New Delhi: The annual inflation rate accelerated to a two-year high of 6.58% in late January, triggering fears of another rate hike by the Reserve Bank of India.
Any increase in rates at this point could threaten the growth trajectory of the economy, currently projected to expand at 9.2%. Alternatively, if these high inflationary pressures persist, they could squeeze the profit margins of companies by pushing up their cost of production, economists said.
Bulk of the increase in inflation, as measured in wholesale prices, in the period ended 27 January, has been brought about by the surge in prices of food items including cereals, pulses and oilseeds, all of which have seen hikes of more than 10%. Meanwhile, speculative pressure on prices of food products is likely to only grow with the government saying that it expected foodgrain production to be below targets. Added to that, low levels of international food stocks have made it difficult for the government to tackle inflationary pressures through imports.
The inflation issue is proving to be politically piquant for the ruling party with three states poised to go to polls and another critical state, Uttar Pradesh, likely to go to the polls later in the year. With price increases in double-digits in several parts of rural India, incumbent politicians are under pressure to explain away the problem.
Meanwhile, the Left parties, which currently support the ruling United Progressive Alliance, are threatening to “take to the streets” if the government is unable to control inflation and expand the public distribution system to help the poor.
And in a statement reacting to the data, business chamber Ficci noted that “the speed and effectiveness of a correction in inflation would critically hinge on the agriculture sector’s ability to scale up to meet the huge demand for primary goods and the removal of supply side rigidities.”
The central bank said it was monitoring the data but didn’t give out any other signals. Some experts however caution against a rate hike at this stage.
“That is no solution,” says Ashok Gulati, director in Asia for International Food Policy Research Institute. “Global prices of most commodities are at a peak. We should have read the signals way ahead through the futures market. ”
“What we have done is too little, too late,” said Gulati. “We cut oilseeds import duty only by 10%, when the actual levels are 60-70%. Similarly, wheat import was opened up very late, and even corn was after poultry farmers had tired of requesting it. We should learn to dovetail the tariff policy with the policy for our domestic markets through the futures trade. Instead, by banning forward trade, the government is killing the messenger.”
Others suggest that by trying to battle inflation through rate hikes, the central bank might be choking off growth. “The rise in agro products is also a seasonal phenomenon,” insists Bibek Debroy, an independent economist.
“Once seasonality is over and the reduction in petroleum product prices are factored in inflation should drop. One shouldn’t press panic buttons, raise interest rates and squeeze both consumption and investment expenditure.”
The wholesale price index is a lot more closely tracked than say the monthly consumer price index since it is published weekly and covers more products.