By : Ashok Handoo :The latest inflation figure in the country has slipped down the 12 per cent mark which, if nothing else, should at least give a psychological relief to the people; the same way as a mere marginal increase in the inflation rate would ring the alarm bells in the media leading people to be overduely concerned about the issue. But a marginal fall in the inflation rate is not something one can be satisfied with. What, however, is a matter of satisfaction is that the phase of constant rise in inflation seems to be over.
During his recent trip to the United States with the Prime Minister Dr. Manmohan Singh, the Deputy Chairman of the Planning Commission Dr. Montek Singh Ahluwalia told reporters that inflation rate will return to single digit by the end of current fiscal. Some even believe that a single digit figure will be achieved by the end of December and by March the position would be still better.
The Secretary, Ministry of Statistics and Programme Implementation, Shri Pronab Sen is of the view that inflation will remain in double digit until January, due to the base effect and higher prices of manufactured products.
Dr. Ahluwalia however indicated that the government is not in favour of taking excessive harsh measures to check inflation because that will impact the growth of the economy.
The government has already taken a number of measures to increase the domestic supply of goods and services in the country. For this purpose while the import of goods has been liberalised, restrictions have been placed on the exports of certain commodities. For instance, in the case of pulses, customs duty on imports has been reduced to zero, until March 2009. Simultaneously a ban has been imposed on its export up to March end. Custom duty on semi-milled or wholly-milled rice too has been completely done away with, till March 2009. Export of non basmati rice was banned and the minimum export price of basmati rice was raised to $1200 per tonne . In the case of wheat there will be no import duty till December this year. In order to pave the way for increased supply of edible oils, a commonly used medium of cooking in India, a number of steps have been taken. Customs duties on crude and refined edible oil have been reduced by about 50 percent and now range from 20 to 27.5 percent. Simultaneously, the import of crude edible oil at zero duty and refined oil at 7.5 percent has been allowed. Customs duty on palm oils too was reduced by 10 percentage points. The 4 percent additional countervailing duty on all edible oils was also withdrawn. Export of all edible oils has already been prohibited.
Customs duty on maize imported under Tariff Rate Quota of five lakh metric tonnes was also done away with. Import of Portland cement, other than white cement, was exempted from countervailing duty. At the same time, export of cement was banned. Basic customs duty on various kinds of steel too was either reduced or done away with. On cotton imports the 10 percent customs duty along with 4 percent special additional duty was abolished. Crude oil and petroleum products also received a favourable consideration. In the case of crude oil customs duty was done away with. On petrol and diesel it was reduced from 7.5 to 2.5 percent. On other petroleum products it was halved to just 5 percent. Excise duty on petrol and diesel too was reduced by Rs. 1 per litre. What is a matter of some consolation is that the international price of crude oil is coming down and has already reached $ 94 a barrel. If the trend continues it will bring down the inflation level in the days ahead.
A series of monetary measures too have been taken to deal with the situation. These include repeated increases in the cash reserve ratio of banks and the Repo, as well as reverse Repo rates. The purpose is to check the flow of liquidity into the open market and thereby reduce the price level.
The problem is that just like any health care medicine, the economic measures mentioned above have a negative aspect too. They can impact the growth rate also if adopted without proper monitoring.
The real treatment of the problem is to increase the supply position. This is bound to happen as soon as fresh crops come to the market. In the long run, the government needs to draw a strategy to ensure that agriculture produce in the country, which continues to be our mainstay, increases. Since food represents more than half of the expenditure of a vast majority of our poor population, adequate attention needs to be given to this aspect.
The question now is how far is the meltdown in the US financial market going to affect the Indian economy. Dr. Ahluwalia maintains that its’ direct impact on India has been negligible. There is also a silver lining. The country has ample stock of foreign exchange reserves. So we should be able to deal with the situation that may arise temporarily in the financial markets. But the US financial turmoil is not likely to end anytime soon. Economists believe that this may happen only by the end of the next year. As such India cannot be completely insulated against the economic uncertainties in future. Even the US government believes that the massive bail- out package of $ 700 billion that it has approved may not be enough to stave a financial turmoil in the US. The sub- prime crisis in the United States is a matter of concern since it is exerting pressure on the financial systems and growth implications around the world.
Ultimately it boils down to somehow increasing the supply of goods and services in the market by increasing the imports and reducing or stopping altogether the exports of certain key commodities, reducing money supply in the short run and ensuring proper distribution of whatever stocks are available. That is precisely what the government is doing right now. How soon it can overpower the monster of inflation can be anybody’s guess. All that we can say right now is that we seem to have crossed the inflation hump.
