New Delhi, Aug. 10: The Congress-led government is cobbling a four-pronged strategy to tame inflation which has threatened to careen out of control after last week’s sudden spurt to 7.5 per cent — a level not seen in three-and-a half years.
The strategy will include a combination of price-line controls, attempt at talking down markets, import of goods in short supply, and sucking out excess money in the financial system.
Over the past two days, finance minister P. Chidambaram and his team of secretaries have held a series of discussions with Prime Minister Manmohan Singh and the ministers in charge of vital ministries like steel, petroleum, agriculture, and food to tackle its first major crisis: the prospect of a runaway inflation.
On Tuesday, Chidambaram held talks with Reserve Bank governor Y. V. Reddy to discuss monetary measures to deal with the crisis. The key areas of concern are rising oil and steel prices, which affect all sectors of the economy and a possible spurt in the prices of oilseed and sugar, two vital ingredients in the diet of all Indian families.
The other action being planned is to allow interest rates to rise slowly to suck out excess money from the economy — a traditional way of cooling down prices. The country's central bank is keen to allow this as its top brass believes that real interest rates, which today stand at a negative 2 per cent, should be at about 2.5 per cent.
However, North Block isn’t in favour of sudden rate increases as it could hit its own borrowing programme as well as India Inc’s. Industry has seen a growth revival after a prolonged lull.
Besides, recent rains have also lifted the mood at Raisina Hill as ministers now feel the country's two main crops — wheat and rice — will not be hit.
The inflation figure for the week ended July 31 will come out on Friday and the cassandras have already started talking about a possible spurt to 8 per cent — a level not seen since early 2000.
“The RBI had been asked to monitor the monetary implications and the finance ministry is keeping a close watch on the situation,” Chidambaram said after the CCEA meeting tonight.
While admitting that inflation had sparked serious concern, he said it was important to understand the underlying causes of inflation. He said the sudden spurt in prices was “largely due to a very sharp rise in the international oil prices. The delay in monsoon was another factor,” he added.
At the same time, the consensus at the meetings was that there was no need to panic as it could still manage to beat the price rise with the weapons it has at hand.
Although steel minister Ram Vilas Paswan has shown reluctance in playing ball, the Congress-led government is insisting that he use the weight of his position to persuade steel chief executives to desist from another round of price hikes. These companies have been winching up prices over the last year to try and recoup the losses they ran up over the past few years.
The steel and finance ministries are also holding talks on withdrawing export incentives from steel makers, reducing the duties on steel produced through ship breaking as well as import duties on certain grades of steel and coking coal. The government wants to tackle the oil price rise threat through a strategy that will involve holding firm on the price-line or allowing small increases which is expected to ensure that inflation does not go out of hand.