, On Monday 20 June 2011,
The Reserve Bank of India hiked rates for the tenth time in fifteen months continuing it duel with inflation. The central bank raised the reverse repo rate by 25 basis points. In its policy announcement the RBI in no uncertain terms said that it would continue it hawkish stance and said it would not pause its rate hike spree till inflation reduces to a comfortable level.
Inflation in the last two years has risen due production irregularities in the agricultural side and not due to an overheating in the economy. The worst hit were vegetables, fruits and meat. In January, food inflation hit 17.05%. In an economy like India where population keeps rising every minute, food demand would increase over a period of time. In order to keep pace with population growth, food production also needs to grow. However, in India, food production and availability have not grown in sync. In 2008-2009, annual per capita cereal availability in India was only around 165 kg, which was that of the same level as in 2000-2001.
While, the Reserve Bank is playing its part to tame inflation, what is our government doing to cure supply side issues? Monetary measures alone can't cure India's food inflation woes. The government needs to step in a resolve supply side issues. These have long since been a bane that India has been trying to rid itself off. Seeking cooperation of states in containing price rise, the RBI said efforts are needed to improve farm productivity, develop rural infrastructure and revamp PDS to address supply side issues and contain inflation.
"My government stands committed to tackling the menace frontally. It requires a diligent and sustained effort by all law enforcement agencies, including those of state governments," President Pratibha Patil in her address to MPs of both Houses of Parliament at the start of the Budget Session said.
To fight rising food prices, Patil said efforts must be made to increase agricultural productivity. "The long term solution lies in increasing productivity and production... the Government stands committed to ensuring that farmers get remunerative prices for their produce," she said.
Meanwhile, Finance Minister Pranab Mukherjee said the government would take appropriate action to contain prices. We would keep a close watch on developments, both domestic as well as international, in the coming months and make appropriate adjustments as we go along, he said in a statement.
But where are these efforts? They don't seem to be showing. Merely acknowledging that inflation is high is of no help, Mr. FM.
In fact, there are reports that recently surfaced of 32,000 quintals worth of rice found rotting in the railway yard in Saharsa in Bihar. This grain had been left rotting at the yard for the last three months. During a raid, it was revealed that the rotten grain was being mixed with normal rice at an FCI godown to be sold in the market. Is this the effort and the commitment?
Also the governments, cuts in subsidies and price hikes of inputs like diesel and fertilisers are further contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the recent weeks.
It seems food and fuel prices are the main culprits to the surging inflation figures. But now food inflation has slowed down to single digits and may be back to normal in another month or so, pulling down headline inflation with it. Then does further hikes in repo are not necessary particularly because the adverse side effects of higher interest rate are gathering momentum. So why suck out liquidity when the high inflation we're seeing today is cost push inflation?
Let's understand what inflation is for that. In lay men's language; Inflation means too much money and too few goods, thus leading to costlier goods. That is, if money exceeds the value of commodities available in the market, the prices are bound to go up. This is also an indicator of the state of imbalance in the economy.
Harsh Roongta of apnapaisa.com says inflationary pressures are no longer restricted to fuel and food prices but are much more broad based. What else could be leading to inflation then?
Morgan Stanley's Chetan Ahya pegs the fiscal expansion outpacing actual investment is the real cause of inflation. An interesting piece I read also point out that futures trading is another cause for high prices. Why? Futures are contracts made between sellers and buyers for sale/purchase of a fixed quantity of a commodity at a fixed price at a future date. What commodity futures markets do is to enable selling and buying of these contracts on a daily basis, like in the stock market. So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs. 30 per kg, can sell at more or less than Rs. 30 per kg in January 2011. Would sucking out liquidity cure this, perhaps yes.
Roongta says the monetary policy response would lead to lower credit demand (thus lower consumption thus dampening of inflationary pressures). So, wouldn't a rate hike hamper growth?
It definitely has an impact on growth, says Roongta but the unusually strong RBI language clearly places inflation control as the centre piece of the monetary policy even though short-run deceleration in growth may be unavoidable in bringing inflation under control.
But, maybe, the central bank should now pause its rate hiking spree, and wait and watch. Provided, ofcourse the government upholds it promise and takes necessary steps soon.
0 comments:
Post a Comment