It’s bad luck for the UPA government that it has to be in the driver’s seat when the country has been hit with the highest inflation figure in 13 years. While everyone did expect to wear furrowed brows in the face of a sub-10 per cent figure, 11.05 is making many knuckles go white. So how does one take this on the chin and keep walking? To cool down prices, the government has basically one option: take monetary rather than administrative measures. This way, economic growth doesn’t become too much of a casualty. The Reserve Bank of India, on its part, has been doing the needful — for instance, raising the cash reserve ratio so as to make banks lend less to industry and households.
In these jittery times, the government will be sorely tempted to take administrative measures like imposing controls. It should seriously avoid taking this path — unless the plan is to take the economy back into the dark recesses of an earlier era that said goodbye to growth. Prime Minister Manmohan Singh indicated in his various statements that a 9 per cent-plus rate of inflation in June was to be expected. He has also said that the price rise would stabilise if this year’s monsoons were normal. The chief economic advisor to the Finance Ministry added for good measure that there are “uncertainties on inflation” in the next three months, after which there will be a downtrend.
Obviously, the government’s biggest concern is that the script on the price front is not conforming to expectations. But at the same time, all this wasn’t a bolt from the blue. The point is that there might be a period of prolonged double-digit inflation that the government must be prepared to address. And preparation is crucial. Although the hike in petrol, diesel and cooking gas prices was a moderate one, no one expected this much of a cascading effect on overall inflation. Clearly, costlier diesel has proved to be the villain of the piece as it has affected wholesale prices via higher rail and road transportation costs. The problem is that global oil prices may touch $150 a barrel. Can the government seriously avoid hiking prices to prevent State-owned oil companies from going bankrupt?