Combating inflation comprehensively

The reduction in the retail prices of petrol and diesel by Rs.2 and Re.1, announced on Thursday, ought to be viewed as part of a continuing, multi-pronged strategy to combat the recent surge in inflation. Earlier, on Tuesday, the Reserve Bank of India hiked the cash reserve ratio (CRR) by 0.50 percentage point to impound about Rs.14,000 crore of bank deposits. Supplementing these two significant measures have been others intended to alleviate domestic scarcity of certain items of mass consumption and hence check the phenomenal price rise. The Government recently banned the export of milk powder and wheat. Import duties on several items including cement were reduced earlier. The concerns over prices have been aggravated by the recent data that showed inflation as measured by the WPI at 6.73 per cent for the week ended February 3, as against 6.58 per cent for the previous week. The factors responsible for the surge have remained the same over the past few months. Prices of primary agricultural products, vegetables, eggs, oil seeds, and spices as well as those of certain manufactured articles have remained high, despite recent measures to increase the supply of these articles at an affordable price. The realisation that both supply side constraints and higher aggregate demand are behind the recent price surge has necessitated a variety of approaches complementing one another.

The latest reduction in the retail prices of the transportation fuels has come on top of another cut by an identical margin last November. Petrol and diesel prices are now back to the levels that prevailed before the Government hiked them by Rs.4 and Rs.2 respectively in June 2006. A reduction was always on the cards, given the softening of global oil prices. However, in the context of inflation, the cut is intended to send a signal to the trade to lower the prices of a number of items including foodstuffs, for which transportation charges account for a substantial portion of the costs. Past experience suggests that there might be resistance from truckers and others to passing on the benefits to consumers. Perhaps more importantly, there can be no guarantee of global oil prices remaining stable. Hence the latest reduction, however welcome, might not make a substantial dent on inflation expectations. The RBI is now relying on the more comprehensive CRR cuts to check "excessive" credit growth in addition to changes in the short-term repo rates. Higher interest rates should help in curbing excessive credit growth but there is a danger that it might impact adversely on economic growth. However, rising prices warrant a continuing vigil and quick responses to new, emerging challenges.

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