The several measures that the Central government has been announcing to rein in prices do not fit into a pattern and hence have been branded knee-jerk reactions to a complex problem. At the very least, however, they bring into sharp focus the apparent intractability of the price issue even as it has, inevitably, acquired political overtones. The Congress party's loss in the elections to the Uttaranchal and Punjab Assemblies is attributed primarily to the price rise. With electioneering in Uttar Pradesh in full swing, the Centre is hard pressed to come out with quick answers. In the process, due attention is not paid to the fact that the present bout of inflation is caused by both supply and demand factors, many of which are amenable to correction only over the medium term. On the supply side, the shortage of essential agricultural commodities has driven up prices. While agricultural recovery is the only lasting solution, recent decisions such as the suspension of forward trading in wheat, rice and certain types pulses might do little to rein in their prices. The case for strengthening the institutional mechanism for discovering agricultural prices over a fairly long period has never looked stronger. Reform of the commodity exchanges would have been the correct approach.
Again, inflation at a time of high economic growth is clearly indicative of capacity constraints. Industries such as steel and cement are operating at full capacity to meet the rising demand. While the government persuaded the steel industry to keep down its prices, the budget proposal for a dual excise duty structure for cement has proved controversial. It is only in capacity augmentation that more permanent solutions can be found. Indeed a number of industries including steel and cement are doing just that. It must be ensured that the well meaning anti-inflation measures do not discourage fresh investments in sectors where demand has been running high. The government seems to have been caught in a dilemma on the sensitive issue of wheat procurement by announcing the highest-ever bonus of Rs.100 a quintal on top of a similar increase in the minimum support price. Thus the effective cost of wheat purchase has gone up from Rs.650 to Rs.850 in one year, a signal for wheat prices in the open market to rise further. Wheat output this year is likely to be above last year's. The procurement target of 15 million tonnes looked achievable even without the extraordinary sops. In the process of pleasing farmers, the government has risked adding to inflation and drawing the ire of consumers.