Inflation and rising crude prices arguably take the first two positions in the list of economic problems.
What are we going to do when the international crude prices touch $200 a barrel? Diesel is the most important product in the crude basket.
A hike in diesel prices will have a cascading effect and reflect in hike in the price of every commodity. Petrol, on the other hand, will not have such a huge impact on the prices compared to diesel.
In this hour of crisis, the government could seriously contemplate pegging the diesel prices at, say, Rs 37 a litre for the next few years.
This price is limited to all goods carriers and public transport vehicles only, so that the common man is not hurt by the cascading effect of diesel price rise.
On the other hand, the subsidy on petrol and diesel for private use must be totally de-regularised. This would be an administrative challenge. This dual policy of diesel distribution will have dual advantages.
As the prices of petrol and diesel for private vehicles increase steeply, people will shift slowly to public transport at no increase in cost.
This will consequently reduce congestion on roads.
If this policy of dual distribution of diesel is coupled with little reduction in excise duty by the Centre and sales tax by the States, it will result in lesser price of diesel (for public transport vehicles and goods carriers), thereby bringing down the costs of essential commodities, which will help stem inflation.
In the long run, the government must give fillip to research on alternative sources of energy, provide better public transport and impose prohibitive taxes on big cars and luxury cars.
Saturday, July 12, 2008
Inflation concerns
Inflation concerns
Rising prices are affecting millions of people throughout the country. Inflation has hit the poor the hardest. Being a predominantly rural nation, these issues concerning the largest section of society need to be addressed on a priority basis. Rising inflation numbers, which crossed 7.5 per cent recently, has put considerable pressure on many families; the absolute inflation measured in terms of individual prices of essential commodities is well above the official rates based on the WPI and the CPI.
The situation can get complicated if production of food and cash crops do not register a significant increase compared to that in 2007-08. The unseasonal rains in the South and the accompanying loss of crops in many parts of Karnataka ,Tamil Nadu, Andhra Pradesh and Maharashtra in recent weeks could affect the production of pulses. If this happens, large-scale imports will become inevitable.
Higher inflation will pressure the RBI to increase the cash reserve ration (CRR), which will result in interest rates hardening. The recent hike in CRR to 8.25 per cent will only push up bank interest rates further. This will buttress capital inflows from abroad, particularly from countries with low interest rates, which will further add to the liquidity in the system and result, thereby, in inflation going up further.
For more than a year now, the RBI has been resorting to hiking the CRR at regular intervals. This is not a healthy approach. But the RBI is caught in a vicious circle. Hikes in interest rates bring in more capital. To stem such capital inflows, the RBI increases CRR which will again bring in more capital. Of course, the RBI is doing whatever it can from the monetary policy point of view.
The CRR is the most powerful tool available with the RBI to reduce the velocity of money. But one must understand that CRR has only marginal influence when it comes to containing food prices, the biggest problem facing the country now. Hikes in CRR may at best prevent people from borrowing for purchasing, say, luxury goods and real estate.We must understand that inflation is not only a monetary phenomenon. Inflation targeting must be done from both monetary and fiscal platforms. On the fiscal front, the Government’s ban on futures trading in certain commodities is welcome. The Government would do well to revive the PDS system and dispense the notion of BPL beneficiaries and provide food for all. Another burning issue is that of agricultural land. Of what use are cars and bikes if 400 million people in our country cannot get one square meal a day? It is time the Government re-looked its industrial policy, especially with regard to SEZs.
The RBI and other authorities concerned must devise a scheme to distinguish food inflation from inflation per se, move away from traditional instruments, and creatively use the capital inflows to fuel the growth. From a long-term perspective, the government must stress on the use of alternative sources of energy.
Rising prices are affecting millions of people throughout the country. Inflation has hit the poor the hardest. Being a predominantly rural nation, these issues concerning the largest section of society need to be addressed on a priority basis. Rising inflation numbers, which crossed 7.5 per cent recently, has put considerable pressure on many families; the absolute inflation measured in terms of individual prices of essential commodities is well above the official rates based on the WPI and the CPI.
The situation can get complicated if production of food and cash crops do not register a significant increase compared to that in 2007-08. The unseasonal rains in the South and the accompanying loss of crops in many parts of Karnataka ,Tamil Nadu, Andhra Pradesh and Maharashtra in recent weeks could affect the production of pulses. If this happens, large-scale imports will become inevitable.
Higher inflation will pressure the RBI to increase the cash reserve ration (CRR), which will result in interest rates hardening. The recent hike in CRR to 8.25 per cent will only push up bank interest rates further. This will buttress capital inflows from abroad, particularly from countries with low interest rates, which will further add to the liquidity in the system and result, thereby, in inflation going up further.
For more than a year now, the RBI has been resorting to hiking the CRR at regular intervals. This is not a healthy approach. But the RBI is caught in a vicious circle. Hikes in interest rates bring in more capital. To stem such capital inflows, the RBI increases CRR which will again bring in more capital. Of course, the RBI is doing whatever it can from the monetary policy point of view.
The CRR is the most powerful tool available with the RBI to reduce the velocity of money. But one must understand that CRR has only marginal influence when it comes to containing food prices, the biggest problem facing the country now. Hikes in CRR may at best prevent people from borrowing for purchasing, say, luxury goods and real estate.We must understand that inflation is not only a monetary phenomenon. Inflation targeting must be done from both monetary and fiscal platforms. On the fiscal front, the Government’s ban on futures trading in certain commodities is welcome. The Government would do well to revive the PDS system and dispense the notion of BPL beneficiaries and provide food for all. Another burning issue is that of agricultural land. Of what use are cars and bikes if 400 million people in our country cannot get one square meal a day? It is time the Government re-looked its industrial policy, especially with regard to SEZs.
The RBI and other authorities concerned must devise a scheme to distinguish food inflation from inflation per se, move away from traditional instruments, and creatively use the capital inflows to fuel the growth. From a long-term perspective, the government must stress on the use of alternative sources of energy.
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