Expect nothing, live frugally on surprise.

Friday, November 14, 2008


Inflation-watch has been a national pastime for sometime now, the recent south-bound figures being one bright spot among other gloomy statistics.
But the news was never as good as on Thursday, thanks to lower industrial oil, food and commodity prices. Inflation at 8.98 per cent is the lowest in five months, below the 10.28 per cent median forecast. The wisdom of the government's shift away from inflation-targeting to growth and credit management need no longer be disputed, though for some time the RBI didn't appear to agree, as reflected in its feet-dragging on a second round of rate cuts. The rate cuts came eventually, as did the prime minister's categorical statement that sustaining India's growth momentum is priority number one. Across Asia, dropping oil and commodity prices have eased inflation. However, there's a flip side, which is that deflationary pressures could act up. To some extent, inflationary slump reflects contraction in consumer spending. Spending by businesses and consumers in India needed shoring up through faster pumping of liquidity into the system than we have seen. We must now keep our eye on the ball of boosting growth by stimulating demand. Add the glad tidings on inflation to those on global oil prices hitting a 22-month low of less than $55 a barrel, and the government's hands are doubly freed for people-friendly policymaking. Fuel prices were hiked in June, when the Indian crude basket stood at $129 a barrel. With dipping prices since then, the oil ministry has kept changing the benchmark at which loss-making oil PSUs would purportedly break even. More recently, the PM himself said no to price cuts, ostensibly because state-run oil marketing firms are still bleeding from underpricing of products. Some political parties have countered that officialese, claiming that oil PSUs have made profits in recent times. Clarity on the issue rather than bald statements by government representatives is required. Perceived lack of transparency will fuel political controversy, avoidable at a time the focus should be on the economy. The goalposts of economic management, blurred by the global financial crisis, must keep shifting. Tomorrow, there may be a good case for allowing global crude prices to determine the cost of fuel domestically. But today, there's an even better case for slashing prices. Propping demand is the need of the hour, as the PM himself admits. One way is via further rate cuts to make credit affordable and liquidity available to consumers and businesses, more so since many banks still prefer parking money than lending. The other is by a fuel price cut. The timing's good, given the twin spurs of low crude prices and single-digit inflation.


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