The latest inflation data shows that the problem has now spread beyond food items and into manufactured products (See) . Taken in tandem with the strong rebound in factory output, this means that the government and the Reserve Bank of India (RBI) need to tighten their fiscal and monetary policies, respectively.
The government said on Monday that wholesale price inflation of 8.56% was at a 15-month high and far higher than what the central bank says it is comfortable with. Galloping food prices did have a role to play, but prices of manufactured goods were also up 6.55% from a year ago.
RBI is very likely to raise interest rates in April to fight inflation, but it also needs to keep down the marginal cost of public debt since it is the government’s banker. This is an interesting conundrum for Indian policymakers.
The initial jump in inflation could be dismissed as the unfortunate effect of a poor monsoon, but now it is clear that prices are rising across the board. Words will soon need to be backed by action.