Govt schemes, high MSP fuel inflation

The increased allocation for flagship programmes of the government and higher procurement prices of paddy and wheat are contributing to high inflation levels. Finance Minister P Chidambaram said this while replying to the discussion on the Finance Bill, 2007-2008.

"Public expenditure has been on the rise, and justifiably so, in view of the flagship programmes and the commitment to increase expenditure in the social sector, including education and health. Such expenditure increases demand. We have also increased the procurement price of paddy and wheat substantially in order that our farmers get remunerative prices. These decisions, while justified on sound economic grounds, also have an inflationary effect," Chidambaram said.

A study by the India Development Foundation (IDF) had also suggested that states like Orissa and Madhya Pradesh, which are large recipients of National Rural Employment Guarantee Act (NREGA) funds, have seen the highest levels of inflation in the country. Counting five reasons for the recent high level of inflation, Chidambaram blamed the worldwide increase in commodity prices, including crude oil, as a major contributor to inflation.

Holding that the average inflation of 5.4 per cent in 2006-07 as "high", Chidambaram said this needs to be contained below 4.5 per cent.

Holding that the average inflation of 5.4 per cent in 2006-07 as "high", Chidambaram said this needs to be contained below 4.5 per cent. He expressed confidence that inflation would be moderated through supply side, monetary and fiscal measures by the government and the Reserve Bank of India.

The supply-demand mismatch in essential articles like sugar, wheat, pulses, according to Chidambaram, is also a major reason for the over six per cent inflation level.

"The supply-demand mismatch can be attributed to the stagnation in production over the last 10 years of wheat, paddy and pulses. The only durable answer is to increase the production of wheat, paddy and pulses and, in the meantime, augment supply through imports wherever possible," he said.

Accepting that many industries like cement are working at near full capacity, Chidambaram said that as a result of this "pricing power has returned to manufacturers and sellers".

Chidambaram also said that the large capital inflows in terms of FDI, FII, remittances, private equity, external commercial borrowings, export earnings etc have increased the money supply beyond the normative level, thus contributing to high inflation.