India takes steps to tame rising food prices

INDIA: Faced with a public outcry over rising prices, the Indian government allowed private players to import wheat, pulses and sugar under easier terms to contain inflation.

India's wholesale price inflation, the most widely watched measure of inflation, is running at an annual rate of about 4.7 percent this month from below 4 percent at the start of May.

Analysts expect it to rise above 5 percent when the impact of a government-administered retail fuel price increase earlier this month kicks in, boosting chances of an official rise in interest rates in July when the central bank reviews monetary policy.

Although government data shows prices of food items have been inching up gradually in wholesale markets, retail prices have gone up significantly.

"The decision to augment the supplies of wheat, pulses and sugar was taken as they were driving inflation. I hope that with these steps, inflationary expectations will be dampened," Finance Minister Palaniappan Chidambaram said after a cabinet meeting.

The cabinet decision to allow easier imports of the three essential items comes two weeks after the Reserve Bank of India raised its key short-term interest rate by 25 basis points to 5.75 percent.

Pressure was mounting on the government to take action to curb price rises with opposition parties and its key allies protesting the 6.6 percent increase in diesel and 9.2 percent rise in retail petrol prices.

Prices of vegetables, sugar, wheat and pulses have surged in the last few weeks and the issue has hogged headlines.

A boom in construction has also pushed up prices of building materials, especially cement. Prices of cement moderated after the government warned manufacturers of stern action including a ban on exports.

Rajeev Malik, economist with JP Morgan Chase in Singapore, said the fuel price increase was likely to add 0.2 percent to headline inflation and he forecast it nearer 6 percent by the end of the fiscal year next March.

Rajiv Kumar, a director of Indian Council for Research in International Economic Relations, said: "It is important that the inflationary expectations are dampened, as it leads to hoarding. "Allowing imports of wheat and pulses by private players will surely bring down their prices. But inflation is likely to cross 5 percent mark soon," he added.

Traders have been demanding wheat imports by users like flour millers, bread and biscuit makers at lower duty. Currently wheat imports carry a 60 percent duty, which traders say is unviable and pushes up retail prices.

The government this month floated tenders to import 2.2 million tonnes of wheat and has received bids for the supply of about three million tonnes.

It has also awarded contracts to import 1.3 million tonnes of wheat, mainly to augment government stocks. But the measures have so far failed to dampen prices.

Wheat futures contracts on the domestic exchanges fell by 90-140 rupees per tonne after Thursday's decision.

Chidambaram said there was a need to import wheat as production had been stagnating for some years while consumption was going up.

The government also waived duty on some sugar imports under a until September this year to stem high sugar prices despite a bumper output. Sugar output is forecast at close to 19.5 million tonnes in the year ending September 2006. New Delhi, Friday, Reuters