The Telegraph
Since 1st March, 1999
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Inflation dip fails to drown dissent

New Delhi, Sept. 9: Differences have emerged over the impact of inflation on the common man, with the Opposition and the Left at odds with the Congress-led government on the issue.

Left leaders as well as the Opposition BJP are planning mass campaigns, aware of the role prices played in influencing the outcome of the state assembly polls last year.

Economists at North Block, on the other hand, are highlighting their contribution and that of the Reserve Bank of India in bringing down inflation to a 16-month low of 3.79 per cent.

Monetary and fiscal policies, the North Block mandarins claim, have checked what threatened to be a bout of galloping inflation at the beginning of the year. At that time, inflation had crossed 6.7 per cent.

Former Planning Commission member S.P. Gupta said, “The truth is somewhere in between. Price rise has been checked but prices which have already gone up have not come down in retail stores even if they have in wholesale markets.” Gupta calls this price stickiness, and if this remains for some time, the common man accepts the higher prices as a benchmark.

Sudipto Bose, a retail market analyst, says discontent arises when prices go up suddenly. “If they had gone up eight to 10 months back and then remained steady, people would start accepting them as the new benchmark. Any small fall after that could in fact result in a feel-good factor,” Bose said.

So when CPI MP Gurudas Dasgupta talks of “fire in the marketplace”, in comparing current prices with last year’s, he may not necessarily be voicing popular perception.

However, for the government, the relatively comfortable position on the price front is a hard won situation that can come unstuck at any stage.

Oil prices have already crossed $76 in the global market. Though the country has a policy of subsidising auto fuels, it cannot afford to forever keep a rein on prices.

Petroleum ministry officials are expecting at least a token hike in the prices of auto fuels sometime later this month or after the festive season. The pressure to increase the price of auto fuels will probably go up in the months ahead as the US and Europe raise their purchases to meet their demands of heating fuel for winter.

Good rains, too, have failed to dampen price fears. Though there is a possibility of a record harvest, prices may go up because of the opening up of commodities markets that allows large traders to take up speculative positions in grain and cash crops.

There is also the problem of buoyancy of foreign exchange inflows and domestic demand. This means that despite RBI’s money tightening measures, the economy remains plagued by fears of a price spiral as more rupees continue to chase a limited stock of goods.

The economy grew at its fastest in 18 years at over 9 per last fiscal, fuelling demand for credit, consumer goods, real estate and stocks. “The net result of this situation was inflationary pressures,” said Gupta

“The vagaries of farming and global trade were compounded by rising credit and money supply,” Gupta said.

Loans of domestic banks were higher by 30 per cent last year, with areas such as real estate and housing seeing a growth of 100 per cent and 52 per cent, respectively.

There was a surge in foreign exchange inflows, which increased by $74 billion to $225 billion in 2006-07. This added to the flow of money in circulation.

The RBI has been stepping in from time to time, tweaking either the repo rate or the cash reserve ratio. The repo rate is the rate at which the RBI injects cash into the system, while the cash reserve ratio is the portion of deposits that banks maintain with the central bank.

However, with money flowing into a booming economy, measures to tighten money supply plug the problem but does not solve it.

Traditionally, whenever too many rupees chase too few goods, prices go up. “But that was not the whole inflation story ... prices of certain core goods such as cement and steel kept going up as a construction boom fuelled more demand for these commodities,” Gupta said.

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