Runaway Inflation

Inflation has gone up to 7percent,the highestin the last one year and a half.The poorer sections of society are the worst hit by the spurt in food prices.The government has resorted to a series of measures such as ban on export of certain items and reduction of import duty on others,but none of these have had the desired impact.Our food security is at riskand galloping inflation has emerged as a major macro-economic issue requiring focussed addressing.If left unchecked it may even threaten and disturb the economy's fiscal equilibrium.The fast rise in the prices of food grains ,edible oils,pulses,vegetables etc coupled with unprecedented rise in prices of such commodities as steel and cement have pushed inflation to a new high.
The real cause is the mismatch between demand and supply not only in India but globally.The government must take measures to contain inflationat a reasonable leveland apply a combination of measures while firming up long-range strategies.Prudent fiscal measuresand a balanced monetary and credit policy are vital for this purpose.Capital market in India has almost fully dried up or is on the verge of becoming so.Also there is a near complete stoppage of inflow of cheap funds from international sources.Cost of bank credit has gone up.
All these have adversely affected production and manufacturing.Thus at this juncture what we need is a cheap money policy.The RBI must have on earlier occasions reduced interest rates by cutting CRR or or other rates like repo rate etc.But the central bank seems to have forgotten the supply side completely.
The RBI policy particularly the high rate of interest has discouraged production of all commodities.Now we need to focus on augmenting supply of all articles-food and non-food.Abundance has to be created and mismatch between demand and supply eliminated.For this the RBI must adopt a cheap money policy as inflation has not been demand-driven but has its genesis in short supply.
Both the government and RBI must initiate supply-side interventions and adopt prudent fiscal and credit policies.The accent must be on agriculture and production of more and more food grains.For this the focus should be on providing farmers bank loans at affordable rates,improving farm productivityand removal of transport and other logistics-related constraints.Inflation control needs concerted and constant efforts by all concerned-the centre,states and the apex bank.
[Published in Business Line of 10th April 2008]