Supply constraints pushing up prices, says Rangarajan

With inflation currently hovering at the 6 per cent level, Prime Minister Manmohan Singh’s Economic Advisory Council...

With inflation currently hovering at the 6 per cent level, Prime Minister Manmohan Singh’s Economic Advisory Council, while identifying this as “a key macro-economic challenge” for the government, said this was only a “short-term” problem.

EAC chairman C Rangarajan, in a presentation to the PM, said inflationary pressures could be reduced through easing of supply constraints by appropriate interventions in the real economy, lowering tariffs and increasing agricultural and industrial productivity.

Explaining the reasons behind the current inflationary trend, Rangarajan said global factors and rising demand had contributed to it in some sectors while supply bottlenecks had contributed to a larger extent.

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The Prime Minister, on the other hand, said the government was committed to reducing the rate of inflation through appropriate policy measures. He observed that while the global environment was currently conducive to sustaining India’s higher growth rate, it was necessary to ease domestic constraints on growth.

The government has already effected a substantial duty cut in 11 items last month and even curbed the trading of some commodities such as urad and tur in order to contain inflation. The effects of these changes would be felt in the weeks to come. In fact, Rangarajan said the step taken by the government and the RBI should be able to dampen inflationary expectations and bring respite on the price front.

In the same meet, the EAC pointed out that for the first time in 15 years, the per capita income growth would be more than 7 per cent in 2006 and in 2007. Projecting the overall economic growth to be close to 9 per cent this year, the EAC also drew the PM’s attention to the sharp increase in the savings rate that stood at 35 per cent of GDP. This, they said, was on account of an improvement in both private sector and government sector savings rate.

Apart from the PM, the meet was attended by finance minister P Chidambaram and a few economic editors.