Price points

A CROSS sectors food,oil,commodities prices have gone up; and consumers have clearly begun to feel the pinch. Thats been reflected in Chief Economic Advisor Kaushik Basus statement to this newspaper that this financial year will end with a wholesale price inflation of 6.5 per cent,0.5 per cent higher than the previous estimate. This is an urgent problem,and one which requires the sternest policy focus.

As Basu also cautioned,however,this focus must be informed by rational thinking. We must distinguish, he told The Indian Express,between short-term commodity-specific price increases and overall sustained price increases. The former,he correctly pointed out,should be seen as temporary adjustments in relative prices,rather than the overall increase in the price level that we call inflation. So we need to look very hard at sector-specific problems. Supply-chain mismanagement; reform to widen market access for participants; the strategic provision of infrastructure to clear bottlenecks in a products path to the consumer. What it doesnt require,he insisted,is knee-jerk imposition of controls: export curbs,price caps. Export curbs,for example,can cause much more harm than they can possibly cure. India recently restricted cotton exports,after textile producers complained of higher input prices. Cotton farmers,however,were badly hit by the decision; governments of states dependent on cotton protested to the Centre. And it completed the devastation of Pakistans textile producers,already hit by floods that destroyed 25 lakh bales of raw cotton.

Thus,on a sector-specific level,the solution needed is reform,and forward-looking investment,not backward-looking control. That must happen within a macro-structure that emphasises controlling inflation,the lowering of inflationary expectations,and increasing the power of monetary policy to affect inflation. As matters stand,Indias financial markets are so shallow that interest rates would have to be hiked more drastically,if they are to have a suitably dramatic effect on prices,than would be comfortable for growth expectations. Meanwhile,recent purchasing managers indices which survey companies about input costs show corporate India is being squeezed on input prices,suggesting that there are several sectors,not just agriculture,which are serving as bottlenecks for growth and causing inflation. What we need,thus,is clarity and a clear framework from the monetary authority,the RBI; and a clear commitment to reform of and investment in the problem sectors.