India - Aam aadmi will have to brace himself for rising prices

NEW DELHI: Having touched 12.63 per cent for the week ended August 9, it should come as no surprise if the headline inflation inches up to about 12.85 per cent for the subsequent week, the data for which is to be released on Thursday.

By all accounts, especially the projections by the Prime Minister’s Economic Advisory Council, the annual point-to-point inflation as measured by the wholesale price index (WPI) is likely to peak to 13 per cent by October. This is something the government has also conceded but blames on the base-year effect, saying the inflationary spiral is likely to persist till the third week of November before it starts softening during the fourth quarter of 2008-09.

Clearly, the aam aadmi will have to brace himself for rising prices for quite some more time, especially because the inflationary expectations are yet to be doused despite the government efforts to hold the price line.

The runaway rise in prices — in keeping with the global inflation owing to surging prices of crude and food commodities — has come at a time when general elections are due next year.

Ever since the WPI inflation inched up from the Reserve Bank of India’s “comfort” zone of 5.5 per cent, the government, in concert with the central bank, has been taking a number of fiscal and monetary steps to douse inflationary expectations. However, the net result has not been up to expectations, primarily because the rise in the prices of certain commodities is beyond the government’s control.

3 major groups


The WPI accounts for 435 items in three major groups — primary articles, fuel and power and manufactured products. The primary articles consist of 98 items in which the annual point-to-point inflation rose to 11.83 per cent during the week ended August 9 from 11.43 per cent a week earlier despite a decline in the prices of 17 articles and 56 others showing no increase at all.

In the ‘fuel and power’ group, the prices of all 19 commodities remained unchanged with the rate of inflation holding at 17.99 per cent. In this category, while the rise in the prices of administered products in early June had a cascading effect by way of higher transportation and input costs of other products, non-administered products such as ATF and industrial fuels had a free run. Now that the global price of crude appears retracting to more “reasonable” levels, its cooling effect on inflation is likely to be reflected after a lag of a fortnight.

Manufactured products


In the ‘manufactured products’ group, inflation rose to 10.91 per cent from 10.75 the previous two weeks though 288 out of 318 items showed no increase and the prices of 15 others actually declined. However, 15 others, particularly sugar and khandsari, hessian bags, craft paper, cement, deoiled cake, mixed fabrics, polyester staple fibre, PVC fittings and accessories and mustard oil witnessed price hikes.

With hindsight, one can perhaps argue that, but for the fiscal and monetary steps taken by the government and the RBI, the rate of inflation could have been higher still, as in some of the other developing countries.

For one, while the makers of steel — a prime mover of the inflationary spiral — were persuaded to cut and hold prices for a three-month period, the import duty on certain essentials such as wheat, rice and pulses was exempted. In the case of edible oils, it was sharply reduced and is being supplied at a subsidy to the poorer sections. Alongside, exports of wheat and non-basmati rice remain banned. However, in the case of crude and some other commodities, it resulted in import of inflation.

Alongside, the RBI’s measures sought to squeeze money supply and render credit dearer to cool prices by bringing about a demand-supply equilibrium in the economy. Another surge in WPI inflation may prompt the central bank to take further stringent steps. However, it may be a catch-22 situation for the government as the RBI’s anti-inflationary measures have already headed the economy towards a growth slowdown.