Having met with little success in reining in inflation, New Delhi has no reason to feel smug over the recent declines in prices of select commodities such as crude and copper in the international market. It could well be the ‘calm before the storm'. The bullish outlook for commodities stems from a combination of supportive factors. Global growth signals have maintained their positive trend in recent months though, as the OECD points out, global recovery is taking place at different speeds across regions. Advanced economies and emerging markets follow diametrically opposite monetary policies, ranging from the US' near-zero interest-rate-driven loose money policy to China's sustained strategy of monetary tightening to fight inflation. India too has been tightening bank credit at regular intervals.
As for commodities — energy products, base and industrial metals as well as agriculture — the demand-supply fundamentals are tilted on the side of dearer prices. Demand for crude, for instance, continues to be robust while supply-side uncertainties are far from resolved. Geopolitical instabilities, especially in the MENA region, are fuelling volatile crude prices that are fostering inflation across nations. In industrial and base metals too, demand is picking up in developed markets as well as emerging economies in Asia and elsewhere. In major producing countries such as the US and China, agriculture is facing weather-related challenges. Worse, the world market entered 2011 with a low grains inventory that runs the risk of further depletion. Add to this the unabated flow of speculative capital into the derivatives market — total funds deployed an estimated $300 billion — and it is clear a directional change in commodity prices would only be upside. If there is a downside, it is the risk to economic growth, resulting from further increases in oil and commodity prices, which could feed into core inflation; a stronger-than-projected slowdown in China; the unsettled fiscal situation in the US and Japan; and renewed weakness in housing markets in many OECD countries. Financial vulnerabilities remain in the euro area, in spite of strong adjustment efforts underway in some countries.
It would be perilous if our policymakers ignored these global cues. A significant part of India's inflation is imported in the form of high-priced crude oil. Our actual import volumes (159 million tonnes in 2010) far exceeded the Eleventh Plan projections. It is the same with agriculture, languishing at an annual average growth rate way below the Plan target of 4 per cent a year; yet, there has been no attempt to initiate remedial action. Inflation hurts the poor the hardest. Greater attention to raising the indigenous farm output and an efficient safety net for the poor are simple yet effective tools to fight inflation.