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7.41%...and it could still go up!

7.41%...and it could still go up!
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First Published: Sat, Apr 12 2008. 12 17 AM IST

Updated: Sat, Apr 12 2008. 12 17 AM IST
New Delhi: Barely a month before the Congress party faces the electorate in the first phase of assembly polls in the key state of Karnataka, and four days before it confronts the opposition in the second part of the Budget session in Parliament, inflation for the week ended 29 March scaled a fresh three-year peak of 7.41%, the highest in the final week of a financial year in 13 years.
Number concerns: Prime Minister Manmohan Singh.
This number, based on wholesale prices, was well beyond the Reserve Bank of India’s (RBI) forecast of around 5%, and worse may be in store: it could end up getting corrected closer to 8%. The number released on Friday was provisional and it will be updated after two months. The latest available final data, for the week ended 2 February, shows a gap of 0.67% between it and the provisional data. Thus, provisionally, inflation was 4.07% for the week ended 2 February. The actual number, it now emerges, is 4.74%.
Meanwhile, business optimism sank to a three-year low, according to a Dun and Bradstreet (D&B) survey released Friday, which reported a 9% drop in the quarterly D&B composite index of business optimism for April-June, down to 153.7, its lowest level since the March quarter of 2005.
As prices rose for the seventh consecutive week, and a further tightening of money supply by RBI in its upcoming annual review on 29 April appeared probable, the Congress party, which leads the United Progressive Alliance (UPA) at the Centre, admitted it could do little to ease the situation even as the Opposition and some of the government allies such as the Left Front prepared to escalate their challenge.
“The government has no magic wand to bring down inflation, which is now a global phenomenon,” Union minister for earth sciences, science and technology, Kapil Sibal, said. “Due to rise in prices worldwide, it has become rather an imported inflation.”
Rajiv Pratap Rudy, a national spokesperson of the Bharatiya Janata Party, expected to be the Congress party’s main rival in Karnataka, predicted electoral reversals for the Congress in the upcoming polls. “The economic brutality unleashed by the UPA government headed by an economist PM has left the aam aadmi (ordinary citizen) bleeding,” Rudy said, “The 7.41% inflation marks the end of (Congress president) Sonia Gandhi’s rule.”
Raashid Alvi, a Rajya Sabha member of the Congress party, said: “We just hope the people of Karnataka will understand that inflation is beyond the control of the government.”
“There is not much the government can do, except hope that the international environment in crude and commodity prices changes dramatically in the next few weeks,” Sumita Kale, chief economist with Indicus Analytics, a New-Delhi based research firm, said. “Some reduction in prices is possible in April, but if the government tries to directly intervene in the markets by clamping on prices, it will be the worst possible solution since firms and consumers get fudged price signals.”
Some experts say that the economic damage could be greater. Chetan Ahya, executive director with Morgan Stanley, said growth could be a casualty as interest rates, ruling at a six-year high, were already hurting demand and industrial growth. “A hike in rates could significantly hurt the growth cycle and increase risks to the growth in gross domestic product.”
Meanwhile, the government continued with its measures to improve the supplies of commodities. Trade minister Kamal Nath announced a ban on export of cement and scrapping of export incentives for rice and primary steel items. Earlier, the government had taken several trade and tariff related measures to curb price rise in essential commodities, cooking oils, metals and minerals, besides threatening hoarders and manipulators. In addition to the withdrawal of import duty on crude cooking oils and maize and a ban on export of rice and pulses, the government had urged steelmakers to hold prices as well.
Some state governments, too, have begun to take measures to mitigate the inflationary impact on consumers.
The Congress government in Maharashtra said that it would provide edible oil, lentil and rice at concessional rates under the public distribution system even for those above the poverty line. Announcing the decision in the state assembly on Friday, food and civil supplies minister Sunil Tatkare said the decision would be implemented on 1 May, which is the Maharashtra Day. The state government has earmarked Rs67.60 crore a month to subsidize these measures.
Basudeb Acharia, leader of the Communist Party of India (Marxist) or CPM in Lok Sabha, rued that none of the measures appeared to have had any impact. “There has been no impact on prices, which have been rising due to the neo-liberal economic policies being followed since 1991. The UPA government has ignored the plight of at least 85% of the country’s population,” Acharia said, and added that inflation would be discussed in the House under Rule 193, which permits a short-duration discussion, on the opening day of the session, on 15 April itself.
The CPM had announced a nationwide stir against inflation from 16 April, while the Communist Party of India had said it would hold protests on 17 and 18 April. The Delhi unit of the CPM-backed Centre of Indian Trade Unions (CITU) joined the chorus on Friday and threatened a two-day strike on 24 and 25 April, involving 1.5 million workers, to press for a revision of minimum wages in view of inflation. The CITU demanded that the minimum wages be increased to Rs8,500 from the Rs3,633 fixed earlier in February. “A worker needs about Rs40 to meet his calorie requirements everyday and a family of three would need at least Rs8,500 to fend for itself. So we have demanded that minimum wages be revised,” Mohan Lal, general secretary of the CITU’s Delhi state committee said.
“When the forest is on fire, you have no choice except to try and douse it. That, however, takes time. Steps needed to contain inflation have to be taken before it starts spiralling,” economist Parth J. Shah, president of the Centre for Civil Society, a New Delhi-based think tank said. “You can invest in agriculture, for example, to boost food supplies. But right now, the government can only pretend to be taking serious steps, which it is doing.”
In fact, the latest surge in the wholesale price index, the highest since 1993-94 when a revision in the index’s base year resulted in a 16.9% inflation, came from costlier food and minerals. “From a political perspective, food inflation matters more than non-food inflation,” said Rajeev Malik, executive director, JP Morgan Chase. “The government is likely to continue using fiscal measures, including increased subsidies, to check food inflation and is also likely to complement the fiscal measures with monetary tightening.”
Prime Minister Manmohan Singh, however, ruled out harsher measures to contain the rise in food prices. “We cannot react to such a situation by returning to an era of blind controls,” Singh said on Thursday.
Since March 2007 prices of primary articles have climbed by 27%, with oilseeds having gone up by 18.7% and cereals by 6.6%. Seasonal scarcity and expectations have pushed up even vegetable prices by 15.8%, compared to just more than 1% in 2006-07. Iron and steel prices, which went up recently, have contributed more than 34% to the total inflation.
Railways minister Lalu Prasad, however, blamed the BJP for rising prices. “There is no shortage of commodities and yet the consumers have to pay more. This is the handiwork of BJP-sponsored traders.”
Mint’s K.P. Narayana Kumar, Bloomberg and PTI contributed to this story.
ashish.s@livemint.com
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First Published: Sat, Apr 12 2008. 12 17 AM IST