With inflation continuing to remain at high levels, the belated hike in the cash reserve ratio (CRR) is unlikely to have an immediate impact unless the government cracks down on hoarders and market-manipulators. Unless some more stern fiscal measures are taken immediately, inflationary pressures, fuelled by the rise in prices of essential commodities, will continue to haunt the Congress-led United Progressive Alliance (UPA) government and the prime minister’s hopes of containing the situation will remain pious wishes. Pushed to the wall over a spiralling rise in prices of essentials, the government cannot afford to remain complacent over the insignificant fall in the inflation rate from a 40-month high of 7.41 to 7.14 per cent.

Apart from strictly enforcing the Essential Commodities Act, there should be an outright ban on forward trading in foodgrain and other essential commodities to rein in inflation. If the states do not join hands in the fight against inflation, the Centre should be at liberty to take the toughest measures, even if they are unpalatable to political parties that have cosy relationships with hoarders, blackmarketeers and market manipulators.

One should not be surprised if poor people take to the streets and resort to violence and food riots, looting the warehouses of both the government-controlled Food Corporation of India and traders, driven by poverty and hunger. It is really surprising that Finance Minister P Chidambaram is sitting on the situation and issuing populist statements. He should announce the government’s annual credit policy immediately instead of waiting for April 29 to further tighten money supply and tame inflation. It is shocking that although the Reserve Bank of India (RBI) had anticipated the inflationary pressure, it had not swung into action earlier.

The UPA government has deservedly been criticised by the Left parties and those in the Opposition for focussing too much on GDP growth and overlooking the interests of the common people, who are suffering because of inflation. The failure of the government was evident when the finance minister made no secret of the government’s frustration with cement and steel manufacturers for not heeding calls to hold the price line and forming cartels.

Although combating inflation has moved to the top of the Centre’s agenda, it has not taken any draconian measures. The new sensitivity was reflected in the announcement of Union Agriculture Minister Sharad Pawar that the government would suspend forward trading in essential commodities.

War on hoarding
It is a fact that the inflation rate has spiralled. As a result, prices of all essential commodities have increased many times, leading to a serious economic crisis. This has put the middle and low income earners in a spot.

When the early signs of inflationary pressure were noticed, the government pinned responsibility on the global trend of rising prices and the crisis of the US economy, but no welfare government can afford to sit idle on such an issue.

Food riots in Egypt and Haiti have already threatened to overthrow their governments of the to countries.

As a result of pressure created by the Left parties, on whose support the existence of the UPA depends, the government has taken various measures like banning the export of cement, steel and non-basmati rice and cutting excise duties on some commodities.

Manipulating the CRR is perhaps the last measure at the disposal of the central government and accordingly it was raised by 0.5 basis points. It is expected that the inflationary pressure on the economy will subside, but will take some time.

But what is important is that an all-out war on hoarding should also be launched with the collaboration of all state governments to destroy the parallel economy.

Focus on agriculture
I think the prime minister’s hope that inflation will be tamed will ultimately go up in smoke. Merely hiking the CRR to mop liquidity in the financial market will serve no purpose. The answer lies in the proper formulation of government policy in the primary sector.

India is primarily an agrarian economy, though with the onset of liberalisation in the early nineties there has been a paradigm shift towards the tertiary sector. The current rise in prices is an effect of the agricultural policy pursued by the Centre over the past three decades.

One of the biggest factors behind the increase in prices is the stagnation in the rate of growth in the production of foodgrain and pulses. Take for instance the production of wheat, which has more or less plateaued since 1999-2000. The price of this commodity has further been impacted by changing food habits and capricious production worldwide.

Since the UPA government came to power in 2004, food prices have been on the rise. The dream team of Prime Minister Manmohan Singh, Finance Minister P Chidambaram and Planning Commission Deputy Chairman Montek Singh Ahluwalia has been unable to spur agriculture production.

All that the Centre has done is ban exports, suspend future trading in some commodities and increase the minimum support price of others. The past one year is a classic example of how the government has failed to address key issues such as declining acreage, rising demand, changing consumption patterns and the global production scenario.
The RBI’s decision to hike the CRR will fail to check inflation.

More measures
The RBI has hiked the CRR, but simultaneously the government must also consider proposals to ban the export of more commodities to boost domestic supply. Since March, the government has slashed import duties on edible oils, banned the export of cement and non-basmati rice and withdrawn export incentives on steel to increase supplies and control inflation. These measures have made the prime minister optimistic that the inflation rate will fall.