Inflation control in times of high crude prices kept govt busy

Inflation control in times of high crude prices kept govt busy

Rising inflation kept the government on its toes for most of the year, with spiralling oil prices threatening to dent its efforts.

Although the government, along with the Reserve Bank of India (RBI), took measures to bring down inflation to below 4% from more than 6% in the early part of 2007, high global crude and food prices have been worrying the administration. Crude oil prices neared $100 (Rs3,940) a barrel this year, but the rise is yet to be passed on to the consumer.

The government knows that inflation can have serious political repercussions, so controlling it remained top on its agenda—even if the resultant tight monetary policy meant slowing down the economic growth rate a bit.

In the second quarter of this fiscal, economic growth cooled to 8.9% against 9.3% in the first quarter. “Controlling inflation remains high on the government agenda," finance minister P. Chidambaram had said in Parliament.

Inflation was at 6.12% during the first week of January 2007 and could be broughtbelow 5% only in the last week of May. Since then, it has been below 5%, slipping below 4% from mid-August. Latest figures show that it has declined by 0.1% to close at 3.65% during the first week of December.

Inflation, although way below RBI’s projection of close to 5% for this fiscal and 4% for the medium term, may go up once the government decides to pass on international crude oil prices to the consumer.

Last month, RBI said any further increase in global crude prices would have implications on domestic inflation since the pass-through has remained incomplete.

India imports nearly three-fourth of its crude oil needs. That inflation could become a scoring point between the political parties was evident from statements given by various political leaders.

Lobbying for maintaining a status quo in fuel prices, Congress spokesman Shakeel Ahmed said, “Our stand is clear. We do not want any burden on the common man."

But Opposition Bharatiya Janata Party’s L.K.Advani said, “Prices of essential commodities are rising. Inflation will be a big issue in the next Lok Sabha election."

It is mainly essential commodities and their retail prices that consumers are mostly bothered about. According to the government’s own admission, average retail prices of onions doubled to Rs18.03 per kg on 31 October 2007 against Rs8.40 a kg a year ago.

Similarly, prices of tur went up 23.7% during the period. Prices of groundnut oil rose by 20.9%, while those of mustard oil by 16.5% and rice and potato by 11.4% each.

Inflation started climbing during 2006-07 due to shortage in supply of food items such as wheat, pulses, edible oils and rising global prices of some essential commodities.

Keeping this in mind, Chidambaram said: “Any failure on the supply management front will not only damage inflation perception in people’s mind but also build up pressure for upward adjustment of wages and other prices."