Govt moves to keep prices under control

FM warns manufacturers against jacking up prices.

Finance Minister P Chidambaram said the government would take action in a "measured" way, both on the fiscal and the monetary fronts, to check inflation. He, however, warned manufacturers against pushing up commodity prices.

The firefighting in North Block began in the morning itself with Reserve Bank of India Governor YV Reddy calling on Chidambaram for an hour-long discussion on the monetary measures that could be considered to rein in the rising prices. The minister also had a detailed meeting with Prime Minister Manmohan Singh on the ministry's plan of action.

The Prime Minister's Office had directed the finance ministry to prepare a detailed note on the rising inflation and its outlook, to be discussed in the Cabinet Committee on Economic Affairs meeting.

Briefing reporters after the meeting in the evening, Chidambaram said the RBI would take action according to its judgment on the monetary side and the finance ministry would take the necessary fiscal measures.

"Some manufacturers are pushing up prices taking advantage of the worldwide increase in commodity prices. I will advise them not to increase the prices. There is no justification whatsoever," Chidambaram said.

He said there was no reason for people to entertain inflationary expectations. "Monsoon has revived and seasonal factors will be ironed out. So, do not pay high prices if you feel the prices are high," the minister said. Besides statistical reasons, the rise in inflation was largely because of an increase in the prices of petroleum, Chidambaram said.

According to officials, the fiscal options being considered include a cut in Customs duty in specific commodities like edible oils, sugar, iron ore, steel and petroleum products, which have contributed to the rise in the wholesale price index (WPI)-based inflation.

The officials said a cut in the Customs duty was favoured since it could be revenue neutral. "Higher imports could make up for the loss in revenue due to a duty cut," an official said.

While the option to cut excise duty was also considered, it did not find favour with the revenue department.

On the monetary front, the RBI could consider allowing the rupee to appreciate, the officials said. RBI Deputy Governor Rakesh Mohan discussed various monetary measures with Chief Economic Adviser Ashok Lahiri. Both Reddy and Mohan refused to comment on the measures being contemplated by the central bank.

"The rupee's appreciation will make imported goods cheaper," an analyst said, adding that such a move would also prevent domestic producers from increasing prices.

"The rise in inflation is due to cost push and not because of demand pull," the analyst said, adding that liquidity was not an issue. "The government has just about completed one-third of its borrowing for the full fiscal year," he said.

The liquidity in the system did not exceed Rs 45,000 crore and a cash reserve ratio or a repo rate cut would be suicidal for the bond markets. "The interest rate could go up by 100-150 basis points if CRR and repo rates are cut," the analyst said.

The wholesale price index-based inflation had shot up to 7.51 per cent for the week-ended July 24 from 6.2 per cent in the previous week. Analysts said the impact of an increase in the prices of petrol and diesel as well as the steel price hike could push up the inflation rate further in the coming weeks, they said.