Fighting inflationary fires

The petroleum ministry's decision to reduce both petrol and diesel prices (to be followed probably by matching duty cuts on these products, so that the hapless oil-marketing companies are spared additional losses) came after the minister had the obligatory meeting with UPA Chairperson Sonia Gandhi, and was predictable for a variety of reasons""including the overt assertion of who is the political boss to whom key ministers go for direction. Of the many anti-inflation measures introduced over the past couple of months, this latest one will have a direct and tangible impact on the general price level, though only to a limited extent. Since petrol and diesel have a 3-4 per cent weighting in the basket of goods used to construct the wholesale price index, the announced cuts in prices will have a direct impact of about 0.2 percentage point, and a knock-on effect through indirect cost reductions that are hard to predict. That this decision has been taken when crude oil prices are climbing fairly steeply once again, and when there is a loss (sorry, "under-recoveries") being incurred by the oil marketing companies, tells of the government's growing concern over the steady ascent of the inflation curve. When the provisional figures for the latest week are finalised, it is entirely likely that wholesale price inflation will have crossed 7 per cent""which used to be the long-term average inflation rate, and the threshold when it comes to political sensitivities. Indeed, retail consumer prices have been going up at that rate for some months.

No one in either the government or the Reserve Bank had warned that inflation would reach such levels, so there must be some degree of surprise in official circles. What is evident now is that those in authority are scrambling to make up for lost time. There has been repeated action in recent weeks on raising interest rates and tightening money supply. And following the reasoning that there are specific supply-side issues affecting the prices of individual items, the government has taken a series of administrative steps as well. It has at various times banned the export of a number of items (wheat, sugar, milk powder, etc), it has lowered import tariffs on some other items, and it has twice dropped taxes and prices on petroleum products. None of it has so far had any noticeable effect. Monetary policy is known to be a blunt instrument that takes up to two years to bite, and some of the administrative measures (like banning wheat exports) have no real significance because no exports have been taking place.

For the last several months, the debate on inflation control has focused on how much the RBI should use the levers available to it, without choking growth. With the economy ripping along at 9 per cent, the finance minister in particular has tried through the past year to make sure that interest rates stayed low""giving the impression sometimes that he was trying to countermand the RBI's measures. Now that inflation is at or near the 7 per cent mark, there can be little doubt that price control takes precedence over growth issues. Expect more anti-inflation measures in the coming weeks, including in the Budget. One obvious course of action would be to drop tariffs more than might otherwise have been done, and another would be to allow the rupee to rise if there is continued capital inflow, so that the RBI is not left with the problem of sterilising more funds, and so that imports become cheaper. All of this will necessarily mean somewhat slower economic growth, but that price has to be paid in the interest of price stability.