Inflation causing the greatest concern in India
Joe Leahy | Monday, 23 June 2008
IN Mumbai, India, it is common to see convoys of up to 20 cars bristling with armed police ferrying high-ranking officials through the chaotic traffic, blocking off other motorists and making the city's gridlocked roads even worse.
In the past few years, with India's economy growing at an annual 9.0 per cent, the citizens of its bustling financial capital have been too busy to worry about such excesses on the part of their politicians.
But with soaring fuel prices threatening to drive inflation to levels not seen in more than a decade, this tolerance has evaporated. In a country where issues as basic as a surge in the price of onions have been known to unseat governments, politicians are taking note.
"Reduce fuel bill by 5.0 per cent. Avoid unnecessary meetings and travel. Three to four officers should use a single car," R.R. Patil, the deputy chief minister of Maharashtra, the state that contains Mumbai, barked at government officials in a recent meeting on car pooling.
Such measures are little more than symbolic. But government officials across India are at a loss for what else to do in the face of sharp movements in global commodity prices that are beyond their control and are pushing up inflation.
The central government, in particular, is panicking. The United Progressive Alliance, India's ruling coalition led by the Congress party, must call an election by next May and has already suffered several heavy losses in state polls, with inflation emerging as the number one issue.
In the 12 months to May, India's inflation rate reached 8.75 per cent, its highest level in seven years and up from just 4.5 per cent in January.
With world crude prices leaping above $130 a barrel, the government this month felt obliged to increase retail fuel prices by an average of about 10 per cent. That was in order to stem losses from subsidies that are costing the equivalent of more than 3.0 per cent of gross domestic product (GDP).
Although fuel subsidies mean the government is still charging consumers an effective rate of barely $50 a barrel, the price rise is expected to add another percentage point to inflation. That would bring inflation this month to a level not seen since the mid-1990s and many think it will then climb further, into double digits.
The economy is still growing strongly but there are signs that this too could soon come under pressure. The Reserve Bank of India, the country's central bank, having tried to bring inflation under control through indirect means such as increasing the amount of cash that banks must keep in reserve, this month finally resorted to an increase in interest rates.
It lifted its key "repo" lending rate by 25 basis points to 8.0 per cent, its highest in more than five years, and economists foresee more rises to come. "Policymakers now are more concerned about inflation - inflation first, then growth," says Shuchita Mehta, economist with Standard Chartered Bank in Mumbai.
Despite the central bank's efforts, however, inflation is already a fact of life for India's millions of poor and lower middle-class people.
Sangeeta Khanna, a mother shopping for groceries in Colaba market in south Mumbai, says the price of vegetables on average has risen from Rs15 ($0.35,
In the past few years, with India's economy growing at an annual 9.0 per cent, the citizens of its bustling financial capital have been too busy to worry about such excesses on the part of their politicians.
But with soaring fuel prices threatening to drive inflation to levels not seen in more than a decade, this tolerance has evaporated. In a country where issues as basic as a surge in the price of onions have been known to unseat governments, politicians are taking note.
"Reduce fuel bill by 5.0 per cent. Avoid unnecessary meetings and travel. Three to four officers should use a single car," R.R. Patil, the deputy chief minister of Maharashtra, the state that contains Mumbai, barked at government officials in a recent meeting on car pooling.
Such measures are little more than symbolic. But government officials across India are at a loss for what else to do in the face of sharp movements in global commodity prices that are beyond their control and are pushing up inflation.
The central government, in particular, is panicking. The United Progressive Alliance, India's ruling coalition led by the Congress party, must call an election by next May and has already suffered several heavy losses in state polls, with inflation emerging as the number one issue.
In the 12 months to May, India's inflation rate reached 8.75 per cent, its highest level in seven years and up from just 4.5 per cent in January.
With world crude prices leaping above $130 a barrel, the government this month felt obliged to increase retail fuel prices by an average of about 10 per cent. That was in order to stem losses from subsidies that are costing the equivalent of more than 3.0 per cent of gross domestic product (GDP).
Although fuel subsidies mean the government is still charging consumers an effective rate of barely $50 a barrel, the price rise is expected to add another percentage point to inflation. That would bring inflation this month to a level not seen since the mid-1990s and many think it will then climb further, into double digits.
The economy is still growing strongly but there are signs that this too could soon come under pressure. The Reserve Bank of India, the country's central bank, having tried to bring inflation under control through indirect means such as increasing the amount of cash that banks must keep in reserve, this month finally resorted to an increase in interest rates.
It lifted its key "repo" lending rate by 25 basis points to 8.0 per cent, its highest in more than five years, and economists foresee more rises to come. "Policymakers now are more concerned about inflation - inflation first, then growth," says Shuchita Mehta, economist with Standard Chartered Bank in Mumbai.
Despite the central bank's efforts, however, inflation is already a fact of life for India's millions of poor and lower middle-class people.
Sangeeta Khanna, a mother shopping for groceries in Colaba market in south Mumbai, says the price of vegetables on average has risen from Rs15 ($0.35,