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Inflation at 6.73%, and climbing

Inflation at 6.73%, and climbing
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First Published: Fri, Feb 16 2007. 12 19 AM IST
Updated: Fri, Feb 16 2007. 12 19 AM IST
New Delhi: With wholesale price inflation touching 6.73% for the week ended 3 February, a two-year high, the Centre scrambled to launch a series of measures to address the problem.
It slashed fuel prices by between 3.2% (or Re1, in the case of diesel) and 4.4% (Rs2 for petrol) and is considering reducing the excise and import duties on several raw materials. A meeting of an empowered group of ministers, led by external affairs minister Pranab Mukherjee, debated banning derivatives trading in key agricultural commodities but did not, apparently, arrive at a decision.
The bad news for the government is that while some experts believe these steps will not work to reduce inflation, others think that things will get worse before they get better.
“(I) hope the cuts (in fuel prices) will moderate inflation,” said P.Chidambaram, India’s finance minister, who admitted that there is a “supply constraint in some commodities” and that this constraint was “more than seasonal”. “Any cut in input prices like petrol and diesel should have a moderating impact on inflation,” he added.
The government will likely follow this up with a reduction in duties of raw materials. The ministry of commerce has identified cement, ferrous metals, and non-ferrous metals as inputs that could have a cascading impact on prices in the manufacturing sector.
Ajay Dua, secretary in the ministry’s department of industrial policy and promotions says that insufficient production of these was contributing to their rising prices. The department believes that a reduction in excise and import duties on these, and the consequent fall in prices, will neutralise the impact of inflation on the sector.
However, a senior official in the ministry said the only long-term solution to tackling inflation in this sector was a significant increase in capacity
And the government could still decide to ban derivatives trading in certain commodities in an effort to prevent speculation. “As far as inflation is concerned, we are adopting a multi-pronged strategy,” said Prime Minister Manmohan Singh.
Over the past few months, the rise of wholesale inflation has been driven by an increase in the prices of food products and a few manufactured goods. Dharmakirti Joshi, principal economist at credit rating firm Crisil told Mint that the reduction in petrol and diesel prices would not have the desired effect. “Inflation in foodgrain depends on the production and supply of these commodities in the coming weeks and if this does not improve, we may still not witness a significant drop in their prices,” he added. However, the food ministry claimed that with imports of wheat and pulses now kicking in, prices had already started stabilising.
If anything, the government’s reaction sends out the signal that it is serious about inflation. “The government has to be seen as serious in its intent of fighting inflation and the oil price cut does show that,” said Rajiv Kumar, director and chief executive of economic think-tank ICRIER, who believes that this will bring down the prices of all commodities “to some extent”.
Investment banks Morgan Stanley and JP Morgan have calculated that “extent” as 0.2%, which they claim will be the direct and indirect impact of the cut in fuel prices on inflation.
Kamal Nath, India’s commerce minister refused to accept rising inflation as evidence that the Indian economy was overheating.
But Rakesh Mohan, the deputy governor of the Reserve Bank of India had said on Tuesday: “...that the actual growth estimate has turned out to be much higher than any prediction is evidence there could be some pressures of overheating.”
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First Published: Fri, Feb 16 2007. 12 19 AM IST
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