Govt worried, but unlikely to push ‘blind controls’ | india | Hindustan Times
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Govt worried, but unlikely to push ‘blind controls’

india Updated: May 21, 2008 20:53 IST
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There is no doubt that the UPA government is worried about the rising rate of inflation that hit 7.8 per cent in the week ending on May 3. At the highest levels of government, there is an expectation that inflation will hover around 8 per cent through June before moderating to more comfortable levels of 6 per cent in the following weeks.

Prime Minister Manmohan Singh’s various statements, including the one after his recent Bhutan visit, as well as his informal meeting with the finance minister and the deputy chairman of Planning Commission, clearly indicate the policy stance of the government to battle inflation.

At Bagdogra last Saturday, Singh held out the prospect that inflation would moderate if this year's monsoons are normal and added that the situation would be better after September 15. “I am confident that with the excellent procurement of food grains —both wheat and rice — and if we have a normal monsoon, we will see a moderation in price behaviour. But one has to be patient,” he stated. He also emphasised that even in a normal year, prices do rise seasonally between May and September; and that one can't make an announcement every week regarding measures to bring down prices.

To lower inflation, it is reliably learnt that the Prime Minister prefers monetary measures over drastic administrative ones. The Reserve Bank of India (RBI) has raised the cash reserve ratio (CRR)—the money commercial banks are mandated to keep with the central bank—to 8.25 per cent. This measure has the effect of draining out excess liquidity from the financial system, making banks lend less to industry and households. RBI Governor YV Reddy, in his policy statement for 2008-09, indicated his resolve to use all such policy means flexibly as and when the situation warrants.

Considering the government’s objective to fight inflation, there is bound to be speculation regarding its stance on the rupee.

The Indian currency unit has been depreciating in recent weeks against the US dollar and is clearly bound to be inflationary at a time when global crude prices have crossed $125 a barrel. Interestingly, RBI has not so far intervened in the foreign exchange market, according to JP Morgan. The big question is: in this war on inflation, how much longer will it be before the central bank intervenes to ensure a rupee becomes stronger?

Preferring monetary measures, Singh has categorically stated that there is no going back to “blind controls” to combat inflation as it would send the wrong signals. He has also emphasised that “hands-off” policies be followed with regard to the economy. The PM’s statements in this regard assume significance given the recent talk of imposing the Essential Commodities Act, besides other price control measures to lower steel and cement prices that hark back to the pre-1991 control regime.

Finally, Singh has also unambiguously argued, right from his address to the Annual General Meeting of FICCI in February, that if in the battle against rising prices some sacrifice has to be made on the growth front, so be it.

No government can be oblivious to the objective of ensuring reasonable price stability, especially when 90 per cent of the population lives in the unorganised sector with no indexation of their income. Simply put, the UPA government is, thus, ready to accept the price of lowering inflation in the form of slower growth, if necessary.