The sharp spurt in inflation for the third consecutive week is bringing about a drastic revision of India’s macro-economic outlook and giving more ammunition to opponents of the Congress party-led government, including allies such as the Left parties.
Inflation has spurted in three weeks to a 13-and-a-half month high of 6.68% on 15 March. It was 5.11% on 1 March and 5.92% on 8 March. In the corresponding period last year, the inflation rate was relatively stable at 6.51% on 3 March and 10 March and 6.56% on 17 March.
Inflation concerns hit government bonds, which fell to their worst level since January 2007, as yields went up to a four-month peak of 7.9% on inflation concerns, while the Bombay Stock Exchange’s Sensex index, which fell 0.4% intra-day, did close 2.2% higher at 16,371 points. The rupee closed stronger than Rs40 a dollar, gaining 1.3% this month.
With inflation surging, the government is already shifting gears and saying some economic growth will have to be sacrificed as the new data effectively kills any slim chances that the Reserve Bank of India (RBI) would cut interest rates.
Finance minister P. Chidambaram, who was earlier hoping for close to 9% growth in 2007-08, against an 8.7% forecast by the ministry of statistics, said he would settle for slower growth in order to fight inflation. For the next fiscal, he expects growth to be around 8%, partly on account of ripples from a US slowdown.
Pronab Sen, chief statistician of India, said he expects 2007-08 to end with around 8.5% growth. “Next year, it could be even less, 8-8.3%,” he added.
Some economy watchers expect inflation to remain high for the next three months. The government has acknowledged that food inflation would be the biggest challenge in 2008, and has used a series of import duty cuts to boost domestic supplies with a promise of more cuts to follow.
The issue will figure prominently at the national meeting of the Communist Party of India (Marxist) or CPM, which starts on Saturday in Coimbatore. (See Page 3). CPM is part of the Left Front that provides critical outside support to the ruling coalition. Says Rupchand Pal, a Lok Sabha member of the CPM: “Partly because of its obsession with economic growth, which has failed to benefit a majority of the population, the government has allowed the situation to spiral out of control.”
Yashwant Sinha, a former Union finance minister, and a Rajya Sabha member of the main opposition, the Bharatiya Janata Party, said: “The latest figures are an indication of how bad the situation is and how much worse it can get. We are back to the bad old times of high interest rates and high inflation, which will hit the common people the most.”
RBI, which will unveil its new monetary policy in April, is expected to allow a temporary appreciation of the rupee, if not a further tightening of monetary policy.
“There is definitely nothing to recommend a policy relaxation now,” says Dharmakirti Joshi, principal economist, Crisil Ltd, a rating agency. “Perhaps, RBI will just do nothing.”
The current spike in inflation is driven mainly by cooking oils and metals. As a result, the commerce ministry announced a suspension of refunds on exports of steel, cement, chrome and manganese ore among 40 items, a measure that it said was focused on inflation. Minister Kamal Nath said the government might allow duty-free import of steel as well as ban rice exports soon.
Last month, the Union government cut taxes on edible oil imports for the fifth time in 15 months and stopped exports of wheat, sugar, rice and edible oils, following it up by raising rice export prices so high as to allow only the highest grade basmati to be sold.
The international rice market is already tight as Vietnam, India, Egypt and Cambodia have restricted exports, affecting one-third of total supplies in the global market, while countries such as the Philippines, the largest importer of the grain, and Sri Lanka are still looking to buy more rice.
With 94mt rice production this year, India currently doesn’t face a problem of inventory. The food ministry said earlier that the closing stock on 1 April was likely to be 1-2mt more than the minimum norms in cereals. “A ban, if it happens, will only affect official exports, but the cross-border clandestine movement of rice will help keep local prices high,” said Sen.
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Sen said that while a part of the sudden price rise was due to “imported” inflation, especially in the case of cooking oils and metals, more important was that prices of agricultural commodities were being driven by investors looking for alternatives as the dollar and stocks drop.
“You can’t have a 21% year-on-year growth in money supply and not expect prices to be affected,” he said. “All this was just hanging around the corner, absorbed in asset prices, and as soon as the asset market inflation lost steam, the pressure has shifted to the commodities.”
Says Shashank Bhide, research head at the National Council of Applied Economic Research: “I’m not expecting growth to be affected considerably, maybe only to slow to 8.5% next fiscal, though the same cannot be said about prices.” Last year, he noted, “most primary commodities were ruling at double digits, so I expect inflation to trend down from next month.”
Most global agencies have already revised their growth forecasts for next year down to 7.5-8%. Says Goldman Sachs economist Tushar Poddar: “We expect greater use of the exchange rate to soften import prices and continued mopping up of liquidity.” Chetan Ahya of Morgan Stanley agreed, saying: “The spike in headline inflation has raised the risk of a further appreciation of exchange rate, since bulk of this rise is coming from higher global commodity prices.”
Ashish Sharma and Bloomberg contributed to this story.