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Sounding the alarm bells

Even for a government that has been keenly alive to the possibility of a resurgent inflation and had initiated a number of steps to contain it, the latest data should sound the alarm bells, particularly as elections are not too far away. During the week that ended on March 15, the Wholesale Price Index (WPI) inflation surged to 6.56 per cent on a point-to-point basis, the highest in 13 months. Compared to the previous week, the increase was as high as 0.76 percentage point, one of the highest spikes ever recorded over such a short period and far above market expectations. For four successive weeks, inflation has stayed above 5 per cent. The latest data confirm what many analysts had suspected: the inflation trajectory has shifted upwards, having remained in the vicinity of 4 per cent for a fairly long period. The latest spurt is attributed to an all round increase in prices, especially of iron and steel and food articles. What is particularly worrying is that global pressures on the domestic price situation, notably through oil and food prices, show no signs of abating. The government has already taken a number of fiscal and other measures to ease inflationary pressures from the supply side. The latest move is to make exports of certain items including steel and non-basmati rice, mineral ores, and cement less attractive by modifying the incentives available to them. Last week, the import duty on edible oil was slashed and its export banned. Supply side initiatives such as these might work temporarily but over the medium-term production-linked structural problems and infrastructure bottlenecks will have to be addressed.

With the annual credit policy for 2008-09 due in less than a month, the role of monetary policy has already come into sharp focus. For the Reserve Bank of India, which has firmly opted for price stability, there are no easy solutions. Inflation is well above its targeted level of 5 per cent. Monetary contraction will help in moderating inflation only if demand exceeds supply. Currently economic growth is slowing down on the back of a deceleration in industrial growth. Besides, there is a fall in external demand. A tighter monetary stance by way of, say, an increase in interest rate might be necessary to reduce inflation expectations, fuelled by rising wages and the possibility of a hike in the prices of petroleum products. However, it is also necessary to sustain growth and retain investor confidence, besides stimulating consumption. Higher agricultural productivity and a vastly improved delivery of public services seem to hold the key.

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