P Chidambaram: It is our goal to keep inflation at 4 to 4.5%

OPINION

Prices of commodities, gold, wheat, rice, say 15 years ago, were not the same as today. What we are trying to moderate is the increase in the rate of the rise, which is what we measure as inflation. The Reserve Bank of India says that in India, given our economic situations, prices should not rise, say, beyond 4.5 per cent to 5 per cent a year. The government has said and I say this "" it is our goal to keep the inflation at around 4 per cent to 4.5 per cent a year. So the prices will rise. What we are collectively debating is as to how to moderate the price rise, so that as wages and incomes rise, people will not be burdened with the price rise.

While the WPI (Wholesale Price Index), which is the usual way to measure inflation, is around 5.6 per cent today, two weeks ago, it was close to 6.7 per cent. There has been a moderation in the last two weeks. It is too early to say whether that moderation will continue, but I am hopeful that it will continue. The primary reason behind this inflation rate is what we call the Primary Articles Group. The Primary Articles Group consists of food articles as well as other primary non-food articles. In this Group, price rise has been 10.84 per cent on April 28, 2007.

Broadly speaking, there are five reasons behind the present inflation. Firstly, take the world-wide increase in the commodity prices, particularly crude oil. Now, crude oil this morning was at $67 a barrel. You will recall that some months ago, it moderated to about $50 a barrel. The government reduced prices twice by two rupees and one rupee a litre on petrol and diesel. But crude oil prices have climbed back to $67 a barrel.

The metal prices have hardened year by year by about 57 per cent in 2006. In recent times, in no calendar year has metal prices increased by 57 per cent. In India, the metal prices have increased by 11 per cent as on April 28, 2007.

Let me illustrate with a few examples. The international price of the Indian basket crude oil increased from $47 per barrel in May 2005 to a peak of $71.29 in July 2006. It came down to about $52 a barrel in January, but since then it has climbed back to $67 a barrel. The price of US Red Hard Wheat, which was $152 per metric tonne in calendar year 2005, went up to $212 per metric tonne in October 2006. Similarly, the price of palm oil, which we import in large quantities, went up from $422 per metric tonne in 2005 to $707 in April 2007. The prices of copper per metric tonne went up from $2,866 in the calendar year 2004 to $7,766 in April 2007. There is a three-fold increase. Iron ore during the same period went up from $38 to $77. In metals, there was a large increase in prices. All this clearly impacts Indian industry, Indian manufacturing and all the downstream activities. We have no control over these prices. Some metals are produced in India. But most of the metals, and a large quantity of metals, are imported by the Indian Industry. We import palm oil. We import crude oil... (Interruptions)

I come to the second reason. The second reason is the supply-demand mismatch. The supply-demand mismatch in essential articles started with sugar in the end of 2005. Then it extended to wheat. Now it has extended to pulses. We must understand why the supply-demand mismatch is there and for how long the supply-demand mismatch will be there... (Interruptions)

(Excerpts from the first part of Finance Minister P Chidambaram's reply in the Lok Sabha on May 17 on price rise)