8/3/2019 FM Attributed the High and Sticky Inflation to a Combination of Domestic and International Factors

1/2

FM attributed the high and sticky inflation to a combination of domestic and internationalfactors, and said the rise in prices of select food items and fuel was defeating the efforts totame prices.

"In these three months, certain food items namely, fruit and vegetables, egg, meat, fish andmilk have been the major contributors to food inflation. Along with fuel and power items,which exhibited a rising inflation in October, it has led to the stickiness in headline inflation,"he said.

Soaring inflation rates will continue to burn holes in your pocket in coming few months. Economistand chairman of Prime Ministers Economic Advisory Council, C Rangarajan, who was at IIMA onMonday, said the inflation will remain high till March 2012. On June 16, 2011 Indias food inflationrate rose to 8.96%.

Rangarajan said they are relying on the monsoon this year. He was in Ahmedabad for the launch of abook titled Brick by RED Brick written by an IIMA professor TT Ram Mohan. Rangarajan talked toDNA on the sidelines of the event.

If monsoon progresses, we can expect inflation rate to come down by 6.5% by March 2012, he said,adding that if the high inflation rate is not curbed, the RBIs policy of increasing repo rate willcontinue. For a common man, it would mean nothing but increase in home and auto loan interest

rates.

If inflation continues to soar, RBI will not change its policy and continue with the same. Thegovernment has two roles to play in this-first, to see fiscal deficit remains low and second it does notadd to the fiscal deficit and food grain market, he added.

Rangarajan said while the price of other food articles has increased by 2% to 3%, the price for pulseshas decreased. He said fuel price hike was inevitable to see if fiscal deficit remains in budgetedlevel. Temporarily, it will lead to spurt in prices but overall rate will moderate, he said.

After unveiling the book, Rangarajan remembered Ravi Matthai as gentle, courteous but decisiveperson. Terming his presence at IIMA as home-coming, Rangarajan emphasised on the fact that

freedom of expression remains an important aspect for any institute to grow. I believe IIMA made asignificant contribution by introducing case method excelling students analysis. But the governmentcannot simply solve problem by only analysis, he said, adding there should be a blend of knowledgebase and analysis.

Fuel and power inflation stood at 15.49 per cent during the week ended November 5, as against14.50 per cent in the previous week.Persistently high food prices are likely to exert furtherpressure on the government and the Reserve Bank to tackle the situation expeditiously.Headlineinflation, which also factors in manufactured items, has been above the 9 per cent-mark sinceDecember, 2010. It stood at 9.73 per cent in September this year.The RBI has hiked interest rates13 times since March, 2010, to tame demand and curb inflation.In its second quarterly review ofthe monetary policy last month, the apex bank said it expects inflation to remain elevated till

December on account of the demand-supply mismatch, before moderating to 7 per cent by March,2012."Going forward, the inflation numbers will tend to move downward. This decline is good, butover the long run, we still need to set right the fundamentals of fiscal deficit agriculture production ifwe wish to see the numbers on the lower side of the target range," financial services firm KASSADirector Siddharth Shankar said.

Indias chief economic advisor Kaushi Basu announced November 4 that thegovernment ought to decontrol diesel prices in order to cut government fiscal deficitsand (as a consequence) suppress inflationary pressures.

I personally believe that we should decontrol diesel prices, which will take some

pressure off the fiscal burden. And in the long run, it will cause inflation to go down,

8/3/2019 FM Attributed the High and Sticky Inflation to a Combination of Domestic and International Factors

2/2

Basu said in an interview with Express India.

The government needs to explain to voters that if we subsidize diesel artificially, byrunning up a large fiscal deficit, that would also exert an upward pressure on prices,he added.

In September, Indias inflation was measured at 9.72%, according to the report.

Indias oil companies raised gasoline prices last week, as allowed by government

policy, but the government still doesnt allow price freedom on diesel, kerosene onliquefied petroleum gas (LPG).

Earlier this month, Petroleum Minister S Jaipal Reddy has sought a meeting of theEmpowered Group of Ministers (EGOM) to devise ways to cut the mounting losses tooil [refining and marketing] companies due to the pricing of diesel, domestic LPG andkerosene as oil companies. Prices of the cooking fuel and diesel were last revised inJune, according to the report.

Basu, who also heads a Prime Minister-appointed panel on inflation, said deregulating

diesel prices will make India a more responsible country environmentally, becausethen we will not encourage over-consumption of diesel vis--vis other moreenvironment-friendly energy substitutes, according to the report.

Food price inflation is an extremely important issue facing the Indian economytoday. Ever rising food prices inflict considerable hardship on the population.This is especially so for the poor, whereby food expenditure is a significationportion of their overall budget. The issue is significant to the point that incumbentpoliticians can lose an election simply because food prices went up too much,even if it had little to do with them. Currently, annual food price inflation is

around 12%, considerably higher than the overall inflation rate of 9%. As of now,the primary focus of the Reserve Bank of India (RBI) has been to reduceinflation.

The only solution to reducing food price inflation is to produce more food. Noamount of interest rate changes, taxes and subsidies, or any other quick fixpolicy will work in the long run. If food production cannot keep pace with risingincomes and a growing population, we are doomed to suffer continuously risingfood prices. Increasing food production is certainly not an easy task. Itrequires investment in better technology to increase crop yields, investment in

better technology to reduce reliance on unpredictable monsoons, a moreregulated and transparent food market, and better incentives and adequatecompensation for farmers to produce more.