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Inflation curbs should not rein in growth

Inflation curbs should not rein in growth
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First Published: Fri, Feb 25 2011. 09 59 PM IST
Updated: Fri, Feb 25 2011. 09 59 PM IST
New Delhi: The country has entered a high inflationary phase with growth having picked up pace sharply since 2005 and attempts to curb price trends should be carefully calibrated as overzealous action by the government may hit jobs, said the Economic Survey for 2010-11.
Also see | Risk Ahead (PDF)
“In designing inflation control measures it is important to be aware that sudden, sharp policy-induced contractions in demand can cause unemployment to rise,” said the survey that was presented in Parliament on Friday.
As employment data significantly lags behind inflation statistics, “the trade-off between inflation and employment escapes public awareness and slants discourse,” it said.
If economic growth is sustained at levels since 2005-6 over the next 30 years, India will have an inflation rate that is 1.5 percentage points higher than what it would have had without this spurt in expansion. As average inflation was 3.5% before 2005, “other policies remaining unchanged, we will have an average annual inflation of nearly 5% during the next decade or so of the rapid growth that is widely expected to occur in India”, the survey maintained.
While political compulsions sometimes oblige governments to take short-term measures to correct price spikes, it is important to take a longer-term view and be restrained in the use of steps such as banning exports and cracking down on hoarders, the survey said.
The indiscriminate lumping together of trade practices and punishing traders can do more harm than good, it said. “Our enforcers have to be taught to distinguish between legitimate activities and genuine malpractices. Hoarding, for instance, like cholesterol, can be both good and bad.”
The survey also drew attention to the possible unintended ill-effects of greater financial inclusion, holding that it could lead to greater inflationary propensity.
“This must not deter us from pursuing financial inclusion since the overall benefit of this can be enormous,” it said. “What is being pointed out is the need to be aware of all its fallouts, and take appropriate action against possible negative side effects.”
Holding that the biggest pressure on inflation comes from the food and energy sectors, the survey cautioned that the risk of its slippage to the core sector that is non-food and non fuel inflation has increased and needs to be proactively mitigated.
Inflation in food articles has remained in double digits from 5 June 2009, after briefly ruling below the twin-digit mark.
In January, wholesale price index (WPI) based inflation and food inflation stood at 8.23% and 15.65%, respectively.
Domestic food prices may surge on account of the rise in global food prices with some items, especially edible oils, being imported.
However, commodity analysts expect pressures on food inflation to soften in the near term with the arrival of harvests boosting supplies and a possible softening of the prices of several commodities.
“Now that we are in the midst of rabi crops, there is some possibility of increase in availability,” said Harish Galipelli, head, commodities, JRG Wealth Management, Kochi. “So, in the next one or two months, inflation might ease.”
“Food inflation is bound to decrease because most of the commodities have been overpriced and some prices have come down in the last few weeks,” said T. Gnanasekar of Commtrendz Research in Mumbai.
However, they cautioned that any surge in crude oil on brewing political tensions in the Middle East could renew concerns on food and headline inflation.
“Crude oil prices are expected to give further direction to the commodity markets,” Galipelli said.
“If prices continue to surge, pricing in the entire commodity basket can go haywire.”
Galipelli said he expected Brent crude to trade at $100-120 a barrel in the next one month, from about $112 currently, while Gnanasekar said it could go to $120 by June.
The survey said the current growth and inflation trends warrant persistence with an anti-inflationary monetary stance as well as consolidation on the fiscal deficit front.
“The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflationary pressures,” it said.
The survey cautioned that if external commodity price shocks build further, the dilemmas will become greater. “Therefore, the policy challenge of maintaining the growth momentum in the economy with price stability is going to remain a key focus area for monetary policy and macroeconomic management.”
Headline inflation as measured by the WPI has been declining since April 2010 after touching 11%. The survey said the trend will continue “in the next two months”.
“The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term,” the survey said.
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First Published: Fri, Feb 25 2011. 09 59 PM IST