Danger ahead

March Inflation Needs Policy Response

As was widely expected, inflation measured by the wholesale price index (WPI) has inched up from the February level of 9.89% to 9.90% in March 2010. True, it is a whisker short of the dreaded 10% mark. But that is small comfort. At 9.9%, inflation is not only well above the RBI’s target of 8.5% for March-end but is also well above the comfort zone for any democratically-elected government. More to the point, while food inflation shows scant signs of abating, inflation in manufactured products (7.13%) and fuel and power (12.71%) is now significantly higher than a year ago. Thus, the contribution of non-food inflation to overall inflation is now almost 50% up from almost zero a few months ago. This clearly calls for action. While the RBI is expected to tighten its monetary policy stance in its policy statement due next week, monetary policy alone cannot win the battle against inflation. The government must do its bit to remove supply constraints (read offload more from its buffer stocks) and at the same time exit more aggressively from its excessively accommodative fiscal stance.
    
As there are no elections, barring assembly elections in Bihar this year, the government may not have to face a wrathful public (and that, perhaps, explains some of the lethargy on its part in tackling inflation). It might also be able to deflect some criticism on the grounds that containing inflation is the responsibility of the states, rather than the Centre. But that will not wash. While combating inflation is the joint responsibility of the Centre and the states, the latter can at best play a supporting role, say, by ensuring a more efficient public distribution system. In contrast, fiscal and, to a lesser extent, monetary policy, both of which have a major role in determining the overall demand-supply balance in an economy, lie squarely in the Centre’s domain. Whatever the justification for an easy policy stance earlier, the situation is vastly different today. February’s 15%-plus industrial growth is only the latest in a fairly impressive list of indicators suggesting growth is now back on track, inflation isn’t. The Centre would do well to heed that warning.