New Delhi: India needs to step up supply of farm products and manufactured goods to “tame” inflation stoked by record economic growth, a finance ministry report said before tomorrow’s budget statement.
Inflation in India, the world’s second-fastest major economy after China, is at a two-year high as consumer demand aided by surging loan growth and higher salaries outstrips the production of wheat, cement, steel and other products.
“Pressure on inflation may persist because of a mismatch in supply and demand,” the annual Economic Survey prepared by officials advising Finance Minister Palaniappan Chidambaram said. “Unless the supply side constraints, especially in food items, are removed, inflationary pressures will not be tamed fully.”
The Reserve Bank of India has raised its key overnight lending rate five times in the past year and the government has cut import tariffs to curb inflation, which is threatening an electoral backlash from poor voters whose purchasing power has been eroded. Chidambaram may spend as much as 60 percent more on ports, power plants and roads in the budget to reduce bottlenecks that are pushing up production costs and prices.
India’s infrastructure deficiencies are hurting supplies and adding to the cost of companies operating in the $854 billion (Rs37,74,205 crore) economy, Asia’s fourth largest.
Honda Motor Co., Japan’s No. 3 carmaker, has its own power plant because government supplies account for only a quarter of its needs. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central India to fit delivery trucks with global positioning system devices so it can locate vehicles stuck in traffic and adjust production schedules.
India produces about 8% less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80 percent of the goods transported in India, account for only about 2% of the country’s roads. It takes an average 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.
Prime Minister Manmohan Singh’s ruling Congress party is set to lose power in the northern states of Punjab and Uttarakhand among the three provinces that went to polls this month, according to the latest trend in counting of votes. The Congress may retain power in the eastern state of Manipur.
The verdicts in Punjab and Uttarakhand matter as they have a larger representation in parliament of 13 and five lawmakers respectively. Manipur sends two lawmakers to parliament. Singh’s government wants to curb inflation ahead of polls in April in the more critical state of Uttar Pradesh, which sends a seventh of all lawmakers in parliament. The state elections will set the tone for general elections in two years.
India’s benchmark inflation rate climbed to 6.73% this month as record economic growth boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94%, while price increases for urban dwellers are the most in six years.
The government expects unprecedented growth of 9.2% in the year to 31 March, the fastest pace after China among the world’s major economies. The economy has averaged 8.6% growth since 2003, after expanding close to a 6% clip in the two decades before that.
“The economy appears to have decidedly ‘taken off’ and moved from a phase of moderate growth to a new phase of high growth,” today’s finance ministry report said. “However, there are some genuine concerns on the inflation front.”
The fastest loan growth since 1971 and the highest salary increases in the Asia Pacific region are enabling Indians to buy products from cars to houses, stretching the capacity of Steel Authority of India Ltd. and other companies.
Consumer affordability has also increased demand for food products such as wheat, sugar and cooking oil. India, the world’s second-biggest wheat grower, last year became an importer of the grain for the first time in seven years. It also banned export of wheat and pulses to augment supplies.
“Rapid growth in capacity additions through investments can avert the problem of capacity constraints,” the report said.
India’s total investment in agriculture declined to 1.7% of gross domestic product in the year ended 31 March 2005, from 2.2% of GDP five years ago. Agriculture growth may slow to 2.7% in the year ending 31 March after a 6% expansion in the previous year, which is “a cause of concern,” the report said.
“Poor agricultural performance, as the current year has demonstrated, can complicate the maintenance of price stability with supply-side problems in essential commodities of day-to-day consumption,” the report said.
The wholesale price inflation rate for agricultural goods is near an eight-year high of 11.52%, according to government data.
“Infrastructure, that constrained for years the growth performance of the economy, appears to be improving,” the report said. India plans to attract $320 billion in roads, ports and other infrastructure by 2012, and the government plans to invest three-fifths of the amount, it said.
“The ability of the government to invest additional resources for developing the much-needed infrastructure critically depends on the creation of fiscal space,” the finance ministry said.
Accelerating growth has helped tax collections to rise 38% in the nine months ended 31 December compared with a target of 15%. India may narrow the budget deficit in the fiscal year ending to 3.6% compared with a 3.8% target set at the start of the year, freeing money for investments in infrastructure, the report said.