Moving against inflation

Jolted by the inflation rate breaching the 6 per cent mark, the government has begun unfolding an anti-inflationary package. It slashed import duties on a number of products on Monday, and followed it up on Tuesday by imposing a bar on futures trading in two key varieties of pulses whose prices have surged for several months. There could be more coming""like a cut in the prices of petroleum products""and the Reserve Bank is widely expected to announce a further ratcheting up of interest rates at its quarterly review next week. The signals coming through are loud and clear: the current level of inflation is unacceptable. That is just as well, for a price rise of 6 per cent (7 per cent in consumer goods) puts India out of line with the rate of inflation in its principal markets. The question is how much the anti-inflation drive will slow down the economic tempo by tightening the flow of credit.

The duty reduction is welcome; some reports suggest that the reductions were slated to be announced in the Budget at the end of February, and all that has been done is to bring the cuts forward by a few weeks. It must be hoped, though, that there will be a broader budgetary push towards lower tariffs""which will certainly be anti-inflationary. Since much of the price increase has been concentrated in agri-products and other commodities, it makes sense to open the tap more for supply enhancement through imports. Imports may not take place immediately because of specific market realities, but the signals will be clear.

The prohibition of futures trading in urad (black gram) and tur (arhar or pigeon pea) is, however, a retrograde move. Domestic prices are unlikely to slide merely because they will no longer be traded on the futures exchanges. Their prices have ruled firm largely because of very real supply-side constraints, and the ban on futures trading is unlikely to alter that scenario. Considering the extent of import dependence in these pulses, their prices can be expected to drop only when international prices soften on the back of an output increase. The longer-term problem is that the acreage under pulses and the level of productivity have remained virtually unchanged for many years.

Among the non-agricultural commodities, cement prices too may not respond immediately to the import duty reduction, except to signal a change of sentiment. International prices are currently ruling higher than domestic rates, ruling out the possibility of any large-scale imports. The government's move can, at best, encourage the import of clinker, which, in turn, may boost domestic cement output to augment supplies. Similarly, alumina prices are also likely to remain mostly unaffected by the duty reduction as the country is a net exporter of this base metal. However, the domestic secondary metals industry could benefit from the lowering of tariffs on primary and semi-finished base metals like copper, aluminum, zinc, tin and others""some of which have seen sharp price increases in recent months. Some secondary copper units have been lying idle for some time, unable to cope with high input costs. On the other hand, the ferro-alloys sector may be hit by higher imports in the wake of the duty cuts. The local ferro-alloys industry had actually been seeking a hike in the import tariff. Thus, the obvious lesson for the government from the perceived after-effects of its recent inflation-targeted actions is that it should refrain from taking hasty steps and should play its cards cautiously. Otherwise, the adverse consequences, even if unintended, would not be ruled out.