The Reserve Bank of India, says that its prime mandate is to contain inflation. RBI had earlier indicated that an inflation rate between 4.5% and 5% was comfortable for the Indian economy. In the last few weeks, inflation has overshot that threshold and is inching towards the double-digit mark. The wholesale price index (WPI) inflation, which was 3.8% in January, rose to7.41% by March 29. It then eased to 7.1% for the week ending April 5 but rose again to 7.33% the following week. In the near future, there is no hope that it will come down. McKinsey & Co, in a recent survey, found that 64% of the Indian executives polled, were apprehensive about the inflation going up in the next six months.
Experts believe that the Government of India (GoI) will resist raising interest rates since the interest rate differential with the U.S. is already quite large, they would not want to widen it any more. To control inflation, one of the things that the GoI is trying to do is set price ceilings and quantitative controls. However, these techniques have historically been unsuccessful not just in India, but elsewhere as well. Not only these are difficult to administer, but also these methods are outdated. Surely, there is a need to curb price rise, as the monetary policy would not be altered at this point in time because of foreign investments, etc. The government is constrained by what is called the impossible trinity of international finance (the perceived irreconcilability of the three objectives – capital freedom, exchange rate maintenance and independence of monetary policy).
The government has been negotiating with cement and steel manufacturers, (almost) forcing them to restrain prices. "It is my view that cement manufacturers and, to some extent, steel producers are behaving like a cartel," Chidambaram told Parliament in late April. Steel companies are also pointing to rising input costs. An uneasy truce has been reached with the manufacturers agreeing to maintain the current level of prices for a few more months. But the truce would collapse if companies see their profits in the red.
The government has implemented several other steps, including various export bans and import duty cuts and revision of the annual export-import policy. For example, this year, cement exports were banned and all incentives on the export of primary steel were withdrawn. The export target for 2008-09 has been revised to $200 billion – an increase of 23% over the $155 billion achieved in 2007-08. This was short of the $160 billion target for the year.
Increase in steel and cement prices results in pressure on user industries. The country’s largest two-wheeler manufacturer, Hero Honda, has hiked prices for its products. The car manufacturers are also being forced to the wall. The Tata Group's Rs. 100,000 ($2,500) Nano, the inexpensive car due to roll off the assembly lines soon, may be impossible to manufacture at such a low price.
Avik Mukherjee
Globsyn Business School
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