India Needs ‘Contingency Plan’

India Needs ‘Contingency Plan’ to Contain Inflation (Update2)

By Kartik Goyal

July 7 (Bloomberg) -- India needs a “contingency plan” by September to control inflation as prices are showing few signs of easing, former central bank Governor Bimal Jalan said.

“Inflation is an urgent issue and we don’t have a package as yet which can give us confidence,” Jalan, 69, who headed the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi yesterday. “We heard inflation will come down by March, then April. It was supposed to come down by now.”

Consumer prices in India are rising at least twice as fast compared with inflation rates in Brazil, Russia and China, the other three nations that make up the BRIC economies. Governor Duvvuri Subbarao is under pressure to raise interest rates in the monetary policy meeting on July 27 after an unscheduled quarter-point increase last week, the third since mid-March.

“Inflationary expectations could have been curbed had the RBI tightened rates more aggressively at the beginning of the year,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “More tightening is definitely needed.”

Shares fell the most in a week after Jalan’s comments stoked speculation interest rates may be raised for a second time this month. The Bombay Stock Exchange’s Sensitive Index fell 0.8 percent while the rupee weakened 0.3 percent against the dollar. The 10-year government bond yield fell four basis points to 7.57 percent in Mumbai.

Consumer Prices

Prices paid by industrial and farm workers in India rose almost 14 percent in May, according to government data. By contrast, consumer-price gains are running at 5.2 percent in Brazil, 3.1 percent in China and 5.8 percent in Russia.

Inflation in India started picking up after a drought last year created shortages in rice, wheat and sugar. It accelerated as consumer demand for manufactured goods and services strengthened.

“Why didn’t you release more grains in the market to reduce the impact of the drought?” Jalan said. “All the good expectations are inflation will come down with a good monsoon and I hope that will happen. But, the real issue is that if that doesn’t happen, what should we do?”

Prime Minister Manmohan Singh’s government is relying on adequate rains in the June-to-September monsoon season, the main source of irrigation in the country, to boost agriculture output and drive down farm prices. Last year’s showers were the least since 1972.

Monsoon Rains

The monsoon covered the entire country nine days ahead of normal yesterday, raising prospects for bigger harvests of rice, cotton, soybeans and sugar cane.

Even so, the India Meteorological Department, which forecast sufficient rainfall this year, failed to predict last year’s drought.

“We need to have a contingency plan,” Jalan said. “If inflation doesn’t come down in September, we should have a plan to subdue, control inflationary expectations.”

As inflation pressures remained unabated, Singh last month risked fanning it by raising gasoline and diesel prices to cut the government’s $5.5 billion fuel subsidy bill.

The move sparked a national strike in India on July 5, forcing schools, shops and offices to remain shut and disrupting air, road and rail transport in several parts of the country.

Fuel Prices

Subbarao expects the fuel-price increase to boost the inflation rate by about a percentage point and on July 2 increased the central bank’s benchmark rates.

He boosted the reverse repurchase rate to 4 percent and the repurchase rate to 5.5 percent, citing among other reasons, “strong underlying growth momentum.”

India’s $1.2 trillion gross domestic product expanded 8.6 percent in the first quarter of this year from a year earlier, the fastest pace after China and Brazil among major economies. Industrial output jumped 17.6 percent in April.

Growth in India’s services industry including software and telecommunications accelerated to a two-year high in June, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics this week.

Exide Industries Ltd., India’s largest maker of automotive batteries, plans to boost capacity by as much as 60 percent by April to cater to customers such as Hero Honda Motors Ltd., Managing Director T.V. Ramanathan said in May.

“They will have to take strong action on the monetary, fiscal policy and on supply side” to control demand, Jalan said.