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Unrelenting inflation

It has been a two-pronged attack on the politically sensitive problem of inflation. On the day the Reserve Bank of India unveiled its monetary policy statement for 2008-09 in which it hiked the cash reserve ratio by 0.25 percentage point, the Finance Minister announced in Parliament a package of fiscal and administrative measures, targeting inflation from the supply side. Import duties on steel, skimmed milk powder, and butter oil were reduced. Export duties were levied on steel products and basmati rice, besides others. With a change in the excise duty structure, some varieties of cement should cost less. The RBI’s action and the government’s fiscal measures are expected to add up to a critical mass and have a substantial impact. It is nobody’s case that the impact of all or even some of these will be felt immediately. Monetary measures take effect after a lag. It is far from certain that Indian consumers will derive the full benefit of import duty reduction on food items. Past experience suggests that global suppliers might respond to the duty reduction in India by pushing up prices, thereby denying Indian consumers the benefit. However, taken in their entirety, recent policy measures do demonstrate the government’s resolve to bring prices under check and this should help in containing inflationary expectations. Both the Prime Minister and the Finance Minister have exhorted producers of steel and cement to keep prices in check, with warnings of stringent action. How much of an impact administrative actions reminiscent of an earlier period will have in the current liberalised era remains to be seen.

Amidst all the bad news on inflation are some positive signals. According to latest reports, the country is set to achieve record food grains production. The outlook for monsoons is favourable. Globally, the prices of some important agricultural items including wheat and pulses have softened, though it is not clear that the tide of high commodity prices has turned. It needs to be noted that all the policy measures to check prices are justifiable only in the current context and might in fact impede the achievement of certain medium-term objectives. Policy measures aimed at increasing the supply of steel and cement, for instance, might hinder the setting up of new capacities in the long-term. Finally, as the RBI points out in its monetary statement, policy responses for managing expectations should take into account not only the evolving global and domestic uncertainties surrounding the slowing down of the global economy but also the potential for exaggerated “bearishness” in the Indian context.

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