The announcement of a 5.6% increase in railway freight rates for iron ore spells bad news for managing inflation. With the headline inflation figure touching a 13-month high of 6.68%, the yanking up of these rates comes at a bad time. It will aggravate core inflation.
This is a problematic situation, more so as key ministries are controlled by ministers belonging to different political parties. Economic coordination is a problem even in cohesive governments, but in a fractious coalition, it has become disorderly.
It’s against the background of price movements in the recent past that one can hear the alarm bells ring. For the period 5 January to 15 March this year, the wholesale price index (WPI) rose from 217.6 to 223.6, a rise of around 2.8%. Iron and steel, which has a weight of 3.64 in the index, rose by a whopping 19%. The increase in iron and steel for the corresponding period last year was a paltry 1.15%.
The causes of this spike, whether due to a demand surge or supply constraints, have so far been economic in nature. After the increase in freight rates, this will no longer be the case. What needs to be understood now is the political matrix of inflation. The railway minister has increased freight rates at a time when the commerce and finance ministries are tinkering with customs duties and taking assorted supply-side initiatives to tame inflation.
Another example of policy chaos is the extra Rs60,000 crore demanded by the fertilizer ministry as fertilizer subsidy. This would be in addition to Rs30,986 crore provided for 2008-09. The ministry is led by the Lok Janshakti Party leader Ram Vilas Paswan.
The result is that as turf battles and ministerial jockeying over domains have become rampant, policy cohesion is well-nigh impossible. So, even if there are supply-side constraints that fuel inflation, it’s important to run a tight monetary policy.
As a result, at this time it’s not appropriate to view the problem from a growth versus inflation perspective.
The argument that inflation is born of supply-side constraints and hence a tight monetary policy would not work does not hold much water. It would in a “normal” political environment, where the cabinet and government had a clearer perspective, one not clouded by electoral and political considerations. But for them it’s a Hobson’s choice: coalition stability versus economic stability.
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