Singh Says India Needs to Slow Accelerating Inflation With `Great Urgency'

Prime Minister Manmohan Singh said India needs to urgently contain prices, that are rising at the fastest pace among major economies in Asia, signaling the government may withdraw fiscal stimulus.

“Inflation is something, which needs to be tackled with great urgency,” Singh said, addressing a meeting of government officials in New Delhi. The Indian economy “has been on a high growth trajectory, but inflation poses a serious threat to the growth momentum.”

Singh’s Finance Minister Pranab Mukherjee may increase taxes when he presents the government’s budget on Feb. 28, aligning fiscal policy with the central bank’s move to raise its policy rates, said Namrata Padhye, an economist at IDBI Gilts Ltd. Rising demand for Hero Honda Motors Ltd.’s motorcycles and Hindustan Unilever Ltd.’s soaps has fueled inflation, which averaged more than 9 percent last year.

“The monetary and the fiscal policy has to be on the same footing to control inflation,” said Mumbai-based Padhye. “The government will need to do its bit by way of fully rolling back fiscal stimulus measures as the monetary policy tries to curb demand.”

Governor Duvvuri Subbarao raised the benchmark repurchase rate by a quarter-point to 6.5 percent on Jan. 25 and urged the government to take steps to control spending on subsidies that is adding to inflation.

The “challenge to effective management of inflation by monetary policy arises from the persistence of a large fiscal deficit,” Subbarao said in a Jan. 25 statement. “While subsidies may contribute in the short term to keeping supply- side inflationary pressures in check, they may more than offset this benefit by adding to aggregate demand.”

Milk, Meat, Eggs

India’s benchmark wholesale-price inflation rate advanced 8.43 percent in December from 7.48 percent in the previous month, the biggest jump in ten months, due to higher costs of food and oil. The recent spurt in prices has been driven by an increase in the prices of vegetables, fruits, milk, meat, eggs and fish, Singh said.

The yield on the most-traded 8.13 percent bond due in September 2022 rose 3 basis points to 8.22 percent at 1:06 p.m. today, after rising 19 basis points since January. The Bombay Stock Exchange’s Sensitive Index fell 1.24 percent today and the rupee was little changed at 45.63 against the dollar.

Inflation may also rise as companies including Indian Oil Corp., the biggest state-run oil refiner, and rivals raise prices. Higher raw material costs will make Videocon Industries Ltd., India’s biggest consumer electronics maker, increase refrigerator and air conditioner prices by 2 percent, Shekhar Jyoti, chief operating officer of the company’s electronics and appliances division, said in December.

‘Lasting Solution’

Prime Minister Singh today said India will need to increase the production of commodities to meet rising domestic consumption, driven by higher incomes.

“The lasting solution for food price inflation lies in increasing agricultural productivity and production not only of cereals but also of pulses, oilseeds, vegetables and fruits, and augmenting the supply of milk and milk products, poultry, meat and fish,” he said.

Finance Minister Mukherjee, in his last budget increased the excise tax rate on manufacturers to 10 percent from 8 percent. It stood at 12 percent before the global financial crisis. He kept the service tax at 10 percent.