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Journalism of Courage
Kaushik Basu,Chief Economic Advisor,prefers not to think about inflation while going to sleep. Inflation,though down to 7.48 per cent now from a high of 11 per cent this time last year,continues to pose enormous challenges to policy makers. For instance,the government would like to spend more to take care of liquidity concerns,but then,it is worried that such spends will further stoke prices. In an interview to Shruti Srivastava,Basu tells her that the government must switch to a rule-based regime for diesel and petrol pricing. This will attract more players and competition will lower prices, he says.
Excerpts:
Q: Inflation has been on a rise for quite some time now in the country. Food article inflation stood at 14.44 per cent for the week ended December 17. Commodities prices across the world,including crude,metals,iron ore,and cotton have risen up sharply. How does the government plan to tackle the situation?
A: Yes,inflation is worrying and we need to bring it down further. But at the same time it must be appreciated that WPI inflation has come down to 7.48 per cent from a high of 11 per cent earlier this year. Food inflation,if you take all food items primary and manufactured was above 20 per cent last December,and is now down to below 7 per cent. So while we are still not in the comfort zone,the trend is clear; the measures taken by the government from January last year have had a substantial effect in dousing inflation. There are still some tricky problems that need to be addressed. The first is the recent spike in food prices,especially fruits and vegetables. In addressing this,we must distinguish between short-term commodity-specific price increases and overall sustained price increases. In fact,in economics the former is often not even called inflation. The recent price spurt in a few items,such as onions,indicates fault lines in marketing and transportation,and hint at the possibility of trader cartels blocking the entry of other retailers. It,therefore,belongs more to the domain of competition management and anti-trust law than overall demand management.
I should also add,though I know this will sound controversial,government should not step in with policy price caps every time there is a relative price increase. Sudden sharp increases which indicate cartel behaviour or sustained overall increases certainly require action but to interfere on every occasion of relative price increase is to do more harm than good.
Talking about overall WPI inflation,we are expecting the fiscal year to close at around 6.5 per cent. We have upped this forecast from 6 per cent. The global commodity price situation is not helping us. There is another special feature of todays world. Increased liquidity in one country affects prices in other countries in a way that did not happen earlier. This is a consequence of globalisation. This is not something that is within our control. We have to work on this through G20 and other public fora.
Q: The core sector growth has slowed down to a dismal 2.3 per cent for the month of November. How far is this going to impact the IIP numbers which are due to be released on the 12th of this month? And what were the possible reasons for this slow down?
A: I am expecting industrial growth rate as given by the IIP figures that will be released later this month to show a slowdown. But this will be a fluctuation rather than a trend. The overall third quarter growth of industry should be fine. And over the full fiscal year I expect GDP growth to be 8.75 per cent. I see no reason to change this by virtue of the fact that the coming IIP growth may not be as good. IIP numbers anyway tend to fluctuate a lot.
Q: On diesel price deregulation what is your view? The EGoM which was to decide on the issue has been postponed.
A: My personal view is that the government should deregulate the prices of diesel and also do it more fully for petrol. By more fully I mean switching to a rule-based regime. People should be able to look at the international crude price,the exchange rate and know what the domestic price of petrol is going to be. If it becomes formulaic,private companies can make long-run plans and more will be attracted into the industry,which will lead to competition and lower prices. This does not mean we do not subsidise these products. We may quite reasonably decide that if the price of crude goes to $120 we will give a per-litre subsidy to petrol and diesel. But we do not have to wait for crude to go up to $120 to say what we will do then. We should say this in advance. This will keep government out of the day-to-day functioning of this market and enable private agents to make better decisions.
Q: At this point of time with rising crude oil prices,how much is it of concern for inflation?
A: It is a big concern. If crude price goes up,there are exactly two options. Either you keep a lid on the domestic price,in which case the fiscal deficit will rise exerting upward pressure on inflation or you hold the deficit down and allow the domestic price of fuel to rise,which will have an upward pressure on inflation. It is not a pleasant thought either way. So,dont think about this just before you go to sleep.
Q: Do you think the government will restructure duties on fuel products with prices of crude going up?
A: I cant really speculate on this at this time. As for deregulation,as I said earlier,I think it should be done. At the same time,the ideal timing for this is indeed an open question.
