New Delhi: Inflation, riding on the back of an increase in domestic prices of fuel, crossed into double-digits and to a 13-year high of 11.05% for the week ended 7 June, prompting the Congress party-led United Progressive Alliance government to signal “tougher measures” including a possible hike in interest rates, even if these meant reviewing its articulated objective of sustaining an economic growth rate of at least 8%.
Lower growth could mean lower tax collections and that could affect the fiscal health of a government that is already facing significant political challenges after a series of electoral debacles and a stand-off with its ally, the Left Front, over the Indo-US nuclear deal.
At 11.05%, the inflation rate, as measured by the wholesale price index, is more than twice the rate of 4.28% in the same period last year. Separately, a labour ministry release showed that the consumer price inflation for rural labourers in May rose to 9.11% compared with 8.22% in the same period last year.
RISING CONCERNS (Graphic)
SURGING PRICES (Graphic)
“This is indeed a very difficult time and we will have to take stronger measures both on the demand side and monetary side,” finance minister P. Chidambaram told reporters.
Later, Congress spokesperson Shakeel Ahmad said: “We are willing to sacrifice growth to control inflation so that the common man does not feel the burden.”
The Congress party, which recently lost in the Karnataka state elections to the principal opposition Bharatiya Janata Party, is keen to contain inflationary pressures as five more states, including key ones such as Rajasthan and Madhya Pradesh, are due to go to the polls this year.
The government had recently banned the export of some products such as non-basmati rice to help control inflation by increasing domestic supply.
The substantive bump in the inflation rate, from 8.75% in the preceding week, was triggered by the partial pass-through of the sharp spike in international oil prices. As a result, inflation for the major group “fuel, power, light and lubricants” rose by 16.25%.
While the government maintains that the inflation rate will moderate, especially in view of a bumper wheat harvest, economists caution that this will happen only if there are no more macro-economic shocks.
International prices of oil in particular and commodities, including fertilizer and food items, have witnessed an unprecedented spike. The government had, till recently, absorbed the effects of increase in international oil prices and relented only after the oil marketing companies were unable to bear the cost of these subsidies.
“Inflation so far is growing in a step fashion (a rise, then some stability, and then another rise). That is good news. The increase in domestic oil prices raised the level of inflation. Beginning next week the inflation rate should remain moderate, unless there is another macro-shock,” said Haseeb Drabu, chairman and chief executive of Jammu and Kashmir Bank Ltd.
According to Robert Prior-Wandesforde, part of Indian economics team at HSBC, the final figures for inflation, which will be in released in six weeks’ time, may well show that inflation is actually close to 12%. “In our view, WPI inflation is likely remain in double-digits for at least nine months, barring a sudden collapse in commodity prices,” he said.
High inflation has not only made products dearer for consumers but also eroded their savings. At the current level of inflation, the real rate of return, or the nominal rate of interest less inflation, is actually negative. At the same time, by making inputs more expensive, inflation is also eroding the competitiveness of Indian exports.
“Exporters sourcing their inputs domestically, especially in the traditional and labour intensive sectors like handicraft, are getting adversely affected since their cost of production is going up,” said Ajay Sahai, director general of the Federation of Indian Export Organizations, an industry body.
Economists, including Sherman Chan, Sydney-based Economist with Moody’s Economy.com, expect the Reserve Bank of India, which has consistently warned about growing inflationary pressures, to respond swiftly by increasing the interest rate.
With the stock markets in a tailspin (it fell 3.42% to close at 14,571.29 points on Friday), raising money through primary market offerings is also becoming difficult. As a result, domestic industry is expected to not only face an increase in the cost of capital but also a shortage of this.
That could hurt growth. K.V. Kamath, president of industry lobby Confederation of Indian Industry and chief executive officer of ICICI Bank Ltd said that industry was hopeful that “inflation management would not overlook growth imperatives...”.
However, Jammu and Kashmir Bank’s Drabu said that from now on, any measure by RBI to tighten monetary conditions would impact growth.
(Krishnamurthy Ramasubbu and PTI also contributed to the story)