The prospects for achieving balanced economic growth in 2010-12 and the opportunity for harvesting bumper food and cash crops for the second season in succession have enabled the Reserve Bank of India and the Union Finance Ministry to have a firm grip on food inflation. The relevant index thus declined to a low level of 7.55 per cent at one stage against over 22 per cent in the same period in 2010. Thereafter, however, the index has been witnessing a two-sided movement on account of dearer milk, eggs, onions and fuel. In fact, green vegetables were extremely costly at one stage but there had been a return to normalcy in the ground situation. After rising to 9.01 per cent in the week ended May 28, the food index has declined to 8.96 per cent in the subsequent week. There is now confidence that some secondary products also will become cheaper and the index may decline to below 6.5 per cent as there will be plentiful availability of foodgrains and the deficits in respect of oilseeds and pulses may get contracted.
However, non-food inflation will remain worrisome as the policies of the various ministries as well as the inadequate availability of coking coal and non-coking coal from indigenous sources will be intensifying inflationary pressures. Besides, the Union Ministry of Petroleum and Natural Gas is anxious to deregulate diesel oil and also increase retail prices for LPG. But decisions in this regard can be taken only at the appropriate stage. In the interregnum, small upward adjustment in the retail prices may be effected for minimising the burden of subsidy. But for avoiding hardships to consumers, efforts may be made to adopt suitable fiscal measures and request also the State governments to lower their levies tangibly. It remains to be seen how the difficulties in this regard will be overcome but it is clear that non-food inflation will not decline noticeably in the near future unless world inflationary trends tend to subside.
Food inflation
Because of the increase in the inflation rate to 9.01 per cent in May from 8.66 per cent in the previous month and necessity to avoid an uncomfortable increase in the burden of oil subsidy and improve also the financial position of the oil marketing companies, it was speculated in industry, money and stock market circles that whether the monetary authorities would adopt a harsh approach when reviewing the developments in the economy for the first quarter. The fears in this regard have happily not materialised and the repo and reverse repo rates are being raised by 25 basis points to 7.50 per cent and 6.50 per cent respectively with credit under the MSF being available at 8.50 per cent. These adjustments have been effected for the 10th time since March last year. The RBI need not have taken even this decision as the variations in key interest rates have not yielded the desired results. The pronounced decline in the food index is due to a significant improvement in the performance of the agricultural sector.
The most favourable development from the point of view of the economy and the Ministry of Agriculture is the unprecedented improvement in the yields of food and cash crops in the 2010-11 season. On the basis of the success in procurement operations and upward adjustments in estimates of production, it can now be safely stated that the output of foodgrains in 2010-11 will constitute an all time record at 237 million tonnes. This big rise in output and harvesting of a record wheat crop have necessitated brisk procurement purchases and buffer stocks have already exceeded 65 million tonnes. There will be compulsion to intensify procurement of rice from October with the crop estimate at 102 million tonnes for the whole of the current season. The wheat crop also may again be 84 million tonnes. For obviating an undue increase in buffer stocks the Ministry of Agriculture has decided to release 20 lakh tonnes of rice and wheat to the State governments at economic cost for disposal in various ways and through the public distribution system (PDS) for bringing down open market prices nearer to the revised minimum support price. It will not be inappropriate to state at this stage that the eagerness of the UPA Government to improve the incomes of farmers with periodic adjustments in MSP (minimum support price) is also a factor aiding inflation. In view of the optimistic assessment of meteorologists and agro experts, it can be hoped that the happenings in the later half of this year will be heartening and the monetary authorities will be in a position to adopt helpful measures for avoiding unnecessary slowdown of the growth process. There is likelihood of a new record being established in respect of the yield of foodgrains at over 246 million tonnes.
Promising outlook
The outlook for the economy has thus considerably improved. However, it is emphasised that the contribution to gross domestic product (GDP) growth by the agriculture and allied industries will be around 4 per cent against 6.6 per cent and 0.4 per cent in the two previous years. Union Finance Minister Pranab Mukherjee and Chairman, National Advisory Council C. Rangarajan, have estimated that the growth in GDP may be 8.75 per cent and 8.5 per cent against the pessimistic estimate of 8 per cent of RBI. For ensuring higher GDP growth it is emphasised that the industrial sector should make a contribution of 8.6 per cent and services sector 9.6 per cent. The trends in industrial production even on the basis of a revised series with base year being changed to 2004-05, the growth in April was only 6.3 per cent though higher than 4.4 per cent according to the old series. The growth of the established industries will be ‘stunted' where the industries concerned had made rapid progress in 1998-2005.
With a view to minimising the handicaps in this regard, established entrepreneurs having schemes involving huge outlays should be helped to secure the badly needed financial resources. The Union Ministry of Industry and Commerce is aware of the urgent need to enlarge the industrial base for facilitating an increase in the share in GDP to 25 per cent by 2025 from 16 per cent now.
The industrial output has to be maximised for sustaining also the export effort. The growth in export was even more impressive in April-May and the objective is to double export earnings to $500 billion in three years.
There should have been a favourable reaction in the bourses as the upward adjustments in key interest rates have been only marginal. But trading on Thursday and Friday was not encouraging and the Bombay Stock Exchange sensitive index closed at 17870 on Friday.
In view of the significant improvement in the ground situation, the new measures should be helpful instead of being retrograde. The economy has strong fundamentals and the difficulties on account of the happenings in the external sector can be overcome as in 2007-08.
