Mumbai: A group of market researchers has begun moving around the country this week, to quiz 4,000 families in a dozen towns about how they anticipate consumer prices to move in the months ahead. The Reserve Bank of India (RBI) will later use this data on inflation expectations as an input for its decisions on interest rates.
Also See | What The Deflators Tell Us (PDF)
Past household surveys have shown that ordinary Indians have been more worried about inflation than policymakers. But inflation has now moved to the top of the policy agenda. The Indian central bank is trying to engineer a soft landing, by increasing interest rates to cool down the economy without annihilating growth. “The emphasis now is on checking inflation by restraining demand and anchoring inflation expectations and to navigate a soft landing,” RBI governor D. Subbarao told analysts and economists in the course of a conference call on 4 May.
Meanwhile, the latest estimates for Indian economic output, released by the government statistics agency on Tuesday, show how the inflation virus spread in the fiscal year ended March. The initial assumption among many economists in the government and private sector was that inflation was being driven by food prices, and that the problem would dissipate after a good monsoon. These assumptions are now known to have been off the mark.
Mint has calculated the deflators implicit in the new gross domestic product (GDP) data—for economic output as a whole, specific sectors of the economy and consumption expenditure. The inflation rates implied in these deflators provide a far more comprehensive view of the inflation problem than the more popular Wholesale Price Index and Consumer Price Index, because deflators provide information on important sectors such as construction, as well as financial and government services.
The data on inflation measured by deflators shows that even while the overall rate of price rises went up by 2.2 percentage points between FY10 and FY11, inflation was far more generalized in the latter year. In the 12 months to March 2010, most of the inflation in the non-services sectors was concentrated in agriculture. Inflation in sectors such as mining, manufacturing, electricity generation, construction and trade was below 5%. In comparison, the deflators for FY11 indicate that inflation soared in each of these sectors, even as there was no let up in the rate of price increases in agriculture. Inflation in services is another matter, since it reflects wage pressure rather than the cost of services.
Has inflation now peaked? The new data shows that the implicit inflation rates for the economy as a whole, specific sectors and consumer expenditure in the fourth quarter are below their annual FY11 levels. It is perhaps one indication that higher interest rates are doing their job after the usual lag. The official RBI expectation is that inflation will start falling in the second half of the current fiscal, or after October. That seems quite likely.
Graphic by Ahmed Raza Khan/Mint