Finmin: fiscal options to fight inflation are limited

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In an unusually long—22-page—note on inflation, symptomatic of the fact that political tempers are running rather high due to this vote-threatening issue, the finance ministry has reiterated that price rises are a global phenomenon, with the assurance that it would “closely monitor the price situation, both domestically and globally” and take appropriate measures to keep prices below international levels.

The government also said that it would ensure that adequate credit is available for the industrial sector, despite a series of monetary tightening measures. The ministry said in a statement issued on Friday that India has fared better compared with many other countries in containing inflation, although it acknowledged that fiscal measures that are used to tame inflation could prove counter-productive beyond a point.

“Fiscal measures may, however, gradually lead to an increase in the fiscal deficit which, in turn, may create inflationary tendencies,” the statement said. The government is also evolving a scheme to involve state agencies to augment supplies in case of rapid price increases. The Centre would provide non-plan assitance to state-level agencies.

The annual inflation rate in India has increased from 6.7% in May 2007 to 7.8% in May, whereas consumer price inflation in emerging Asian economies jumped from 4.8% in July 2007 to 7.3% in May 2008, it said.

During the same period, the inflation rate in China increased from 3.4% to 7.7%, while in Russia it jumped to 15.1% from 7.8%. Even in the industrialised countries of the European Union, inflation rose from 1.8% to 3.5% in the same period. “The increase in the rate of inflation is a global phenomenon,” the ministry said.

The white paper on inflation comes at a time when the UPA government is increasingly worried about the almost uncontrollable rise in prices. The finance ministry said that the increase in commodity prices in India has been much smaller compared with many other countries, even as global commodity prices rose by 62% during June 2007 to June 2008.

“Rice prices have increased in international markets by 169.9%, while the increase domestically is only 8.4%. Wheat prices have similarly increased by 68.5% internationally, while the increase in domestic prices is only 8.4%,” it pointed out. In the case of groundnut oil and soyabean oil, prices have increased by 95.4% and 84.0%, respectively, in international markets, while the increase in India is only 5.5% and 9.7%, respectively.