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Chidambaram says inflation still a threat

India's annual inflation rate hit 4.89 per cent in mid-February, the highest in more than eight months.

business Updated: Mar 03, 2008 12:45 IST
Rajkumar Ray

Inflation in India is still a threat because of high food prices, the finance minister said on Monday, as he promised to consider policy intervention if growth slowed in any industrial sector of the $1 trillion economy.

India's annual inflation rate hit 4.89 per cent in mid-February, the highest in more than eight months and just below the Reserve Bank of India's target of 5 per cent for the fiscal year ending March 31.

"One of the reasons why inflation is still a threat is because of food price inflation," Palaniappan Chidambaram told Indian businessmen three days after he unveiled the 2008/09 budget.

"If we grow enough food to feed our people, we are insulated from world prices, but if we are dependent on imports we are subject to world prices."

He said world prices of wheat had increased by 88 per cent since April 2007 and those of rice by 15 per cent.

India's food output has failed to keep pace with the demands of its 1.1 billion population, most of whom rely on the land for all or part of their livelihoods.

Stagnant farm growth has widened an already yawning wealth gap between city and village.

At the same time, a jump in global prices of farm commodities has made importing staples a costly and politically damaging exercise and contributed to a spike in local food prices.

"Taking all this into account, we came to the conclusion that the distress of the farmers calls for an unorthodox response. And the response was the farm loan waiver," Chidambaram said.

The finance minister announced in Friday's budget a controversial plan to write off $15 billion of small farmers' debts to banks in a move analysts say is aimed at wooing voters ahead of elections due by May 2009.

Chidambaram added the government would step in if there were signs that growth in some sectors of the economy was flagging.

The Indian economy is the third largest in Asia and the fastest growing major one in the world after China.

Gross domestic product grew at 9.6 per cent in the fiscal year 2006/07 and is on course to slow slightly to an estimated 8.7 per cent in the year which ends on March 31.

"You have my word that if any sector faces difficulties, if there is any signal that growth is flagging in some sectors, government will certainly step in and try to see what can be done to that sector," Chidambaram said.