Fear over persisting world inflationary pressures
The prospects for the 2008-09 agricultural season commencing on July 1 are being carefully assessed in government, the Planning Commission, industry and farm circles. There is anxiety to know whether the uptrend in output of food and cash crops witnessed in the previous three seasons will be sustained.
A further improvement in food and cash crop yields is considered imperative as prices of agricultural products and crude oil are soaring in world markets and the Indian economy has to be insulated to the extent feasible from external inflationary pressures. The all time record of 227.3 million tonnes for foodgrains in 2007-08 has enabled the Agriculture Ministry to procure large quantities of wheat and rice through the Food Corporation and State agencies. This has enabled significant additions to buffer stocks after providing for a larger offtake through the public distribution system and under the various programmes of the Central and State governments.
The monsoon for the kharif season arrived a little later than usual in Kerala. But it has become active in other parts, with copious rainfall received in the North East and North India with the exception of some portion of Rajasthan, two weeks earlier than scheduled. The weather experts forecast a normal monsoon for the whole season. While it is too early for a reliable assessment, estimates of the total output for the whole year vary in wide limits from 228 million tonnes to 235 million tonnes.
If these estimates are realised, procurement of fine cereals can be easily 50 million tonnes and moderate imports of edible oils and pulses. Cotton exports can be sizable though textile circles complain that their interests are not safeguarded and that even efficient units are unable to secure reasonable profit margins. However, the weakening rupee will push up the cost of imports of edible oils and pulses as also crude oil and petroleum products in deficit.
Against this background, it will be reasonable to expect that open market prices will tend downward and the inflation curve can flatten and even come down from the 13-year high of 11.05 per cent touched during the week ended June 7. The jump under this head by 2.30 percentage point was due mainly to hike in the administered prices for petro products and other uncontrolled items.
But the rise of more than two percentage points has shocked business circles. It is feared that persisting world inflationary pressures will pose new challenges for the UPA government. The Finance Ministry and the monetary authorities are confused after the latest developments. The adjustments in excise and import duties by Finance Minister P Chidambaram and cut in sales tax rates on petro products by several States have not had the desired impact as the rupee depreciation has had a queering effect.
Cash crunch likely
The monetary authorities on their part have been trying to minimise the hardships from rising inflation with a hike in cash reserve ratio on two occasions and increase in the reverse repo rate by 25 basis points to 8 per cent. The latter increase could very well have pushed up deposit and lending rates of many banks. But in view of the sluggish growth in fresh credit and the depressing performance of industry, the State Bank of India and other major banks are wary about raising the rates. It is felt that the impact of the higher repo rate will be absorbed and existing levels maintained.
However, a cash crunch is feared during the busy season as the impact of the loan waiver scheme will be serious if the Finance Ministry does not provide equitable additional liquidity to the banks concerned.
RBI can help
The monetary authorities should therefore keep a watch on the developments and prevent a squeeze developing in the money market early next year. In any event, a liberal approach will have to be adopted by the Finance Ministry as well as the Reserve Bank as industrial output has not been rising at the desired rate.
While it may become necessary to augment bank funds with the desired adjustment in cash reserve ratio later, it is baffling why the UPA government has not adopted measures for reducing the deficits in essential commodities and helping the sugar industry in respect of utilisation of by-products. The Agriculture Ministry has been dragging its feet and the importance of ethanol for the country’s energy security has not been fully recognised.
The growth process also can be sustained by providing the required additional working capital of the petro and fertilizer sectors and other industries like steel, cement, chemicals and pharmaceutical, which have been affected by escalating costs.
The foregoing clearly emphasises the importance of adopting an integrated approach by the authorities concerned for raising the export potential and moderating imports of products not available locally in the required volume.