Focus on the aam aadmi

The government must take immediate, decisive action to control price rise. As a result of the expansionary monetary policy of the NDA government, the last four years have seen a sharp rise in the ratio of money supply to GDP. Since March 2004, the growth of money supply has accelerated to more than 15 per cent. Liquidity in the system is high, and unless steps are taken to reduce the growth of money supply, it may become difficult to control inflation. A tighter monetary policy should be accompanied by measures to tighten fiscal policy. A reduction in government borrowing would reduce the upward pressure on interest rates and minimise pain for borrowers and industry. These measures should be announced immediately. It will help control inflationary expectations, which are pushing up interest rates in bond markets. Finance Minister P. Chidambaram made a good beginning in this direction in the budget when he kept the growth of government expenditure restricted to 6 per cent, and promised that the revenue deficit would be controlled. He needs to move further quickly in this direction.

The sharp rise in inflation has, until now, been seen only in the Wholesale Price Index WPI. The sharpest rise has been in the price of iron ore, iron and steel. These are inputs into consumer products, but the increase in their prices has not pushed up the price of final products yet. The cost of living index and the Consumer Price Index have not risen yet. Consumer prices are still rising only at 3 per cent. But the rise in WPI has sounded alarm bells about the direction in which consumer prices can go. To protect the consumer, the government must reduce the impact of the rise in wholesale prices on retail prices. Supply management must be improved. Artificial export incentives for iron and steel exports should be removed. The impact of the world oil price hike on the Indian consumer should be minimised by cutting import duties. Custom duties on most petroleum products are currently 20 per cent. These should be reduced to 10 per cent. This will bring down the price of imported petrol, diesel and kerosene. Lower duties will also put pressure on domestic producers to bring down the price of petroleum products. Next, the government should identify the agricultural products such as sugarcane and edible oils for which shortages are expected to develop as a result of the monsoon. The finance minister should immediately remove controls and reduce custom duties on these products.

Higher prices should not be allowed to hit the 8220;aam aadmi8221;. Under normal circumstances, measures to consolidate deficits and cut custom duties may face political opposition in the name of the 8220;aam aadmi8221;, but in a moment of crisis it8217;s clear these reforms are in his interest. The rise in inflation is an opportune moment for Chidambaram to push forth economic reforms.