PRICING BY PERSUASION

Moral persuasion by the government has brought about some reduction in steel prices.It may work in respect of cement and other commodities also.But the long term solution which is most enduring will be augmentation of supplies through capacity expansion and augmentation of production.This is true of all commodities including agricultural goods and manufactured articles.For moral suasion to be effective it must be supported by enabling legislation.But the amendments proposed such as amendment to Mining Act,and Land Acquisition act etc are pending and would perhaps be taken up only in the monsoon session of the parliament.
By far the most effective weapon that can be employed to control inflation and price rise is augmentation of supplies and elimination of mismatch as between demand and supply.When supplies are in plenty producers and sellers will compete on the basis of prices to sell more.With acute competition among producers and suppliers black marketing will stand discouraged.The focus must thus be on augmentation of production of all articles and commodities.For this availability of bank credit at low rates of interest is vital.The RBI can advise banks to increase credit for production of all commodities and credit for expansion of capacities and also for production of manufactured goods.
The central bank could even advise banks to curtail and even resort to rationing of credit for non-essential consumption.Such a strategy will help expand production ensure growth and combat inflation simultaneously.For the present package approach may be required.But in the long run augmenting supplies,and creating a situation of abundance is absolutely essential.
[Published in Business Line dated 12th May,2008]