New Delhi, Feb. 9: Food prices have sent the inflation rate racing to a two-year high of 6.58 per cent for the week to January 27, leaving the government grappling with a potential election-spoiler.
The high rate of inflation has emerged as a sore spot in an otherwise booming economy and the slowdown in the agricultural sector appears to be a key factor behind the shortage of goods.
With a string of Assembly elections coming up, political parties kept the pot boiling with the Left demanding cuts in petrol and diesel prices and a ban on forward trading of essential commodities to contain inflation.
Sources said cabinet secretary B.K. Chaturvedi held a high-level meeting this week to remove administrative constraints that were slowing down the distribution of goods.
A finance ministry official told The Telegraph that “the government would initiate measures both on the supply and demand side to check inflation. In the short run, the budget would be a key element to bring down prices by reducing customs duty to allow more goods into the country”.
“On the demand side, the ministry is in touch with the RBI to see in which way money supply can be reduced,” he added.
Raising the interest rate and an increase in the cash reserve ratio are two instruments of monetary policy that the RBI uses to suck liquidity out of the economy.
However, these instruments have to be used carefully as they have the potential to disturb economic activity in general.
Finance minister P. Chidambaram said the government was concerned about the steep growth in bank lending, “leading to inflation”. “That is why the government decided to control lending in some sectors,” he said, referring to the RBI rate tweak that targeted personal loans and credit card expenses.
What is worrying the government is the realisation that food prices are triggering the inflation spiral, which makes it hard on the common man.
The inflation, based on the wholesale price index (WPI), went up by 0.47 percentage point within a week from 6.11 per cent on January 20 this year, mainly on account of a rise in prices of vegetables, eggs, meat, fish, milk, fruits and oil seeds.
The RBI plans to use all possible monetary policy instruments to curb the inflation rate, the central bank's deputy governor Rakesh Mohan said on the sidelines of EuroIndia Summit in Goa.