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Inflation clouds Chidambaram's budget
February, 17th 2007

The Congress-led UPA Government is definitely on back foot vis--vis price rise and inflation. Feel good factor in the economy seems to be fast evapourating as the good old days of high prices and double digit interest rates have kicked in and made the matrix a wee bit complex for Dr Manmohan Singhs economic management team.

Finance Minister Palaniappan Chidambaram definitely has a tough task ahead while presenting his union budget for 2007-08 on February 28.

Political fallout aside, the steep increase in prices of most commodities and consumer goods has thrown the kitchen budgets of low income and middle class families out of gear. Finance Minister may or may not agree, but the impact is showing in more than one way.

The price rise in last few months has made life difficult and painful for vast sections of Indian society in both urban and rural areas. No amount of goading to bask under the influence of high growth rates, mega corporate deals and large foreign exchange build up touching US $ 180 billion will assuage the feelings of a large chunk of population.

Consider this: Year on Year inflation for vegetables, pulses and oilseeds has marked an increase between 24 29 percent. Milk and milk product prices have shot up by about 15 - 20 percent in last six months. Onions have become expensive by about 30 percent in last few months. Supply side constraints were pointed out by both Manmohan Singh and Chidambaram time and again as the crucial factor for rise in the prices of primary articles.

Situation is definitely grave. And, hard decisions are the call of the day for UPA to regain the dwindling confidence of people at large on Manmohan Singhs government. Politically also it makes sense for Singhs team to continue the fight against price rise with most important Uttar Pradesh scheduled to go to polls. 
But, one issue that seems to be seriously overlooked by the powers that be is the possibility of food grains hoarding by companies engaged in this business. Reserve Banks advisory to banks on this seriously evolving situation needs to be reflected upon by the Prime Minister and his economic managers.

Look at this: Retail prices of consumer and industrial goods have gone up reflecting the increase in input costs and profiteering by corporates. Services both registered and unregistered -- have become expensive as an extension of this phenomenon which some economists attribute to world trends.

Ponder over this: Boom or asset over-valuation in real estate sector combined with localized price-rise owing to the pursuance of policy on special economic zones (SEZs) has also given a feeling to those in lower and middle-income class that nothing comes cheap. One needs to seriously think as to whether increasing the cost of funds to burst the asset bubble is the right anti-dote. This is the classic case of allowing the disease to spread and then resort to emergency surgery to take the malignant portion out.

The increase in Cash Reserve Ratio (CRR) was yet another move to suck excess liquidity worth Rs 14,000 crore and prevent further damage in the form of higher inflationary expectations.

While impact of price rise world wide is not to be discounted, it is only one single factor that has bearing back home.

For instance, the duty cuts announced last month on a clutch of products should have reflected in the prices of both cement and other capital goods. This is yet to happen. Belated ban on wheat and milk products exports is yet to show up.

There are reports to the effect that Finance Minister P Chidambaram may bring down the customs duties across the board by 5 percent to South East Asian levels a year earlier to make industrial inputs cheaper and douse the flames of inflation rocking the UPA boat. Cement, paper and metals seem to be on his radar.

In mid-90s, it was Dr Manmohan Singh who led the P V Narasimha Raos team to fight inflation. And, it is his skills and tools that are being put to test right now on fight against price rise while ensuring the economic growth momentum. China is a singular case where the double digit growth coupled with minimal inflation has been consistently reported. It is a case in study for our own policymakers and those making the budget.

Situation is definitely grave. And, hard decisions are the call of the day for UPA to regain the dwindling confidence of people at large on Manmohan Singhs government. Politically also it makes sense for Singhs team to continue the fight against price rise with most important Uttar Pradesh scheduled to go to polls.


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