Pressed by inflation

Issue 14 - Apr 2008

Gulzar Natarajan

The current spurt in prices has been caused by a coincidence of factors that include the US consumption boom, burgeoning demand from emerging economies like India and China, poor harvests in major agricultural economies like Australia, diversion of farmland for bio-fuels, declining inventories, and falling agriculture investment. All countries have been affected and inflation is much higher in other developing countries. In China, it touched an 11-year high of 8.7 percent in February 2008. India has probably been spared the brunt of global inflation—a list of countries ranked by inflation finds India in the 79th place.

Regulatory controls and short-term supply side measures may ease inflationary pressures slightly, but cannot contain it when global prices are rising. It is a moot point as to whether it is possible to contain inflationary pressures in India, even if the supply side constraints are removed and there is a domestic surplus. For example, despite surplus iron ore production, domestic prices have more than doubled in the past year. Measures like lowering import duties are likely to be offset by the producers in exporting countries raising their prices, capturing the benefits of the lower duties.