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The UPA Government, in its early days in office, faced an unexpected challenge of a sudden spurt in inflationary pressures with global prices of crude and commodities touching new highs during 2004 even as a deficient monsoon and excessive liquidity at home posed risks for price stability. The Government’s effective control of the inflationary trends helped sustain the growth momentum of the economy, which recorded 6.9 per cent in 2004-05. By the end of the fiscal year, the annual rate of inflation was down to 5 per cent, though in recent weeks there are signs of an uptrend. But the Government and RBI are fully determined to ensure that inflation is kept within tolerable limits.
Principally, rising inflationary expectations in 2004 were countered by prompt fiscal and monetary measures along with flexible supply response which succeeded in bringing about a gradual decline of the annual rate of inflation from a peak of 8.7 per cent in August to around 5 per cent by the end of the year. Resolute steps were called for and taken so that the overall climate of revival of investment and output and the general mood of optimism on the economic front were not vitiated.
Under the National Common Minimum Programme, the Government is committed to taking effective and strong measures to control price hike of essential commodities, i.e. commodities which enter into consumption of individuals as well as goods going into production processes which contribute to the growth of the economy. But primary articles like foodgrains and edible oils are even more essential for the common people and inflation hits the poor the most. Prime Minister Manmohan Singh has, therefore, regarded holding the price line as an important pro-poor initiative and a priority for his Government.
A normal monsoon with well-spread plentiful rainfall helps maintain a reasonable degree of price stability while a weak or deficient monsoon causes output shortfalls and generates inflationary expectations. This was a significant factor in 2004 for the build-up of price pressures in primary products other than rice and wheat. But what really drove up inflation was the soaring international oil prices. For continued price stability in 2005 and beyond, we need both a normal monsoon which would strengthen our agriculture to obviate cyclical shortages of commodities as well as timely fiscal and monetary measures to meet contingencies, internal or external.
The fiscal measures taken during the first half of 2004-05 to tame inflation in the wake of the upsurge in international oil and commodity prices (steel, in particular) comprised cuts in excise and custom duties on select petroleum products, reduction in customs duty on non-alloy steels and reducing the tariff value of many vegetable oils. Two revisions in petroleum product prices were effected between June and August 2004, which had been held over by the previous Government. The increases in retail prices were considered minimal in a burden-sharing arrangement for the higher import prices between Government (through duty reductions) and the oil companies (taking a sizable cut in their profits) and the consumer. On the monetary side, the Reserve Bank took necessary steps to reduce excess liquidity in the financial system as part of stabilizing inflation.
Outlook for 2005-06
The Budget for 2005-06 is designed to secure a GDP growth of not less than 7 per cent with relatively moderate inflationary expectations. Globally, inflation is on an uptrend, though somewhat marginally in major industrial countries, and central banks have reversed accommodative monetary policies and, in some cases, revised interest rates. The world oil market continues to remain volatile with oil prices holding above 50 dollars a barrel. The RBI has projected a 7 per cent growth and inflation at 5 to 5.5 per cent while money supply target is fixed at 14.5 per cent to provide appropriate liquidity for the productive sectors of the economy. But all this is subject to uncertainties about oil price and supply situation and the domestic absorption of higher prices. Although the new fiscal year began with underlying inflationary pressures appearing moderate, there can be no room for complacency in view of the persistence of high international commodity prices. Despite signs of easing on the price front in the latter half of 2004-05, the year ended with an average rate of inflation at 6.4 per cent, as compared to 5.4 per cent in the previous year which saw the beginning of deterioration of world inflation environment.
The Government has so far restrained itself from effecting a full pass-through of the higher oil costs, considering the serious implications it would have for domestic inflation, but given its own fiscal position, there are limits to increasing the level of subsidization of petroleum product prices or placing more burdens on oil companies. India’s import demand for oil has been growing, though not as spectacularly as for China, and it has already begun to incur current account deficits, mainly due to higher oil bill. Since the Indian economy is increasingly getting integrated with the rest of the world through trade and capital flows, it cannot be immune to external shocks but the country is in a comfortable foreign exchange situation to meet contingencies.
After a dramatic upturn in 2004, the world economy is headed for subdued growth but not without risks flowing from worsening global imbalances, edging up of inflation, and the rise in interest rates. All this could impact on the monetary policy of RBI. This is why the Bank has stressed in its latest Policy Statement that it would be desirable to contain inflationary pressures to stabilize domestic financing conditions both for Government and the private sector.
The Indian Meteorological Department has forecast a normal monsoon for 2005 which should help a more balanced growth in agriculture in the current fiscal year. With a vibrant manufacturing sector producing basic, intermediate and consumer goods, the economy is not expected to experience any demand-supply mismatches. International oil and other commodity prices would be monitored closely by the Government and RBI to take timely measures to rein in the emerging inflationary pressures.
*Freelance Writer
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