Open the choke

RBI’S preoccupation with combating inflation is well known, and so, it was only natural for RBI Deputy Governor Rakesh Mohan to compliment his organisation in a recent conference in Mumbai, when inflation fell to a low of under 4 per cent on September 1. But, alas, it appears to be more of a pyrrhic victory.

From motorcycles to fridges, sales have dropped as loans have become expensive. Is it then a case of RBI administering strong medicine in the monetary system to quell consumer demand? Anyway, the fallout: inflation in manufacturing goods is at its lowest over the last one year.

Further, the latest industrial production figures show a decline from double-digit growths in the recent months to a little over 7 per cent in July. Clearly, industry is not in for an easy ride. In such a situation, it will certainly help if RBI eases it grip and fosters consumption— from the new capacities that are being created by industry, or the improved productivity levels.

The government, too, can take some credit for this record low inflation, though for the wrong reasons. While food prices have moderated marginally, fuel prices have not risen. In the case of food prices, the burden has actually been borne by the farmer. The Indian farmer received half the global price for wheat, which constitutes 31 per cent of the food grains basket. However, it is unlikely that the farmer will let this happen again next year: he will not settle for Rs 8.50 per kg paid by the government, the single largest bulk procurer.

In the case of petroleum products, where our import dependence is about 70 per cent, the government has chosen not to increase prices of mass consumption products like petrol, diesel, LPG and kerosene—which constitute close to 60 per cent of domestic consumption. This, despite the fact that crude oil has hit new highs in the global market. Rather, by issuing bonds to the public sector oil marketing companies, it has deferred the liability by seven years. And, it plans to issue more of these in time to come.

In other words, with grain and fuel prices rising globally, inflation is waiting to raise its head again.

In this scenario, there is a natural tendency for the government to provide sops to industry. Last month, Heavy Industries Minister Santosh Mohan Dev said that if the auto industry’s second quarter results do not improve, the government would consider interventions. Bad idea. Rather, it should limit itself to monetary interventions to the extent that demand risk created in the first place to choke inflation is mitigated. For, otherwise, it will create incentives for industry to create spare capacities in the hope that the government will bail it out when demand does not materialise.