Price of timidity

Inflation is actively back as a policy concern now, after last weekend8217;s WPI figure of 6 per cent plus, the highest in two years. Inflation has been an RBI concern for some time. With the finance minister saying prices have to be watched, there are strong possibilities of official action. But the thing is there is nothing much for the government to do, and what the government should do should be part of good economic policy anyway. Inflation was widely expected to breach 6 per cent this month. There8217;s a natural economic effect 8212; with high growth and still relatively robust credit flow, inflation will climb. It is absolutely vital that both the government and the RBI understand this. In any case, sharp rises in interest rates are never a good solution; the RBI doesn8217;t think so either. Interest rates have 8216;delayed8217; impact on inflation. Therefore, as long as the RBI continues to give out small but firm signals about its inflation tolerance, it should suffice. Especially since banks, which have used up the option of turning government security into lendable resources, are no longer in a position to freely provide credit after the long boom. Now small increases in rates will bite harder on credit supply.

As for concerns over a sharp rise in primary article prices, the fact that this component of inflation is subject to sharp, short-term movements needs to be remembered. There8217;s also a link to global commodity price movements, factors not really amenable to government policy. Of course, that the inflation rate for manufactured products 8212; the figure that economists track for the true measure of inflation 8212; is also high needs to be noted. But it is by no means sure that consulting the ministry of consumer affairs and therefore looking at micro-management options is the best course of action.

The best course of action for the government is to help increase the supply of urban infrastructure and quality of education 8212; high asset prices and high wage growth are among the determining factors in the current price situation. These are basically responses to supply side constraints 8212; too little good quality infrastructure and too few well-skilled students. The government hasn8217;t been clear or intelligently proactive on either urban infrastructure or higher education policy. Inflation is one proof of that failure.