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Prices hit by cash current

New Delhi, Aug. 25: The price monster is again on the prowl: the headline inflation rate has shot up to a six-week high of 4.92 per cent, ostensibly on the back of rising food prices.

However, the price devil is supping not only on scarce wheat and pulses but also on the extra money being pumped into the system by the government.

The concern for the government, which has launched an array of initiatives to bust inflation, is the revenue deficit which at a mammoth Rs 70,765 crore in the first quarter has already touched 83 per cent of the target that was fixed in the budget.

Simply put, the government is on a spending splurge. In one quarter, it has run up a deficit that is equal to the target for nearly three quarters.

“The rural job guarantee scheme, heavy spending on universal education and by the health ministry have made a mess of government finances,” advisors to the Planning Commission said.

Spending by the ministries of rural development and elementary education and literacy in the first quarter was double that of 2005-06. The outlay of the health ministry is two-and-a-half times of the expenditure in the first quarter of 2005-06.

“The faster circulation of money caused by huge government spending has fed the inflation monster,” plan panel advisors said. By economic logic if there is too much money chasing too few goods, prices are bound to go up.

Money supply during the first quarter increased by nearly 19 per cent compared with 14 per cent in the same period last year.

Finance minister P.Chidambaram told newspersons, “My effort is to control inflation below the five per cent.”

Check on hoarding

To put a lid on food prices, the government today empowered the states to crack down on the hoarding of wheat and pulses.

In 2002, the previous NDA government revoked the powers of the states to curb hoarding under the Essential Commodities Act.

States will now monitor the stocks of wheat and pulses and monitor its movements. Officials said the powers were enabling ones, and the states will use them.

The inflation spurt this week comes six weeks after it touched 5.44 per cent in the fourth week of June. Economists at HSBC have placed the inflation at over 6 per cent.

The government has kept prices in check by banning the export of pulses, cutting the import duty on wheat and allowing private traders to import wheat and sugar.

However, a good monsoon and a bumper paddy crop is expected to bring down food prices.

A more pressing concern is the impact of inflationary expectations on the economy. This is expected to be high due to the uncertainty surrounding oil prices and the pressure on prices brought about by higher demand from cash-flush Indians.

The government think tank the Institute of Economic Growth, has forecast that weekly inflation will go up to 5.4 per cent in September from 5.2 this month.

The silver lining is the sustained appetite for industrial credit, implying industrial growth is not going bust because of inflationary expectations. This in turn may moderate to some extent the inflation rate as more goods and services are pushed into the market, reducing prices because of easier or better availability.

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