Noting that inflation will continue to rise unless the mismatch between supply and demand of certain products is addressed, the Economic Survey of 2006-07, which was tabled in Parliament on Tuesday, suggests that one way to manage this is through “supply-side policies”, especially in agriculture.
Improving agricultural productivity would call for extensive reform in existing policies and doing this is beyond the powers of the finance minister, who will present the Union Budget on Wednesday.
The Survey’s observation on supply-side policies, however, is borne out by the fact that inflation continues to stay at a two-year high despite the government keeping a close watch on the prices of food items like onion, wheat, pulses and oilseeds and resorting to the import of some essential commodities. According to it, eight commodities—urad, moong, gram, wheat, maize, ragi, jowar, and arhar—witnessed inflation in excess of 5% in 2006-07.
Although there was a marginal decrease in wholesale inflation, to 6.63% for the week ended February 10, from 6.73% for the previous week, consumers continue to be subjected to high prices, especially for basic food products.
Duty-free imports of wheat and pulses to make up for supply shortfalls simply haven’t worked because of the high prices of these commodities in the international market. Shashank Bhide, senior fellow at the National Council for Applied Economic Research, told Mint that he expects wholesale inflation to range between 5% and 6% in 2007-08. “It will be interesting to watch the supply-side response, especially in manufactured products,” he added. On 20 January, the inflation rate in manufactured products was 5.65% as compared to 2.32% a year ago.
The government’s response to inflation has thus far ranged from reductions in the import duty on some essential commodities, metals and cement, and two consecutive cuts in the prices of petrol and diesel, first in November 2006, and then in February. It has also left the central bank to do most of the work, in terms of fighting inflation, with its efforts to reduce money supply. Still, while the economic survey calls for a “calibrated” fight against inflation, it says that these policies “should contain inflation without compromising growth.”