The impact will inevitably be felt by government finances. There is no way that the government will risk increasing prices of either petroleum products or fertiliser in the current environment. As a consequence, the issuance of oil and fertiliser bonds, which it has been using to compensate producers of these commodities, will increase during the year, widening the effective fiscal deficit far beyond the Budget estimate of 2.5 per cent of GDP. The finance minister told Parliament that he saw no escape from this course of action.
No one can accuse the government of inaction. Since the beginning of April, it has resorted to export restrictions and cuts in import duties as short-term measures. It has also aggressively procured wheat after the recent harvest after squeezing out private buyers, thus replenishing its stocks and its ability to increase supplies through the public distribution system. However, inflation is being driven by global forces and there is a limit to which governments can use domestic instruments to deal with it. Fortunately for India, food prices are steadily moderating and the prospect of a good monsoon will reinforce this trend. In the last few weeks, even as the overall inflation rate has climbed, the contribution of food items to it has declined. This was evident in the latest weekly release, which showed that, with the exception of tea, whose prices rose by 17 per cent over the previous week, the prices of other food articles either remained steady or declined a bit. The main drivers of inflation now are metals, with the prices of several iron and steel products continuing to increase significantly even on a week-to-week basis. Until new capacities come on stream, these trends are likely to persist; the supply response for steel takes much longer than it does for wheat or rice.
The dilemma for the government is that it simply cannot be seen to be doing nothing, even if that is the reality. The compulsion to act often results in measures that not only do not work but also cause damage in the future. Hopefully, at least food prices should ease off before too long, providing both consumers and the government some relief.