Remove agri supply constraints to contain inflation: Ficci

Claiming the current inflation of over 6 per cent as an inevitable offshoot of high growth, the Federation of Indian Chambers of Commerce and Industry (Ficci) today said the government would have to adopt a twin long-term strategy to combat the bottlenecks in the supply of primary articles and manufactured products.

"The current inflationary pressure is an inevitable offshoot of high growth and market forces, which in due course would correct the upward bias in prices," a Ficci study released today said.

It added that speed and effectiveness of the current inflationary pressure would critically hinge on the agriculture sector's ability to scale up to meet the huge demand for primary goods and the removal of supply side rigidities impeding the growth and competitiveness of Indian industry.

The spurt in food prices is an upshot of the huge demand for food articles generated by the increased purchasing power of people, which in essence demonstrates the income effect of growth. The near stagnation in food production in the recent past has only accentuated the situation.

The Ficci study on current inflationary trends notes that after hovering within the range of 5-5.5 per cent during August-December period last year, the annual rate of inflation has scaled to a high of 6.12 per cent in the week ended January 6. It later dipped slightly to 6.11 in the week ended January 20, thus surpassing the inflation tolerance band fixed by the RBI.

The chamber suggested that the government should draw up a long-term action plan to tackle low farm productivity, volatility in production, poor supply chain infrastructure, improvement in marketing infrastructure for farm products and availability of food grains by beefing up the targeted Public Distribution System (PDS).

As for addressing the supply side rigidities faced by the manufactured products, a clear-cut focus on capacity building in the capital goods segment was needed. The study suggests concerted action on reforms in sectors like labour flexibility, interest cost, indirect taxation, power cost, infrastructure reforms and inspector raj.

The disproportionately large share of food articles, basic metals alloys and metal products, machinery and machine tools and non-metallic mineral products in the rise in WPI reflects the key role of robust consumption demand and a strong capex cycle in the recent inflationary developments, Ficci said.

The rapid price rise in machinery and machine tools has been underpinned by the ongoing drive to capacity addition coupled with the supply side pressure of a continued spell of rise in metal prices.

Cement prices, which emerged as the key driver of inflation in the 'non-metallic mineral products' category have been led by the combination of rapid expansion of construction activities and the impossibility of instantaneously adding capacity.

Much of the impetus to the prices of basic metals alloys and metal products has come from non-ferrous metals, which could be ascribed to the upswing in international prices of non-ferrous metals.