FM cautions on price hikes

Inflation can hit interest rates: Chidambaram.

Finance Minister P Chidambaram today cautioned the manufacturing sector against increasing prices on the slightest pretext.

"If prices go up, interest rates cannot remain soft. This in turn affects investments. There is a functional relationship between inflation, interest rates and investments. The short-term temptation to raise prices hurts the economy in the long term," Chidambaram said.

He was addressing the Bombay Chamber of Commerce and Industry at its 169th annual general meeting.

He said manufacturers must keep the country's interests ahead of short-term temptations to jack up prices. They also had the obligation of keeping prices in check for "orderly and peaceful" development.

The minister said there was pressure over investible resources but promised a benign rate and an under-control inflation.

He admitted that the budgeted government borrowings of Rs 1,40,000 crore for 2005-06 were unacceptably high, but hoped these would be less than budgeted through better management of cash flows, as was done last year.

Chidambaram said the government had been able to manage inflation and the interest rate scenario reasonably well so far. The pressure on money supply and inflation, however, continued in conjunction with the pressure on interest rates owing to the budgeted government borrowing programme and the demand for credit from industry.

Inflation increased to 5.61 per cent in the week ended May 7 from around 5 per cent in early February.

The huge foreign currency inflows continued to have implications for money supply. The Reserve Bank of India (RBI) today sucked out Rs 23,900 crore through a reverse repo auction.

There is pressure also on investible resources because a large number of people did not have confidence in the capital markets, he added.

High global oil prices and the temptation of the manufacturing sector to increase prices on the slightest pretext added to these pressures, Chidambaram noted.

He advised manufacturers to cut costs, stop wasteful expenditure, adopt new technologies and scale up capacities to keep prices steady as long as possible.

Once inflation was under control and the government borrowed less than budgeted, interest rates would remain benign, he felt.

On the tax front, he said the government wanted to keep rates moderate, ensure a friendly tax administration and make enforcement strict.

The tax administration recovered Rs 9,475 in arrears in 2004-05, which is the highest ever recovery of overdues.