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Inflationary fires ahead

Inflationary fires ahead
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First Published: Tue, Jun 15 2010. 08 12 PM IST
Updated: Tue, Jun 15 2010. 08 12 PM IST
There is hardly anything surprising when the Union government announces inflation numbers every month: they remain unfailingly high. Now they threaten to become part of the country’s story of high growth. Only the government remains sanguine about dousing inflationary fires.
The inflation figures released on Monday show continued increase in the prices of three sets of goods. One, primary articles (food and non-food items such as fibres, oilseeds, etc.). In May, prices of primary articles rose by 16.6%. Two, raw materials such as wood and wood products (which rose 8.8%), metals and alloys (12.1% rise) and three, fuel products (which rose by 13%).
The food component of inflation is particularly worrisome as it hits the poor very hard. While the government continues to announce that food prices will moderate “soon”, they never seem to. One reason for the government’s comfort on this front is that much of the rise in these prices is attributed to statistical effects and the “real” (supply) situation does not warrant panic. Good crops are for everyone to see and the buffer stock situation, too, is reasonable. That may be so, but it cannot be denied that there is a divergence between the increase in per capita income seen in the past couple of years and the continued rise in the prices of food items. This is close to becoming a structural feature of the economy.
Here it is also appropriate to point out the divergence between the expectations of government spokespersons, officials and ministers and those of the citizens at large. In the Inflation Expectations Survey of Households released by the Reserve Bank of India (RBI) in May, close to 96% of the respondents said they expected prices to rise in the three-month period ahead. As many as 96.5% of the respondents said they expected prices to rise in the year ahead. This is in remarkable contrast to the government’s expectation that prices will moderate or will cool after July. Clearly, there is a role for monetary policy in stabilizing inflationary expectations.
There is also a strong link between the good industrial growth, as reflected in the industrial production data, and the rise in the prices of raw materials mentioned above. The very high growth observed in capital goods and consumer durables reflects this correlation. Price stability ought to be a higher priority for the government than it is now.
Is the government too casual about managing inflation? Tell us at views@livemint.com
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First Published: Tue, Jun 15 2010. 08 12 PM IST