The Hindu Business Line : Inflation concerns

AS THE COUNTRY moves towards the kharif harvest — less than six weeks to go for the withdrawal of the South-West monsoon — the good news is that inflation is under control. Due to cheaper food items including vegetables, inflation fell to 3.35 per cent in the week ended August 6. Will the good times continue with prices of essential commodities remaining generally friendly to consumers? There is fear that inflation will test higher levels in the coming months primarily because of the twin effects of higher crude prices and less-than-satisfactory farm goods output. The upcoming kharif crop production is likely to be well below the season's target.

The Agriculture Ministry has made confident statements about kharif prospects improving after the widespread rains since the second half of July, supported also by some private forecasts of an across-the-board increase in output. However, the situation on the ground is slightly different, and far from euphoric. Rains after mid-July have not led to any notable expansion in area coverage. Reports from across the country suggest a near-certain decline in the output of major crops such as paddy, coarse grains, pulses, oilseeds and cotton for two reasons — one, the slight decline in the area under cultivation and, two, lower yields because of initial weather aberrations. In the case of oilseeds, coarse grains and pulses, the harvest is likely to fall short of even last kharif levels, while in cotton the decline is expected to be offset by a large carry-over from the 2004-05 bumper crop. Only sugarcane is expected to show a significant rebound; thanks to the heartening conditions in Uttar Pradesh, its output is forecast to rise at least 20 per cent from the weather-reduced crop of the last two years.

The upside potential for commodity markets is real, not only in India but also worldwide. With India steadily integrating with the global markets, both external and internal factors are at work. Public stocks of rice and wheat with the Food Corporation of India are tight and may barely meet the requirements in the coming months. Besides the income increases, festival demand over the next two months could drive the market up. With too much money — a significant part of it speculative — pouring into the commodities sector, the possibility of price volatility is high. Tightening indigenous supplies and robust demand are a sure recipe for a strong upward price pressure. If higher prices translate to higher incomes for the primary producers, it is indeed welcome, but history does not inspire much confidence of this happening.

The policy-makers have to guard against runaway inflation and spare no effort to keep it on leash. There is also the political angle. Elections to the Bihar Assembly are likely by November, and in UP, West Bengal and Tamil Nadu by early next year. Polls and high prices do not mix. It is going to be a challenge for the Centre — the Finance Minister, in particular — to manage the potentially inflationary situation. Normal rains till end-September may leave satisfactory sub-soil moisture for the next crop. The Agriculture Ministry, in association with the State governments, must quickly start planning for the rabi season and strive to make good at least partially what may be lost in the kharif.

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