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Inflation clouds budget discussions

Official measures take time to impact prices

IT MAY be an exaggeration to say that inflation worries overshadowed even the Union budget. However, even a good two weeks after the budget, concerns over price rise are heard in every forum including those convened to discuss budget proposals at this time of the year. The budget did address the issue of price rise. Customs duties on a number of items were brought down. Some controversial proposals such as a dual duty structure for cement were introduced.

It is nobody's case that the budget should focus entirely on the price situation or any other development but intentionally or otherwise that is how the Government presented its case. The large outlays on agriculture are justified in the context of efforts to raise its annual growth rate to 4 per cent and promote inclusive growth. The beneficial results will be felt over time. In the meantime, solutions will have to be sought to increase the supply of agricultural commodities and moderate their price rise.

Price rise has naturally acquired strong political overtones. The Congress's loss in both Uttaranchal and Punjab is partly attributed to price rise. With the Uttar Pradesh elections looming large inflation worries will remain even if, as the Finance Minister claims, there has been a significant fall in the prices of essential commodities over the past two months. (The Government says that the inflation rate for essential commodities has come down to 3.67 per cent on February 24 from 6.77 per cent two months ago thanks to its efforts).

Such claims of moderation on the price front, as a rule, have little impact on what are known as inflationary expectations. It can be argued that official statistics have a credibility problem especially when they indicate lower prices. There is a straightforward explanation. Consumers do not see the full benefit of even well publicised official measures to check prices. The reduction in the prices of diesel and petroleum did not automatically translate into lower auto or bus fares although there is some substance in the claim that transportation costs of a number of commodities have come down. Recently the Reserve Bank of India said it would conduct a survey to measure inflationary expectations.

Ironically, the more vociferous the Government gets with its price control measures, the more intense the problem seems to become from a layman's perspective. One reason is that official measures inevitably take time to impact or are impractical at the given point in time. In the meantime the Government is seen to be taking sole responsibility for tackling the price rise.

Ineffective measures

Note for instance how prices of foodgrains and pulses remained sticky despite the Government announcing a series of measures in quick succession. Just to mention a few, private trade was allowed to import wheat free of duty from September last. Wheat exports were banned from February. Futures trading in wheat and rice was banned recently as was done in urad and tur dal earlier. Even the Government admits that these are short-term measures. International prices of some of these agricultural commodities, especially wheat and pulses, have remained high. Banning forward trading can do very little to bring down prices but such actions can do plenty of harm by creating uncertainty in the development of institutional arrangements for discovering prices of agricultural commodities.

The first post-budget inflation news (for the week ended March 3) has not been all that good for the Government. WPI inflation is 6.46 per cent, up from 6.10 per cent for the previous week. Costlier vegetables and cement have contributed to the rise.

As is known, cement producers first defied the Government by raising prices in the wake of the dual excise duty announcement. Subsequently a truce was reached with the companies agreeing to hold the price line for a year.

Agreed, a weekly dissertation on the price situation is not particularly relevant for the common man. It only heightens the awareness of individuals about the general price rise.

Correspondingly the Government is pushed further into the defensive. It is time to stress the obvious: that there can be no immediate solutions for the common man. On the other side, policy makers cannot expect a quick reprieve.

C. R. L. NARASIMHAN

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