The Hindu : Business : `Inflation, interest rates need attention'

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Wednesday, May 25, 2005

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Business

`Inflation, interest rates need attention'

Staff Correspondent

Union Finance Minister asks industry to cut costs

— Photo: Vivek Bendre

SIGNALLING CAUTION: The Union Minister of Finance, P. Chidambaram, delivering the keynote address at the 169th anniversary of the Bombay Chamber of Commerce and Industry in Mumbai on Tuesday.

MUMBAI: The Centre's borrowing in 2005-06 will be less than earlier estimated but it will have to contend with pressures from inflation and interest rates, according to the Union Finance Minister, P. Chidambaram.

Addressing the 169th annual general meeting of the Bombay Chamber of Commerce and Industry (BCCI) on Tuesday, Mr. Chidambaram said, "I concede that Government borrowing is a problem and gross fiscal deficit is inexplicably high. But last year, the government borrowed less than projected and this year too, we should be able to do so. Also, this year there are much better cash reserves than was anticipated."

It was the government's intention to ensure that inflation was under control and interest rates were benign to promote investment.

"So far we have been able to manage this triangulation of forces well," said the Finance Minister, adding that, this year the economy could grow at last year's seven per cent.

However, he cautioned that there were inflationary pressures due to increased money supply and rise in oil prices, interest rate pressures due to the government's huge borrowing and demand for money by a growing industry and pressure on resources because of a large number of people not having confidence in the capital market. A huge inflow of foreign exchange has contributed to increased money supply and today alone, the Reserve Bank absorbed Rs. 23,900 crores through reverse repo.

Mr. Chidambaram said the country needed sensible policies, which included containing inflation, keeping interest rates benign and promoting investment over the next 15-20 years, if it had to emerge as an economic superpower.

Criticising the manufacturing sector for increasing prices at the slightest pretext, the Finance Minister said the temptation to increase prices could cause damage to the economy. "We have an obligation to keep prices stable and that is the key to orderly and peaceful development in India. There is no word that a poor man fears as much as `inflation.' Industry has an obligation to keep prices down by reducing costs, using new technology and up-scaling business. Because, if prices increase, inflation cannot be far behind and therefore, interest rates are inextricably linked to inflation. When interest rates move up, there is an immediate impact on investment and decisions are postponed," he said.

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