Inflation refuses to be tamed, rises to 7.83%

Inflation refuses to be tamed, rises to 7.83%
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First Published: Sat, May 17 2008. 12 13 AM IST

Updated: Sat, May 17 2008. 12 13 AM IST
New Delhi: In an indication that the price situation is going to get worse, inflation for the week ended on 3 May moved to 7.83%, touching a 44-month high, lending increased volatility to the rupee and bringing double-digit inflation within the realm of possibility. This is the highest level since 6 November 2004 when the figure touched 7.93%. Inflation based on the Wholesale Price Index (WPI) was 7.61% in the week that ended on 26 April.
As the news came in, over and above Monday’s release of a six-year-low industrial growth of 3% in March, the rupee weakened to as low as 42.93 to a dollar and ended at 42.66. The local currency had its worst week since 1997 over inflation worries and the widening trade deficit, including an oil import bill that almost doubled year-on-year to over $8.6 billion in March.
After rising more than 12% in 2007, the rupee has fallen by some 7% this year. Analysts expect inflation to not only remain high but also to have already moved to 8.5% or higher, based on the fact that previous weeks’ figures have been revised sharply upwards since January. The gap between the provisional and final numbers has also been growing, with inflation for the week that ended on 8 March now revised to 7.78%, almost two percentage points more than 5.93%, the provisional figure. The spike in inflation, analysts say, will only make the job of the Reserve Bank of India (RBI) difficult, as industrial growth has already slowed considerably and further tightening could hurt overall economic growth. In its monetary policy for 2008-09, RBI raised the cash reserve ratio, the amount of money banks need to keep with the central bank, to 8.25% and indicated an expected growth of 8-8.5% and an inflation target of 5.5%.
Finance minister P. Chidambaram, however, told reporters on Friday that inflation would moderate once the impact of lower steel and cement prices comes through.
Saumitra Chaudhuri, economic adviser at domestic rating agency Icra Ltd and a member of the Prime Minister’s economic advisory council, said the latest movement in WPI reflects a slower rise in inflation in many commodities, such as edible oils and other food items. But the deregulated part of the mineral oils basket, which includes aviation turbine fuel, has gone up. “Core inflation, which is inflation exclusive of food and oil, is higher in India at 8.7% because of lack of oil price pass-throughs and a slightly better food situation,” Chaudhuri said. Also, he explained, the sharply higher revised number in March reflected the rise in the iron and steel basket. After moving from 279.6 on 5 January to 287.4 on 1 March, the component for iron and steel shot up to 344.1 on 8 March, as the price data from the producers came in. It has risen slower over April, even falling in the latest week.?Still, he said, inflation was unlikely to come below 7% until September. “Depending on whether we get a reasonably good monsoon, it may go down to 6% in the third quarter but the annual average would not be less than 6.5%.”
Alleging that the policies to control inflation has failed, Prakash Javadekar of the Bharatiya Janata Party, the main opposition party, said: “Last year the government tried to control demand through fiscal measures but never considered supply-side problems. Now the situation has become uncontrollable.”
Even D.K. Joshi, principal economist at domestic ratings agency Crisil Ltd, felt inflation would prevail above 7% “for the next three to four months. It’s a tough task for RBI as it has to manage both slowing growth and rising inflation”.
While Icra’s Chaudhuri felt WPI inflation will come off its peak after the third week of March, as the steel price rise effect wears out, Robert Prior-Wandesforde, India economist at HSBC, warned of even higher inflation. “If oil continues to rise, there is a significant risk that inflation will hit double-digits in the not too distant future. And in the short-term, the rupee will not show the large imbalance it has seen in the past several years, while RBI’s foreign exchange policy will give it a weak bias.”
Although India has been able to keep food prices somewhat under check, it has been hit by sharply rising commodity prices around the world, as investors moved from a weakening dollar to oil, metals and agri commodities. Global inflation is expected to rise to 3.7% in 2008, posing a challenge for policy makers, as nations face one of the toughest years in recent history, said the mid-year update of the UN’s World Economic Situation and Prospects for 2008. “The food crisis is not only of great humanitarian concern, but is also posing a threat to social and political stability,” it said.
Joachim von Braun, director general of the International Food Policy Research Institute, had asked governments to adopt emergency measures such as higher food aid to the poorest, abolition of biofuel subsidies and export bans as well as help to small-scale farmers to tide over the crisis.
Echoing the need for immediate relief, Brinda Karat, a member of Parliament representing the Communist Party of India (Marxist), the biggest outside supporter for the United Progressive Alliance government, said, “Strengthening and universalizing the public distribution system (PDS) will help control the situation immediately. We have constantly been pushing for expanding the number of commodities under the PDS but the government has not taken a single step in this direction.”
Ruhi Tewary of Mint and Bloomberg contributed to this story.
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First Published: Sat, May 17 2008. 12 13 AM IST
More Topics: Inflation | WPI | RBI | Manufacturing | P Chidambaram |