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Inflation at a 3-yr high, it hurts badly

Inflation hits 3-year high in an election year; Centre scrambles to limit damage, report Arun Kumar and Gaurav Choudhury.

business Updated: Apr 05, 2008 12:13 IST

In the war between economic reforms and political status quo, the spotlight has irreversibly shifted to inflation. Standing at a three-year high of 7 per cent, it is this number that is skewing political stakes as the UPA administration, in an election year, reverses some of the reforms and brings in the age-old price controls with a vengeance.

<b1>The current headline inflation rate of 7 per cent as on March 22 is being driven by a sustained surge in food (tomatoes are up 43 per cent over the year, guavas 36 per cent, ginger 51 per cent) and commodity prices, according to official data released on Friday.

This number is about 50 basis points above economist expectations of 6.5 per cent. The underlying fear: the Indian economy might be losing its momentum faster than expected. Predictably and as the first barometer, the Bombay Stock Exchange’s 30-share Sensex tanked 489 points, or 3 per cent, with BHEL, HDFC and Mahindra and Mahindra falling over 6 per cent.

Fearing the worst— as proved by the imposition of price controls on the steel industry earlier this week — industry leaders urged policymakers to bring further cuts in import duties of essential goods and commodities. Their plea: don’t further tighten monetary policy or increase interest rates, as RBI governor YV Reddy is expected to on April 29.

Analysts are expecting a 50 basis point increase in cash reserve ratio (the percentage of money banks have to keep with RBI against their deposits) to 7.5 per cent.

Meanwhile, the politics of the situation is plucking out its favourite keywords, as an election sensitive government threatens to come down heavily on those found to be involved in "hoarding" and "profiteering."

"We will not hesitate to take the strictest measures, including using legal provisions against hoarding and profiteering whether in food, cement or steel," said Commerce and Industry Minister Kamal Nath, reacting to the latest price data.

The government has already empowered states to impose stock limit orders on essential commodities to check hoarding. It has brought a slew of fiscal measures, including this week's Cabinet decision to cut import duty on edible oil and ban export of non-basmati rice.

Saner elements know these to be futile. "Inflation is in an accelerating mode and we are yet to see any signs of its softening," said Saumitra Chaudhuri, a member of the Prime Minister's Economic Advisory Council.

The shortage of food products and commodities, the key factor driving prices across countries, is a global phenomenon, and it will take some time, may be years, to bridge those supply-demand mismatches worldwide. In India's case, its sluggish farm sector has also contributed, and the government will have to find ways to revive agriculture, said Rajeev Chandrasekhar, president, FICCI.

Asking manufacturers to hold the price line could only be a short-term solution, he said. "If you ask me to hold the price line, I may do it for one day, or one month, but eventually I will have to get to the price that the market decides," he said.

"You may coax them (industry) into regulated price model in the short term. But that's not a sustainable solution in a free-market economy."