Hints at tough monetary measures, deeper cut in taxes. With inflation at a 13-year high of 11.05 per cent, Finance Minister P Chidambaram today said monetary measures will be taken to curb inflationary expectations. He added that foodgrain stocks in the government's silos will be used to cool food prices if they rise and options will be explored on a deeper cut in taxes.
Chidambaram's statement, outlining his plan to combat spiralling inflation, was handed out at a press conference this morning, which was addressed by Finance Secretary D Subbarao.
"We believe the first line of defence has to be monetary measures. Depending on the situation, we will take fiscal measures," Subbarao said, though he did not disclose what options the Reserve Bank of India (RBI) would exercise to control monetary expansion.
Economists expect the central bank to go for a repo rate increase of another 25 basis points before the quarterly monetary policy review on July 29.
RBI had raised its benchmark repo rate to a six-year high of 8 per cent on June 11, the first increase in 15 months. It also increased the cash reserve ratio (CRR) twice since April 17 to drain out excess liquidity in the financial system.
After the inflation figure was released on Friday, Chidambaram met Prime Minister Manmohan Singh and discussed the situation with him. This morning, RBI Governor Y V Reddy first met Chidambaram and then Singh in the capital. It is learnt that the two gave clear signals to the RBI governor for further monetary tightening.
Later in the day, Chidambaram visited United Progressive Alliance Chairperson Sonia Gandhi to apprise her of the situation.
A further hike in interest rates resulting from the RBI action could make loans costlier. As the Indian growth story is fuelled largely by domestic consumption, this could choke growth in the current financial year. Finance ministry officials, on their part, allayed any fear of an economic slowdown.
"We maintain our GDP growth projection of 8.5 per cent with a margin of error of 0.5 per cent," said Arvind Virmani, the chief economic adviser to the finance ministry.
Chidambaram blamed the "relentless rise in crude oil prices" for the double-digit inflation for the week ended June 7. "The week-on-week increase in inflation was 1.77 per cent. And 94 per cent of the week-on-week increase in inflation is attributable to petroleum products," he said.
However, Chidambaram said there was nothing to worry about food prices. The index for food prices declined 1.11 per cent for the latest week.
"We have procured 22 million tonnes of wheat and 26 million tonnes of rice so far. We will provide adequate wheat and rice to the public distribution system and use our stocks to moderate prices in the open market," he said.
Chidambaram also agreed to consider a suggestion by former finance minister Yashwant Sinha to go for "deeper cuts in taxes".
"I have no quarrel with the proposition.... (However,) I may point out that giving up revenues and borrowing an equivalent amount in the market in order to finance expenditure would also be inflationary. Nevertheless, I take Sinha's suggestion on board and will explore the options," he said.
'Nov-Dec best time for polls'
At a meeting with Congress President Sonia Gandhi, Finance Minister P Chidambaram urged the party to make the best of the spell starting from the end of August to the beginning of September, when he anticipates the rate of inflation to come down.
He said November-December would be the best time to hold elections because inflation was likely to rise, not decline, by the beginning of the next year.
