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Chidambaram says inflation will be moderated
May, 04th 2007
Govt, RBI taking measures on fiscal and monetary side

The Finance Minister, Mr P. Chidambaram, today expressed confidence that the current inflation rate, which is hovering over 6 per cent since January 2007, would be moderated due to "a combination of supply side, fiscal and monetary measures taken by the Government and the Reserve Bank of India."

Winding up the debate on the Finance Bill 2007 in the Lok Sabha, Mr Chidambaram said that there has been a rise in inflation with wholesale price index crossing 6 per cent and inflation of the primary articles ruling at 12.3 per cent.

Recounting the steps initiated by the Government, he said on the fiscal side, the Government had reduced import duty on edible oil, raw materials and also excise duty on important mass consumption goods.

On the monetary front, the central bank had increased the cash reserve ratio (CRR) in six steps from 5 per cent to 6.5 per cent, besides increasing risk-weights on several sectors including housing, commercial real estate and capital market and non-banking finance companies. He said the RBI had taken a number of steps to moderate credit growth.

The Minister added that on the supply side "we have not hesitated to provide finance to import food items to meet rising demand." He said that while replying to the demands for grants of the Agriculture Ministry, the Union Minister of Agriculture, Food & Consumer Affairs, Mr Sharad Pawar, had said that the Government had taken steps to augment production and productivity of foodgrains and pulses. He said that the UPA government had provided "a new thrust to agriculture".

Reeling out statistics on inflation for the pasts several years, the Finance Minister said that even the average inflation rate of 5.4 per cent in 2006-07 was high which required to be brought down to 4.5 per cent. But this must be seen in the context when average inflation was 5.9 per cent in 1998-99, 7.2 per cent in 2000-01 and 5.5 per cent in 2002-03, while the peak rate of inflation in all these years were 7.3 per cent, 8.8 per cent and 6.9 per cent, respectively. He said that during 2000-01, inflation ruled at over 6 per cent for 48 weeks and 8 per cent for 12 weeks.

Contributing factors

He attributed five reasons for resurgence of inflation in recent years. Foremost, he said, was that there was worldwide increase in commodity prices with metal prices going up last year by 11 per cent. Second, there was supply-demand mismatch of essential goods of mass consumption. Third, Mr Chidambaram said, public expenditure had been on the rise "justifiably so during the past three years when the government had to undertake several social sector programmes of education, health and rural development as per the mandate of the National Common Minimum Programme (NCMP)".

The fourth reason for rising inflation, he said, was that the higher rate of growth of GDP (gross domestic product) had stimulated higher demand for goods and services and this was reflected in rising consumption as reported by the latest National Sample Survey Organisation (NSSO) on consumption pattern in the country. Finally, he said, there had been large capital inflow in the form of foreign direct investment, foreign institutional investment, remittances, private equity, export earning, and external commercial borrowings, which have increased the money supply in the country.

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