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India steels itself against inflation
Joe Leahy in Mumbai
 
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April 01, 2008

India is expected to ask domestic iron ore producers to lower prices on Tuesday as part of a range of emergency measures aimed at stemming an alarming jump in inflation.

The government is already considering reducing import duties and scrapping some export incentives for steel producers in response to rising inflation, which hit a 13-month high of 6.68 per cent in the week ending March 15.

"We expect a clampdown by the government on all inflationary commodities, especially food and metal products, through excise and customs duty cuts, increasing export prices and forced price cuts," Tushar Poddar, economist with Goldman Sachs in Mumbai, said in a report entitled Inflation: The hydra is back.

India's Congress party-led government is becoming increasingly concerned that inflation will hurt India's poorest and damage the ruling coalition's chances in state and national elections in coming months.

The Reserve Bank of India [Get Quote], the central bank, has kept interest rates at a peak of 7.5 per cent to try to quash inflation, which is now well above its comfort level of less than 5 per cent.

But the RBI's tight monetary policy has failed to curb a bubble in commodities markets that started with food and has extended to cement and now steel, prices of which have risen more than a fifth since the end of December.

"I am calling a meeting of iron ore producers on April 1 and will ask them to offer the ore at slightly lower prices to domestic companies," G K Pillai, India's trade secretary, told reporters last week.

The rise in steel prices has been driven by a 34 per cent jump in iron ore prices in India over the past year and this is set to rise further after Brazilian iron ore producers clinched a 65 per cent increase starting tomorrow.

Hemant Luthra, a member of the management board of Mahindra & Mahindra, India's leading producer of sports utility vehicles and tractors, said that, aside from iron ore, other factors blamed for the increase in the price of steel included a shortage of coking coal.

But he pointed to the fact that many steelmakers have their own access to raw materials, such as coal and iron ore.

"A large number of steelmakers the world over are integrated and cost may have less to do with (raw material) price increases than opportunism," Luthra said.

Indian steel producers have increased prices by between Rs 5,000 and Rs 7,000 (pound 88, $175, euro 111) per tonne to Rs 37,000-Rs 38,000 for the lowest grades over the last three months, Reuters reported.

A senior executive at one steel producer said the government needed to avoid knee-jerk interference in the market to deal with inflation.

"If the government feels steel is adding to inflation, the best solution would be to create capacity and increase supply," he said.

Luthra said: "Welcome inflation, exit 9 per cent GDP growth."




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