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Uphill tasks for government and Reserve Bank of India

Both Finance Minister P. Chidambaram and Reserve Bank of India Governor Y. V. Reddy are finding it difficult to take quick and appropriate decisions to stimulate segments in the economy affected by a dearer rupee and cost escalation. At the same time they have to keep inflationary pressures under control.

The inflation rate is already at a 14 month high of 6.68 per cent for the week ended March 15. It has become clear that selling prices for petroproducts will remain high because of soaring crude prices. There is also anxiety to avoid a sharp rise in selling prices for diesel and gasoline while those for LPG and kerosene sold through fair price shops have to remain affordable.

However, trends in foreign trade so far this year indicate that the oil import bill for 2007-08 may be as high as $70 billion ($57.13 billion last year), enlarging the subsidy burden as well as the trade deficit. Even the rupee cost of oil imports may be higher at Rs. 2,85,000 crore (Rs. 2,58,572 crore). Continuation of present policies will only increase the subsidy burden on enterprises in the public sector affecting their profitability. Petro bonds will therefore have to be issued again on a large scale next year.

These do not form part of the revenue or fiscal deficit of the Centre as they are below the line as stated by the Finance Minister. Such explanation of an unethical practice, though it conforms to past practice, cannot be justified. The recommendation of the Eleventh Finance Commission in this regard is awaited. However, the outstanding amount of petro bonds and indeed fertilizer bonds will be rising as there is no suggestion yet of a significant reversal of the world prices for crude and petro products.

Apart from a likely increase in camouflaged revenue and fiscal deficits, what is really worrisome is the spurt in prices for essential commodities. Even though the farm sector will fare better in the current agricultural season ending in June and the output of foodgrains will rise to 219 million tonnes from 204 million tonnes earlier, there is a shortfall in wheat and big deficits in pulses and edible oils. While the deficit in pulses has been increasing with no breakthrough in production, dependence of edible oil imports to the extent of 45 per cent of consumption is resulting in a big outgo of foreign exchange due to higher prices and larger volumes.

The quantum of imports was 4.26 million tonnes in 2006-07 with a value of $2.1 billion (Rs. 9,540 crore) while in the first half of this year the quantum was 2.63 million tonnes having a value of $1.39 billion (Rs. 5,677 crore). With a further spurt in prices after September the total outgo for the whole year may be easily Rs. 12,000 crore. The big rise in domestic edible oil prices this year is mainly attributed to high world prices. There are also other factors at work.

Despite a bumper cotton crop internal prices have risen sharply in the wake of substantial exports at remunerative prices. The textile industry is badly hit by a dearer rupee and unexpected rise in costs. Similarly, Indian iron ore is in keen demand overseas and domestic prices have gone up over 30 per cent. Steel producers having no captive mines are thus seriously affected and have to raise selling prices as coal imports too have become costlier.

It is clear that supply constraints in wheat, pulses and edible oils are responsible for a spurt in commodity prices and a further rise in inflation rate cannot be averted with monetary measures alone as indicated by Mr. P. Chidambaram. It will be necessary in the short term to import essential commodities in short supply and sell them at subsidised rates to the weaker sections of the community. It remains to be seen whether the slowdown in the global economy will have a softening effect on the price structure.

A long term solution lies in raising the output of all foodgrains and non-food products, particularly oilseeds. Paradoxically a much larger cane crop has resulted in a record output of sugar and huge stocks being carried over to the next season. Yet instead of evolving a policy for boosting ethanol output based on cane juice and reducing petroleum imports, the minimum statutory price for cane has again been raised. There is also a needless ban on export of sugar. The promised New Sugar Policy is yet to be formulated. Meanwhile even efficient sugar mills are suffering huge losses.

The Finance Minister will thus be facing new challenges in the coming months. He has also to provide Rs. 10,000 crore in supplementary demands for 2007-08. It has been decided to create a Farmer’s Relief Fund with a credit of Rs. 10,000 crore. A further sum of Rs. 15,000 crore is to be provided on this score later this year. The balance of Rs. 35,000 crore will have to be found out of the budgetary resources for 2009-10 and 2010-11.

With a gap in “resources availability” for short periods, profitability of the institutions concerned will be affected adversely. Apart from liability on account of the loan waiver scheme a sizable amount will have to be found when implementing the recommendations of Sixth Pay Commission.

The inflationary situation should not deter the Finance Minister from taking bold steps to pep up the economy. In an expansionary phase, there is no justification for unused capacity in automobiles, consumer durables, consumer electronic products and the like. The bottleneck in coal has to be removed with a massive effort to open up new mines with the assistance of the private sector and indeed foreign interests. Only 45 per cent of the country’s coal reserves has been exploited so far. There should not also be any slowing in the development of power and transport.

It is now recognised in government circles that industry will need fresh sops. The deceleration in industrial growth to 8.5 per cent in April-January 2008 from 12.5 per cent a year ago is disturbing and, if allowed to persist, the budget estimates for tax revenues, rather optimistically conceived, will be difficult to realise. The creditable performance of 2007-08 cannot be repeated on present indications.

A pessimistic view of the economy in the next fiscal is of course not warranted. There have been welcome developments in the petro sector with success in boosting the output of crude and natural gas from the new offshore areas later this year. It is also expected that the world price situation will improve. In fact, it is asserted in the survey of the “Economic & Social Commission for Asia” that the GDP growth can be raised by 10 per cent yearly given the right “business environment” by developing its physical infrastructure and human capital.

In view of the uncertain economic situation, entirely different approaches are required for boosting agricultural and industrial output and encouraging the service sectors to grow further in stature.

Simultaneously supply constraints in respect of essential commodities should be overcome by strengthening the agricultural sector and promoting allied industries.

A balanced growth will strengthen immunity of the Indian economy and increase its capability to resist the onslaught of external factors.

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