Price Pressures

Our Central Bank is walking a knife edge here: - the offtake of commercial credit is flattening, with the 12-month growth rate down to 14%, which would normally signal that interest rates need to come down to stimulate investment. - however, inflation is gathering strength, particularly for the politically sensitive group of food articles, where the latest figures show a 12 month price increase of 14.8%. High inflation numbers would suggest a choking back of money supply - but then this could strengthen the slowdown in the investment cycle that drove India's spectacular growth earlier this decade. The 8 million odd governmental employees are to be compensated for price rises by a 5% Dearness Allowance (D.A.), in addition to a 22% D.A. already in place, in addition to a subtantial pay revision under the 6th Pay Commission. Nevertheless, the government blithely announced yesterday that it would review its borrowing program to see if new austerity measures would allow it to reduce borrowing. Said measures? Asking our Ministers of External Affairs, Junior and Senior, to move out of luxury hotel suites, as they await the readying of their colonial bungalows. The Junior Minister protested that the proposed interim accommodation lacked privacy. Responding to another proposed austerity measure - that all government functionaries fly economy class - Shri Sharad Pawar, our Minister for Agriculture, objected on the same grounds, that he needed privacy while flying. Wonder what MK Gandhi, to whom our politicians all pay token obeisance, would have thought of the emerging consensus - that public servants need privacy. But back to real economics - the other emerging gap is the trade gap. Last night, the US reported a higher deficit than expected, thanks to petroleum prices. In response, the dollar hit a new low. In India, too, exports continue to weaken, for the 11th month. Crude oil, our largest import, is not weakening; in July, the average price of crude oil on our commodity exchanges was in the region of Rs. 3100 per barrel; in August, it was up at Rs. 3450. Yesterday, crude oil futures closed at Rs. 3486. Rupee weakness looks like an on-going reality - which means further price pressures.