07/27/2011, 00.00
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Inflation choking India despite more expensive borrowing

Inflation is expected to be double-digit. Food prices are outpacing overall inflation. As economic growth cannot keep pace with rising consumer prices, the government is forced to subsidy poor households, further stoking inflation.
New Delhi (AsiaNews/Agencies) – The Reserve Bank of India (RBI) raised the repurchase rate by half-point to 8 per cent, the 11th time in 18 months. The rise was greater than expected, but the RBI said in a statement that it was “necessary” to fight growing inflation, which is higher than the economy’s overall rate of growth.

Household inflation expectations exceed 12 per cent for the end of the year, above the 9.44 per cent current pace. However, food and basic items inflation is much higher, a real killer for poor families.

The situation has been made worse by the country’s poor infrastructure, which makes food shipments that more difficult. In fact, it is estimated that about 40 per cent of India’s fruit and vegetables rot before they can be sold because of a lack of cold-storage facilities and poor transport infrastructure.

The figure is alarming also because inflation is higher than growth, estimated at about 8 per cent for this year.

Governor Duvvuri Subbarao said the RBI was forced to raise the cost of borrowing because of the lack of specific government policies to handle the current crisis. Deputy Governor Subir Gokarn said the government’s decision to boost spending on health care and food risks adding to inflation pressures without steps to pay for it.

“Certain moderation in growth is an inevitable price we have to pay for bringing down inflation in the short term,” Subbarao said.

The government lacks the wherewithal to build the country’s infrastructures, essential to attract investments and boost short-term economic development, as well as fund social services like health care and education.

At the same time, its subsidy policy in favour of the poor represents a big chunk of its budget.

The RBI said, “In the absence of appropriate [government] actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore.”

In addition, for the central bank, the government fuels inflation with its “large fiscal deficit”.

B. Muthuraman, president of the Confederation of Indian Industry, is less confident about higher interest rates. In his opinion, an increase in borrowing costs alone may not help contain inflation because the latter is driven by higher global commodity prices.

“The 50 basis-point hike in policy rates will seriously slow down the growth rate of industry, which is already suffering from an increase in the cost of funds,” said Muthuraman, who is also vice chairman of Tata Steel Ltd. “While it is important to control the threat caused by persistently high inflation, we cannot risk a collapse in growth which will affect employment creation.”

Prime Minister Manmohan Singh has come in for criticism over inflation and growth because, in light of rising prices, his government plans to expand its subsidy policies.

The Indian government is in fact planning a health insurance programme for the poor and legislation that would guarantee wheat and rice supplies at subsidized prices for 70 per cent of India’s 1.2 billion people.

Whilst such spending may be necessary to stave off hunger, critics point out that it carries risks if it is not part of a broader development plan.

At the same time, India needs foreign investments to grow.

Corporate investments in the second half of the fiscal year that ended March 31 dropped 43 per cent compared in the first six months of the year.

Also, a UN report released on Tuesday found that foreign direct investment flows into India dipped from US$ 36 billion in 2009 to US$ 25 billion last year.

Likewise, substandard infrastructures and hard-to-get credit are compounded by rising labour costs, which experts expect to increase on average by 11 per cent this year, the highest raise in Asia.
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