The Hindu Business Line : Recovery may be in jeopardy: NCAER

THE National Council of Applied Economic Research (NCAER) has contended that the United Progressive Alliance Government is in a difficult situation with what it views as "the return of the inflation dragon" in recent weeks.

In its latest Macrotrack monthly bulletin, the Council said that if inflation were not checked, it would not only put the present Government in difficult situation but also have an adverse impact on interest rates, thereby putting the sustained recovery of the economy in jeopardy.

Moreover, it said, the fiscal measures in the form of reducing taxes and duties would have implications for the Government as the Fiscal Responsibility and Budget Management Rule (FRBMR) binds the Government to control the fiscal deficit.

Stating that an inflation rate of more than 7 per cent is not unknown in India, the Council said it was 7.1 per cent for 2000-01. It was only on the back of this high average that in 2001-02 and 2002-03 inflation remained at around 3.5 per cent — before increasing to 5.5 per cent in 2003-04. "Indeed, inflation would have been higher during January-July 2004 if the oil companies had been allowed to revise petroleum product prices. The impending elections prevented this revision. The birds are now coming home to roost," it noted.

It said that as compared to the previous two years, the money supply in 2003-04 increased by 15.95 per cent and this was reflected in the average inflation rate of 5.5 per cent last year. Even during 2004-05 year-on-year growth of money supply until August 6, 2004 has been 15.7 per cent, compared to 11.7 per cent last year. It said the fiscal response to inflation has come mainly from the reduction in customs and excise duties on petroleum products and the reduction of customs duties on steel.

The Council noted that the depreciation of rupee, of late, has also led to the spiralling inflation via rise in import bill. Global metal and non-coking prices have also continued to firm up this year and this was reflected in the hardening of domestic prices of basic metal and metal alloys and non-coking prices.

Stating that the recent spurt in inflation has been caused by multiple factors, the Council said the week-long strike by truckers against the imposition of the service tax on booking agents has further aggravated the situation. It said varieties of factors are responsible for the rise in inflation — demand-pull, supply shock (domestic as well as global), monsoon, base effect (average inflation during April-August 2004 works out to be 6.11 per cent, which is higher than the corresponding period last year of 5.42 per cent) and impact of earlier fiscal and monetary policy.

The Council is, however, optimistic that the relatively lower global oil prices in future and the lowering of customs and excise duties on petroleum products as also the revival of the monsoon might help control inflation. With control on money supply growth, demand side factors would also ease up. The reduction in prices of steel products by major producers might also help, as steel has been an important contributor to overall inflation.

Referring to farm sector growth, the Council noted that as on August 25, the overall monsoon rainfall index for the country as a whole shows a deficiency of 7 per cent compared to its normal level. The available estimates show that output of kharif foodgrain in 2004-05 might slip by about 8 per cent over last year's output and rabi production might be lower by 3 per cent. But, if rainfall situation improves, kharif foodgrain output in 2004-05 might be around 105.2 million tonnes (4.8 per cent below last year's output) and rabi foodgrain production might be 100.2 million tonnes, same as previous year's level.