By Priya Nigam
The Earth seems to be burning up with the heat of inflation. High inflation is a global phenomenon, with world food prices skyrocketing 40% last year. Commodity prices have also soared. And India has not been spared. With the spiraling prices of grains, oils and metals, India's headline inflation jumped to 7.41% in late March, hitting a four-year high. Against this backdrop, the government’s attempts at duty cuts on imported products and export bans appear rather feeble. So, we are now faced with the possibility of the government resorting to more aggressive measures to cool inflation. What’s next in store?
Finance Minister Mr. P. Chidambaram warned that the government may have to undertake fiscal, monetary and supply-side measures to stem the rising prices. The Finance Minister urged individual states to take stringent steps to curb the hoarding of food items. Moreover, Mr. Chidambaram accused cement and steel manufacturers of “behaving like a cartel,” adding that the government “will not hesitate to take tough measures” to break the cartel. The Finance Minister also stated that it would consider sacrificing revenue to control prices. The stock market is already showing signs of worries over what the government will do to contain inflation.
There is widespread speculation of the RBI announcing another hike in the cash reserve ratio (CRR) at its upcoming policy meeting on April 29. The central bank, which was targeting inflation at near 5% for the fiscal year ended March 31, 2008, had raised the CRR by 50 basis points each time in June and October last year. The CRR, which is currently at 7.5%, is the percentage of deposits that banks have to maintain with the RBI. An increase in this ratio curbs liquidity, which in turn curtails inflation. The other weapon in the hands of the central bank is the short-term benchmark rates, which may be hiked to control inflation. A combination of the two tools is also a possibility.
The government should act fast. Having said that, I thought it prudent to add that there isn’t a great deal that the government can do. Inflation or prices are impacted by demand and supply. While demand can be controlled in various ways, the demand side does not seem to be the core of the problem. And there is not much that can be done to immediately increase supply. There is no easy solution. Amidst all this, what is clear, however, is that India's economic growth would bear the brunt of any measure to contain inflation.
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