The bird is still in the bush

The bird is still in the bush

It was a well-timed coincidence. A day after Prime Minister Manmohan Singh claimed that combating inflation was top priority for the Congress-led United Progressive Alliance (UPA), provisional figures for inflation dropped out of the double-digit range—9.97%, provisionally, in July—for the first time since April. Logically, this should suggest that the worst is behind us. That may well set off a chorus of political voices that are desperate to sustain the country’s economic momentum and want a rollback of the monetary tightening ordained by the Reserve Bank of India (RBI).

A closer perusal reveals that the let-up is more apparent than real. The moderation in inflation has less to do with economic management and more to do with the base effect of last year’s high inflation levels. And, if we factor in the difference between the final number and the provisional one—at least 100 basis points in the last three months—there’s a good chance that by the time the final July number arrives eight weeks from now, it will be in double digits.

The retail price indices, too, show inflation levels moderating; but they still continue to hover around double digits. Inflation, measured by the Consumer Price Index for Industrial Workers, was 13.70% in June, compared with the peak of 16.22% in January. But this is largely because of the higher base; inflation started accelerating from April last year.

What is more worrying is that the relentless run of high prices, which began with food products, has begun to spill over into non-food products, and consequently affect inflationary expectations. Further, the overall health of the economy is still tenuous, though there are enough indicators that growth is back on track.

Besides inflation, there are some concerns—not alarming yet—in the external sector; the country’s current account deficit on balance of payments (or the amount of domestic demand financed externally) worsened to 2.9% of the gross domestic product in 2009-10 from 2.4% the previous fiscal. And expectations on global growth are still uncertain. While one school of thought argues that there could be a double-dip recession in Western economies, others predict a long spell of low growth before an enduring recovery.

Mercifully, RBI recognized the problem, and unambiguously signalled its intent in the latest credit policy statement. But are politicians on the same wavelength?

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