Tame the beast | india | Hindustan Times
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Tame the beast

Lower growth is inevitable as measures to fight inflation include retaining interest rates at current levels instead of cutting them to stimulate economic activity.

india Updated: Mar 31, 2008 20:28 IST

On the economic front, nothing worries the UPA government more than rising prices, especially of food, edible oil and other essentials. With inflation rising relentlessly to 6.68 per cent — much higher than the comfort levels of 5 per cent — worried policymakers are trying to contain the problem on a war footing. Witness the slew of initiatives taken of late that include reducing import duties on different varieties of palm oil, withdrawing incentives to export of at least 40 items such as steel, cement and non-basmati rice. No doubt, India’s inflationary predicament is hardly exceptional as commodity prices have also risen sharply internationally. In the case of edible oil and steel, higher global prices are instantly reflected in higher domestic prices. But this is not so for food grains that is relatively insulated from the world market.

The grounds for concern are obvious. Ahead of crucial state polls, including a national election, rising prices are a political kiss of death, especially for incumbent governments. Inflation is bad news for the middle-class. It also represents a regressive ‘tax on the poor’ as food consumption accounts for a large share of their meagre budgets and dearer prices of rice, wheat and vegetables drastically erode their standards of living. What is worrisome from the government’s standpoint is that short-term remedies to import cheaper food from the world market, to augment domestic shortfalls, are not a feasible option as global prices rule at all-time highs. Wheat prices are up by 88 per cent since April 2007. Rice prices, too, have surged to 20-year highs.

Exemplifying the government’s resolve to contain inflation even if it is at the expense of growth is the recent statement of finance minister P. Chidambaram. While necessary fiscal, monetary, and supply-side measures would be taken, “if that means that we have to live with a slightly lower growth rate, so be it,” he added. As if on cue, official expectations of growth this year have changed from 9 per cent to 8 per cent. Global agencies, too, have revised their forecasts to 7.5 to 8 per cent. Lower growth is inevitable as measures to fight inflation include retaining interest rates at current levels instead of cutting them to stimulate economic activity. The upshot is that ensuring price stability at all costs is now the paramount objective. Watch out for the heavy fire-fighting.