New Delhi, June 1: Spooked by inflationary apprehensions, a tensed North Block is gearing up to fight a possible price spiral.
Alarm bells have started ringing and indications are that finance minister P. Chidambaram may direct the use of India’s huge forex reserves to import price sensitive commodities such as sugar and wheat to snuff out the inflation monster.
Policy makers are also exploring the possibility of jacking up interest rates to suck out liquidity from the system. The strategy will curtail demand and clamp down on prices. “If prices rise further, we have to go in for an even tighter money policy ... interest rates will have to be allowed to rise,” said senior officials in the department of economic affairs.
If the push comes to a shove, the finance ministry is even open to the idea of raising the administered rates on small savings.
Stoked by rising oil and steel prices and a higher money supply, the inflation rate is now hovering around 4.5 per cent from 3 per cent just a few months back.
The index of wholesale prices ' the barometer of inflation ' may climb some more notches on the back of a further rise in oil and steel prices.
On the brighter side, if it could be called that, high inflation holds out a promise of interest rates on deposits being raised to mitigate the effect of higher prices on people’s dwindling savings and suck out liquidity from the system.
Though oil and steel are the main drivers, it’s a fact that the 17.6 per cent growth in April money supply will also impact on prices. The old adage of higher money supply creating a situation of more money chasing fewer goods and generating inflation will come into play.
Planning Commission officials, who are also tracking the situation, said, “We may not have a worst case scenario of a stagflation but growth rates may be checked ... it may come down from last year’s 8 per cent plus to 6-7 per cent, if oil-linked inflation keeps inching up.”
Besides, a weak monsoon in parts of the country could accentuate the danger from hardening global oil prices, which hit an all-time high of $73 a barrel in New York. Analysts said till the US managed to cool down the West Asian turmoil, prices would continue to rise.
To the government, high inflation is bad politics ' high prices eat into people’s salaries, and for those living on fixed income, such as pensioners, it could mean a drastic fall in living standards.
“Interest rates, including on government bonds, are bound to rise, there is no way out,” the officials in the department of economic affairs said.
“It’s a trade-off between industry's need for cheap finances and the need of pensioners and others with fixed incomes.”
A weak monsoon may also mean a demand-supply gap in oilseeds by about 2.5 million tonnes or a sixth of the total demand. Sugar output, which too has been hit by poor rains in western Uttar Pradesh and Maharashtra, is expected to come down by about 12 per cent. With global prices inching up, any plans to import these commodities are unlikely to bring any relief to the consumer.
The biggest danger stems from rice: if output falls below the target, it could spell trouble despite the huge stocks the government theoretically has in its silos.