placed again on a high growth path only if the forthcoming Central budget has the necessary triggering effect.

The budget exercises on the present occasion will not thus be challenging as in July last year.

Any move to levy additional taxes or withdraw the stimulus packages can be made conveniently in October and if necessary even a supplementary budget can be thought of.

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