8/14/04 INDIA - There is good reason for the finance minister’s promisedmeasured response to inflation to weigh more in favour of fiscal andsectoral policy changes than of monetary tightening.

Some tightening of liquidity might be warranted to keep real interestrates positive in the face of rising inflation. But the response to supplyshocks in the case of some commodities like oil, iron-ore and steel cannotbe a tight money policy that kills off burgeoning growth.

Three things can be done to moderate oil prices. One is to replace thepresent inefficient tax structure that amplifies global price changes bythe time refined products reach consumers. We need specific duties on oil,not the present ad valorem ones.

And the specific duty could correspond to a low, say 5%, ad valorem dutyfor crude and products pegged to a crude price that is below its currenthigh but above the average for the last year.

Edible oil imports need to be liberalised, never mind the domesticopposition from the ministry of agriculture. The ministry should bespending its time getting foodgrain farmers to diversify to pulses andoilseeds and stopping the input subsidies that distort cropping patterns