The revision in oil product prices on top of the double-digit WPI inflation became the proverbial last straw on the camel's back for all opposition parties led by BJP on one side, and the Left on the other, to stage a fairly successful one-day Bandh on July 5. It disrupted normal life, paralysing transport services across the country, closing down schools and businesses in many states, and causing damage and loss estimated at thousands of crores of rupees. Above all, it is a serious wake-up call for Congress-led UPA Government to manage inflation and ensure better governance.

Government spokesmen may justifiably talk of the rationale for decontrolling fuel prices, which have been heavily subsidised for users and the need to relate them to international prices, but what gave momentum to the organised protest at the mass level was the galloping inflation. The bandh was duly condemned by the Congress Party as “unjustified and politically motivated” but it has nothing to persuade opinion that its Government has done all it should to control prices which are causing widespread misery. The fall in food articles index year to year to 12.92 per cent, during the week ended June 19 was due to 'base effect' - a statistical juggling - but the corresponding week of the previous year had also recorded a double-digit high for food articles.

As RBI points out, in its July 2 statement, developments on inflation front have raised “several concerns” with overall WPI inflation at 10.2 per cent in May with non-food manufactured products rising by 6.6 per cent and the fuel index higher at 13.1 per cent. The recent increase in fuel prices, “although entirely justified in terms of fiscal and energy conservation objectives“, RBI noted, would have an immediate impact of around one percentage point on WPI inflation with “second round effects being felt in the months thereafter:”. According to RBI, two-thirds of WPI inflation in May was contributed by non-food items suggesting that inflation is now very much generalised and that “demand side pressures are evident”.

At the same time, the central bank has taken measures to enlarge liquidity in the banking system which had to deal with pressures triggered by sudden build-up of government cash balances by the larger realisations from 3G spectrum auctions. The position has since begun to ease, RBI said. The Finance Minister Mr Pranab Mukherjee initially said RBI measures were “welcome and appropriate” but subsequently expressed the hope that this would be “subsumed” in the July 27 policy statement, hinting thereby that RBI could perhaps not make a further revision at this stage. This is understandable given the Government's pursuit of an 8.5 per cent growth this year.

This also underlines what has been apparent all along that fighting inflation has been virtually outsourced to the central bank, though the latter is not autonomous enough to be freed of hints from North Block. The Finance Minister has talked of the need for “calibrated exit” from the earlier expansionary monetary policy, a line taken by the Prime Minister Dr Manmohan Singh as well at the G-20 Toronto Summit on June 26. The advice was more for advanced economies where recovery is fragile and uneven and could impact the growth of emerging economies and other developing countries. Our Finance Minister had himself substantially withdrawn the stimulus measures in his Budget for 2010-11.

RBI Deputy Governor Mr. K.C. Chakrabarty has made the point that the central bank and finance ministry could differ on approaches in a democracy. He clarified that RBI could act on what it considers right, within the overall perspective and while monetary tightening may hurt growth in the near term, tackling inflation is essential for long-term sustained growth. Economists do not buy the argument that inflation could be tamed with monetary measures alone, and some see further rate revisions by 100 basis points unavoidable during the rest of 2010-11.

On the other hand, top economic advisers of Government keep telling the country that inflation would ease by the end of the year, either December or by March 2011. Meanwhile, UPA Government would leave it to time and monsoon to do some correction. The Deputy Chairman of the Planning Commission Mr Montek Singh Ahluwalia, who keeps defending Government policies all the time, appeals for patience and let monsoon work its wonders on the price front. If so, it should make things easy for everyone, more especially for the Government.

Taking a more realistic view, RBI said in its July 2 statement that food price inflation and consumer price inflation remained at elevated levels. “There has been some moderation in food price inflation, but the price index of food articles continues to increase. More importantly, the prices of non-food manufactured goods and fuel items have accelerated in recent months”. RBI hopes its measures would contain inflation and anchor inflationary expectations without hurting the recovery process.

But what is left unsaid by everyone is that food product prices are not lowering - and might not - from previous levels, even if pace of further rise is arrested, notably in rice and other cereals, pulses and edible oils. If they stabilise at these levels, UPA would no doubt claim a victory in the battle against inflation.

Opposition parties highlighted the fuel price hike for the bandh maintaining that it hurt the people at a time of high inflation putting pressure on household budgets. For the Left, CPI(M) in a statement characterized deregulation of oil prices as designed to“ put the people at the mercy of a market controlled by the oil multinational corporations and the domestic corporates“. Claiming unprecedented unity among themselves and success at the nationwide bandh, opposition parties have planned to carry the campaign into Parliament when it reassembles for its monsoon session. It will now depend on the UPA-2 leadership how it effectively protects the interests of aam admi. (IPA Service)