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Rush to rein in inflation

The Finance Minister met Manmohan Singh, Sonia and the RBI Governor, and hinted at tax cuts and hike in interest rates, says Gaurav Choudhury.

business Updated: Jun 22, 2008 01:46 IST
Gaurav Choudhury

The country’s top leadership got into a huddle on Saturday to hammer out new measures to curb inflation that has surged to double digits and threatens to snowball into a major electoral issue.

A mix of duty cuts on petroleum products and interest rate hikes are being explored, officials said, a day after latest price data showed the inflation rate rose to 11.05 per cent in the week ending June 7, its highest in 13 years.

“We should not give room for panic, we should take steps to quell inflationary expectations,” Finance Minister P Chidambaram said in a statement after holding meetings with Prime Minister Manmohan Singh, Congress president Sonia Gandhi and RBI Governor YV Reddy.

The Finance Minister, who has drawn criticism from Opposition parties as well as Left allies for the price situation, said the government was willing to consider deeper cuts in taxes to soften the impact of rising raw material costs on consumers.

Any such move would have to be weighed against its impact on the government budget deficit. Earlier this month the government had abolished customs duty on crude oil, reduced import duty on petrol and diesel, and slashed excise duty on petrol and diesel by Re 1 per litre.

Those moves are estimated to result in a revenue loss of Rs 22,000 crore, according to finance ministry estimates.

“Giving up revenues and borrowing an equivalent amount in the market in order to finance expenditure would also be inflationary,” Chidambaram said.

Separately, Finance Secretary D Subbarao said the government expected RBI to bring measures that will help suck out excess money in the system and dampen demand.

“We expect the central bank to take some more action. It is for the RBI to take a decision and to take a decision on when it is appropriate,” Subbarao told a news conference.

Earlier this month, the RBI surprised market by raising the repo rate, the rate at which it lends to commercial banks in the short term, to 8 per cent from 7.75 per cent. Most experts expect another hike, a steeper one, soon.

“It is highly probable that the RBI will hike its key interest rates,” said Yashika Singh, Head, Economic Analysis Group, Dun & Bradstreet.

Any increase in repo rate will surely force banks to raise interest rates on home loans and other finances.

That, in turn, could hurt the broader economy by slowing new investments, but the government and policy makers appear ready to settle for a lower growth than risk higher inflation.

Expectations are the inflation rate will remain in double digits unless global prices of crude and other commodities soften soon.

On Saturday, Chidambaram along with Petroleum Minister Murli Deora headed to Jeddah, Saudi Arabia, where top government officials from key oil producing and consuming countries are meeting on Sunday.

The meeting is expected to focus on measures to ease availability of crude, especially for emerging economies like India and China.