There has been considerable debate about what the Government is proposing to do in the context of rising inflation and visible strains on the food security of the country. There has been speculation that with the prospects of elections in key States and for Parliament itself, the recent macroeconomic developments may play a very important role in the political fortune of the UPA.

The situation has not been helped by the rise of crude prices. The Government’s policy of not passing on the cost to the consumer is having a heavy fiscal burden. Further, the oil companies, which are put to heavy loss, are finding it difficult to maintain their supplies of essentials, such as LPG. The present policy of inadequately pricing petro-products may result ultimately in breakdowns of essential transport and even power supply, which depends on petro-products.

The question is what the Government will be doing, faced by the forthcoming electoral battles, to solve this problem. Caught in the conflicts of coalition politics, will the Finance Minister and the Prime Minister face a breakdown in petro-products supplies or bite the bullet and raise the prices of the petroleum products to reflect the actual cost, which is the only correct solution for any sensible government to follow?

Only then will the consumption of petroleum products adjust itself to the signals of the high prices of crude. Subsidised supply of fuels will worsen the situation by increasing the competition of those costly commodities, whose prices are high, signifying scarcity. The economic reformer that the Prime Minister is should overcome the political compulsions and communicate the painful message that scarcity should reflect itself in higher petroleum product prices at the consumers’ end.

Meanwhile, the consequences of the RBI’s counter-inflationary policies have been felt in the banking sector. The SBI has already decided to cut down its tractor loans. Similarly, there will be counter-expansionary tendencies as a result of contraction of credit for consumer durables, automobiles and so on. The net result may be that the index of industrial production (IIP) may be in for a slower rate of growth.

Cement manufacturers, for instance, have been “persuaded” to depress their prices — a throw-back to the days of “Control Raj”. Similarly, steel producers are being persuaded to depress the prices of their products, notwithstanding that their input costs are high. These attempts by a Government of reformers to force market behaviour to suit their political needs are an indication of politics intruding on reforms.

There was a recent debate on a television channel where manufacturers’ representatives representing the heavy capital equipment industry said they were sorely tempted to move their operations to China, where power of good quality is available at a lower price. This view was shared by many participants in the debate, who said the prices at which most manufacturers had to produce power through captive generators is an embedded disadvantage, which the Chinese do not suffer from.

While the Government may preen itself on its achievements, the fact remains that the power sector has been a symbol of India’s abject failure. The Manufacturing industry cannot depend on such unstable sources of costly uncertain power which the grid “supplies”.

It is time the Government applied itself to meet the challenge of bridging the power gap by starting installation of additional capacity and reducing supply bottlenecks that exist in the present structure. It is unfortunate that in spite of announcements to the contrary, action has been wanting in this vital sector.

The manufacturing industry of India has yet another grouse that India is not yet a unified market in the sense that China is. There are various restrictions on inter-State movement and a common market in India is still an unrealised dream.

One of the objectives of policy for the Government should be to remove these restrictions on inter-State trade and transport. This has far greater and urgent relevance than the value-added tax reform on which the Government had applied its mind with great care. An important positive aspect of the macroeconomic scenario is that the buffer stock of wheat and rice in the possession of Government seems to be above the limits considered safe by the experts. This has been helped by the liberal procurement price policy as well as active steps taken by the procurement agencies to get hold of marketed surplus.

There have been suggestions that while the procurement has been good and food security is not in threat, private participants, such as millers, have been wary of purchasing because of Government’s threat regarding hoarding. It is to be hoped that in view of the relatively comfortable food stock situation, Government will relax its so-called anti-hoarding measures, which may serve to reduce market access to farmers.

There have also been trends in the international commodity markets that show a slow but sure declining tendency in the rate of inflation. Commodity prices, especially in food products, have been showing a healthy sign of decline in the recent weeks. Hopefully, this will coincide with better arrivals in our markets and reduce the pressure on Government to resort to fiscal and monetary measures to reduce prices.

While on the subject of fiscal contra-inflationary action, I am intrigued by the RBI’s insistence in the Weekly Statistics on WPI. The WPI released by the RBI cannot fully include the effect of fiscal concessions, such as excise duty reduction, which ultimately affect the consumer price. The WPI is not a true reflection of inflation in the country.

Apart from this, there is also need for the RBI to focus on core inflation, as is done by the US Fed, which focuses on the consumer prices of items of commodities, excluding fuel and food. Perhaps, the US Fed knows that its monetary policy measures can have little influence on the prices of these excluded items. It is time the RBI also follows the Fed’s practice of core price inflation.

I turn to another aspect, namely some reversal of rising trends in the value of the rupee — a reversal will promote exports and decrease the agony of software exporters. Recently, the rupee has been depreciating against the dollar, partly restoring the competitive advantage of our exporters.

It is hoped that this policy of benign neglect continues on the part of the central bank enabling the exporters of India to increase their contributions to the BoP. Incidentally, this will increase employment opportunities in highly sensitive areas such as textiles and service industry.

On the whole, the situation is not as dismal as it appeared the beginning of the year. The inflation has shown signs of eventual modulation. Food price inflation may abate and industry may be able to restore its rate of growth, thanks to the exchange rate policy of the RBI.

Hopefully, Government will undertake suitable policies to ensure that the manufacturers of India can concentrate on expanding their activities inside the country, instead of availing investment opportunities in competing nations, such as China.

Electoral politics should not in any way derail economics of reform. Hopefully, the UPA, in spite of all its contradictions, will be able to see what is good for the country and accordingly decide on suitable policies.

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