CRR hike just 1st step to combat inflation, says FM

Speaking to The Indian Express, Finance Minister P Chidambaram said the main cause for the rising inflation has been rising petro prices in the international markets. ‘‘The demand for petro products in volume terms has grown only by 7.7 per cent in the April-July period but the value has gone up by 50 per cent,’’ he said, adding, ‘‘We can’t change consumption behaviour patterns overnight, but if global prices continue the current trend, austerity measures may have to be seriously considered.’’

Chidambaram said while the RBI had already taken monetary steps to combat inflationary pressures, more measured steps would be taken in the coming days. ‘‘What these will be, I can’t disclose yet,’’ Chidambaram said.

He said that RBI’s hiking the CRR by 0.5 per cent in two tranches would help in sucking out Rs 8,000 crore excess liquidity and help to ease pressure on prices.

Asked if the government would step in to check prices of petrol and diesel with a review due on September 15 by oil companies, Chidambaram said: ‘‘You will have to check that with Petroleum Minister Mr Aiyar.’’

Over the past month, RBI has taken a series of monetary steps like one-day repos, liquidity adjustment facility and vigorous interventions through market stabilisation schemes to keep the situation under check. This was in addition to fiscal measures like cutting down customs and excise duties on petroleum products and steel.

The Finance Ministry has blamed the current inflationary tendencies to two factors both in which the UPA government has had no role— external issues especially hardening international crude prices and the inherited problem of liquidity estimated at Rs 60,000 crore of excess money supply in the economy.

This is not the first time inflation has breached the eight per cent mark in recent years, officials said pointing to the 8.84 mark touched on January 13, 2001 which continued for a month till February 17.

Also, the average inflation during 2000-01 hovered over seven per cent without the external factor of shooting oil prices. The single biggest contributor to the sharp rise in inflation, the government feels, is the crude oil prices ruling at $ 40-44 dollars a barrel.

The previous NDA government had allowed $ 37 billion dollars of foreign exchange to flow into the economy last year which had pushed the money supply from 14 to 16.6 per cent. And it had taken very little action to suck out the excess liquidity arising out of it, official sources said, adding the market stabilisation scheme was operationalised by the NDA government on April 1 without gathering pace thanks to elections.

Sources in the Finance Ministry said the increase in the volume growth of oil imports was 7.72 per cent during April-July 2004 as against 9.36 per cent in the corresponding period in 2003. But the growth in value of crude oil imports had shot upto over 50 per cent this year as against 10 per cent in the previous year, indicating the phenomenal rise in crude oil prices in recent months.

The overall economic situation, the sources said, was in the pink of health except the inflation front, which was a cause of worry. All the economic indicators have shown marked improvment during April-July, 2004 as compared to the corresponding period in the previous year.

The economy ahieved a growth of 7.8 per cent during April-July 2004 as against 5.9 per cent in the corresponding period of the previous year. Likewise, manufacturing grew by 8 per cent as against 6.4 per cent, electricity 7.9 per cent against 2.7 per cent, mining 5.2 per cent against 4.8 and capital goods 14.7 per cent against 9.1 per cent.