'Inflation will put Govt on defensive during polls'

HIGH HOPES: Chidambaram says despite inflation, growth will be around 8 per cent.

        

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Disclaimer: As a condition for granting this interview, Finance Minister P Chidambaram demanded the right to clear it as well as deny clearance without citing reasons. CNN-IBN was forced to agree otherwise the interview would not have happened. But the final take is being broadcast exactly as recorded and the Finance Minister did not ask for any change.

Karan Thapar: Hello and welcome to Devil’s Advocate. Will the Finance Minister be able to control inflation or will it sink the UPA Government? That’s the key issue I shall explore today with the Finance Minister P Chidambaram himself. Mr Chidambaram, with inflation crossing 11 per cent, senior leaders of the CPI, including General Secretary A B Bardhan, have publicly called for your resignation. Is this politics or can you accept that you haven’t been able to handle inflation as effectively as you ought have?

P Chidambaram: I'm delighted that Mr Bardhan should want my job. I'll be very happy if he can step forward and join the Government and one of the members of his party takes over this portfolio. These are all political statements. One must understand the reason behind the double-digit inflation in virtually every developing country today.

Karan Thapar: Let me explore inflation first before I come to an understanding. Were you surprised by the sharp increase of over 2.25 per cent last week or was such a large spike expected?

P Chidambaram: I was not surprised at all. In fact, I had cautioned the CCPA that the price increase in petrol, diesel and LPG together with the price increase in the products, which have no administered price, would push inflation to double digit.

Karan Thapar: But had you really expected it to cross 11?

P Chidambaram: I had expected it to be a double digit figure. This is a way of calculating. It all depends upon the base effect also. The base last year showed a dip in that week. The increase will be exaggerated but I said double-digit inflation, so none of us in the Ministry of Finance were surprised.

Karan Thapar: Given that you’ve only passed on a very small proportion of the international increase in oil price to the Indian consumer and yet we’ve end up with inflation that’s over 11 per cent, does this suggest that there’s more fuelling the inflation in India than simply the oil price?

P Chidambaram: No. It's only the oil price. You're only looking at oil as petrol, diesel, LPG and kerosene but in reality it's not so. Oil affects every price. First of all the direct products, then the products whose prices are not administered such naphtha, jet fuel, aviation fuel. Then come the plastics and subsequently naphtha leading to fertilizer, and finally DMT PTA and all the man made fibres. So all the products are affected by crude oil price increase, as they are all derivatives of it. Then there's the second order effect: it feeds into the transportation system and even agriculture where diesel pumps, etc are used.

Karan Thapar: But have you done enough to tackle inflation or not? On Wednesday, the RBI announced a set of monetary measures. You’ve increased the CRR rate the repo rate. Earlier your Government had taken fiscal steps. Are those two together sufficient to rein in inflation or do you still need further stringent measures?

P Chidambaram: If you believe Milton Friedman, inflation is always and everywhere a monetary phenomenon. There are, of course, people who disagree with that. But if you consider the monetary phenomenon, then monetary steps are the first and the most important line of defence. All that we are doing is tightening aggregate demand. If there is demand in the economy — and with the economy growing at 8.9 per cent there will be high demand — what we are doing is moderating demand. Fiscal steps are the next line of defence. We have taken a number of fiscal measures. If necessary, we will not hesitate to take more fiscal and monetary measures.

Karan Thapar: So, at the moment, you're inclined to the Milton Friedman view that monetary steps are the most essential, but if need be you're leaving open the possibility of further fiscal measures?

P Chidambaram: No. I said we have already taken fiscal steps. The RBI, as a monetary authority, has taken very strong monetary steps. If necessary we will take further fiscal steps.

Karan Thapar: Has the time come to seriously consider Left's advice that you should ban forward trading in certain selected essential commodities?

P Chidambaram: But we already have. We have banned forward trading of wheat, rice, urad, toor (pulses). We added four more commodities to the banned list two months ago. There is no other commodity in which there is significant forward trading that requires to be banned. And the Abhijit Sen Committee report said there is no conclusive evidence that forward trading is causing a rise in the prices.

Karan Thapar: So when the Left continues to demand bans in forward trading on essential commodities, you're saying to them that you have done what you can, further bans would not be necessary, therefore your advice at this point of time isn't actually pertinent.

P Chidambaram: It’s no longer pertinent. We have banned it despite the committee's advice.

Karan Thapar: What about the expenditure that you've committed yourself to in recent budget? Do you accept that in present circumstances, the Rs 71,000-crore farm-loan waiver, the decision to extend the NREGA to the entire country and, then on top of that, the Sixth Pay Commission could be highly inflationary? Do you need to rethink those expenditures?

P Chidambaram: Is there any political party which opposes the loan waiver and other things? Point is we are in a democracy and the measures we have taken are only in the aid of all universally articulated demands.

Karan Thapar: I accept that these are politically impossible to oppose but economically, at this juncture, ought you not postpone carrying out these measures?

P Chidambaram: It depends on how you look at it. Which demand do you moderate? Do you moderate the demand for wage groups by poor people or do you moderate the demand for the slightly more affluent sections for the groups in the services? I think the approach is not to moderate the demand of the very poor but to moderate the demand of the slightly better off people...

Karan Thapar: ...in which case could you moderate, dilute or hold back the Sixth Pay Commission because it affects the well-off rather than the poor?

P Chidambaram: I think that the Sixth Pay Commission report itself is manageable. The question is what will the committee of secretaries report.

Karan Thapar: Inflation is already at 11 per cent. How much higher is it going to go?

P Chidambaram: It's difficult to say. It will depend upon the rise in price of crude oil prices and the impact it has on other prices.

Karan Thapar: I accept that there's uncertainty and you can't be precise, but as the FM you must have an idea how high it could go.

P Chidambaram: It's not possible to make any estimate of that kind because this will depend on how soon the monetary measures will start to have an impact. It also depends on the behaviour and the inflationary expectations of people. All I can say is inflation will remain in double digit for some more weeks.

Karan Thapar: Last week we got the first 11-per cent shock. On Friday you will get the first inflation figure after that shock. Do you expect it to go to 12?

P Chidambaram: It’s difficult to say, but will remain in double digit for some more weeks.

Karan Thapar: Do you have a figure or a target that you would like to achieve by the end of the year ?

P Chidambaram: That’s what the RBI said. The target is to moderate inflation and bring it down to the accepted range of 4.5 to 5. Whether this will happen over a period of three month or more is difficult to say at this moment, but every effort will be made to bring it down.