ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Inflation s Return

EVERY aspect virtually of the government's economic management threatens to fuel price increases, particularly prices of commodities of common consumption. Apart from the phenomenally large revenue and gross fiscal deficits, the 1994-95 budget has opted for larger consumption expenditure in preference to productive and capital expenditure. The budget has done nothing to encourage saving; rather it has provided every stimulant to encourage consumption even as the disposable incomes of the relatively well-to-do have been augmented through tax reductions. Domestic saving and investment rates have declined in the three years from 1991-92 to 1993-94. Government policies are stoking liquidity growth at a time when productive investment continues to be sluggish and when the institutional and instrumental channels for directing larger flows of investible funds to agriculture and rural industries are choked. As a result, the growth of liquidity can only lead to build-up of speculative inventories of consumption goods. On the supply side, while there is growing availability of goods of middle and upper class consumption, both domestically produced and imported, the prospects for goods of mass consumption hinge precariously on the country experiencing a seventh successive year of buoyant rainfall in 1994-95, The large food stocks with the public procurement agencies and the impressive level of foreign exchange reserves are not sufficient safeguards against rise in the prices of essential consumer goods. Apart from the fact that the public agencies carry stocks of only rice and wheat, their operations have increasingly begun to be inflation-stimulating rather than inflation-containing. Overall, the hold of rich farmers and traders on rice and wheat marketing has tightened. Ministerial declarations of intent to effect large exports of rice and wheat have tended to push up prices of these major cereals in the open market. Besides, there are indications of acreage and farm investment in the agriculturally-advanced states getting diverted from cereals and pulses. As it is, the budget for 1994-95 has given a clear signal of reduced public investment in agriculture. Finally, in industry, apart from increases in raw material costs, the high real interest burden and, in many cases, the fact that product prices have been sluggish for quite some time reduce the scope for further containment of price increases, signs which are already visible in some basic industries.

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