Finance Mnisters statement on inflation

The following is the text of the statement of Finance Minister, Shri P Chidambaram on inflation given at the press conference addressed by the Finance Secretary, Dr. D Subbarao, here today.

"Yesterday, the WPI for the week ending June 7, 2008 was released.  Predictably, grave concern has been expressed at the rate of inflation crossing 11 per cent.

I have carefully read the news reports and the statements made by a number of people. I have also read the editorials in the newspapers.

It is necessary to place the matter in context. The context is a relentless rise in crude oil prices as will be seen from the following table:

Date	WPI Inflation (%)	Nymex Crude Oil Price ($/bbl)
24 Nov 2007	3.11	98.19
1 Mar 2008	6.21	101.85
31 Mar 2008	8.75	127.37
7 June 2008	11.05	137.54

Since the Budget was presented on 29^th February, 2008, crude oil prices have increased by 37 per cent. Besides, we administer the prices of only four petroleum products - petrol, diesel, LPG and kerosene (PDS). All other petroleum products and derivatives are sold at market prices. When crude oil prices rise, those prices also rise. For the week ending 7^th June 2008, the week-on-week increase in inflation was 1.77 per cent.  Of this, the petroleum products under administered prices contributed 0.79 per cent and other petroleum products contributed 0.88 per cent, making a total of 1.67 per cent. Thus, fully 94 per cent of the week-on-week increase in inflation is attributable to petroleum products.

In the primary articles group, the index for food articles declined by 1.11 per cent. For the group as a whole, the index declined by 0.37 per cent. Even the manufactured products group registered only a small increase of 0.30 per cent. It is the "fuel, power and light" group that has sharply pushed up the inflation rate. The most important driver of the current inflation is crude oil prices.

Last evening, I called on the Prime Minister and had a long discussion with him. This morning, I invited the Governor, RBI to meet me and we have reviewed the situation.

I am happy to take note of the sober and reasonable advice given by Shri Yashwant Sinha, a prominent leader of the principal opposition party. He has suggested that Government could have gone for "deeper cuts in taxes". I have no quarrel with the proposition. After the Budget Estimates were presented to Parliament, we have cut taxes and sacrificed considerable revenue. Only recently, we gave up revenues of Rs.22,000 crore. I may point out that giving up revenues and borrowing an equivalent amount in the market in order to finance expenditure would also be inflationary.  Nevertheless, I take Shri Sinha's suggestion on board and will explore the options.

We take comfort in the fact that there has been record production of wheat and paddy and we have adequate stocks of wheat and rice. We have procured 220 lakh tonnes of wheat and, so far, 260 lakh tonnes of rice. We will provide adequate wheat and rice to the PDS and we will also use our stocks to moderate prices in the open market. Hence, there is no cause for worry regarding wheat and rice.

Given the difficult circumstances, Government will take appropriate measures in order to contain and moderate inflation. A number of well-meaning experts as well as the editorials have advised that the authorities should take monetary measures; that we should not give room for panic; that we should take steps to quell inflationary expectations. That is precisely the course that the Government has adopted in the past and will adopt in the future too.

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Inflation driven by crude oil prices prompts government to coordinate fiscal and supply measures to moderate prices. Inflation is chiefly driven by sustained crude oil price increases, with administered and market-priced petroleum products accounting for the bulk of recent week-on-week rises; other groups showed limited movement. The Government, after consulting the central bank, has implemented fiscal measures including tax cuts, will explore further tax options, considers monetary actions to quell expectations, and will use public wheat and rice stocks via the Public Distribution System to moderate food prices and contain inflation.