Well, yes, Reddy may be right, says PC

C Chitti Pantulu & Raj Nambisan

HYDERABAD/MUMBAI: Mint Road has managed to get North Block to toe its line. One day after finance minister P Chidambaram said there was no overheating in the economy, he made a subtle shift to bring his views in alignment with that of the Reserve Bank of India (RBI) governor Yaga Venugopal Reddy.

The government’s “immediate” goal, Chidambaram said, was to slow inflation to 4% and prevent overheating in the world’s second-fastest growing economy.

Inflation rose 15 basis points (100 basis points make 1%) to a more than four-month high of 5.41% in the third week of October.

So, Chidambaram says, banks must cut down on loans to some sectors where credit growth is very high. “One must be on guard to see that asset bubbles don’t build up, nor do they lead to overheating.”

He says he is not second-guessing the RBI. “We endorse its assessment (on overheating),” he said at Bancon 2006, the annual conference of bankers in Hyderabad on Friday.

The resurgence of inflation has been worrying economists and analysts also.

Sri Prasad Prabhu, a Mumbai-based fixed-income analyst at IDBI Capital Market Services Ltd, a primary dealer that underwrites government debt sales, told Bloomberg on Monday: “We see inflation on a rising trajectory in the second half of the fiscal year.”

He expects inflation to accelerate to as much as 7% toward the end of the fiscal year on March 31. “Inflation will be driven by demand pull pressures and prices of food products because of a shortfall.”

D H Pai Panandiker, president, RPG Foundation, an economic policy group in New Delhi, told Bloomberg Inflation can really get out of hand, given the shortage in food supplies and rising demand for manufactured products. “The government will be concerned as elections are round the corner.”

While the RBI’s move to increase the repo rate by 25 basis points early this week was a monetary measure towards reining in inflation, the government would take all necessary fiscal steps, Chidambaram said.

He refused to elaborate what measures were being contemplated. He will be meeting chiefs of public sector banks in New Delhi on Monday, November 6, to discuss loan growth, among other things. “And I will take this forward.”

The build-up in net foreign assets apart, the primary reason for the fast rising inflation rate is the rise in prices of primary articles, he said.

Globally, wheat prices are expected to rise up to 50% in the next six months, according to estimates. The cereal contributes 1.3841% to the wholesale price index, so a 50% price rise would mean a 65 basis points blip in inflation on this count alone.

Last fiscal, the government stumbled in the management of food stocks and had to import wheat. A similar pressure continues this year. “But having learnt from last year’s experience, we will manage the supply-side economics better,” Chidambaram said.