• PAGE ONE
• INDEX
• HOME

Worrisome signs of stagflation

S.D. Naik

THE rate of inflation measured in terms of the wholesale price index (WPI) on a point-to-point basis breached the eight per cent mark for the first time in two years for the week ended December 9, 2000 and stayed at that level in the subsequent week.

The inflation rate during the corresponding weeks of last year (December 11 and December 18, 1999) was unchanged at 2.53 per cent based on final data. In fact the entire year 1999 was a year of low inflation. The inflation rate at the beginning of the cu rrent fiscal was 4.22 per cent for the week ended April 1, 2000.

However, it crossed the five per cent mark on April 17 at 5.26 per cent and six per cent mark on May 6 at 6.31 per cent. After fluctuating between five and six per cent for several months, the inflation rate crossed the seven per cent mark on September 3 0 and eight per cent mark on December 9, though it had dipped below the seven per cent mark for a few weeks in between.

Last time the Indian economy experienced a high rate of inflation was in 1998 with the WPI-based inflation rate touching 8.85 per cent for the week ended November 7, 1998. The inflation rate at that time was fuelled largely by the soaring prices of onion s and other primary articles. The inflation rate for the primary articles group for the first week of November 1998 had touched high of 18.23 per cent.

However, this time around, the inflation is almost entirely driven by the unprecedented rise in the international prices of crude oil, diesel and other petroleum products and the consequent hike in the domestic administered prices. The prices of electric ity and coal have also gone up this year, though not to the extent of petroleum prices. The inflation rate for the fuel group has zoomed to over 30 per cent.

Despite the rise in the overall WPI-based inflation rate in recent months, the inflation rate for the manufactured products group having a weight of 63.75 per cent in the WPI continues to remain low at just around three per cent.

In fact, for the greater part of the year it was ruling below two per cent and has crossed the three per cent mark only over the past few weeks. Similarly, the inflation rate for food items and other primary articles is also ruling low, thanks to the mou nting food stocks and liberal imports.

Not surprisingly, unlike in the past, the inflation rate based on consumer price indices is ruling lower than that based on the WPI this year because of the depressed prices of food items, primary articles and manufactured products.

For instance, the inflation rate based on consumer price index for industrial workers (CPI-IW) has declined to 2.75 per cent for the month of October from 3.50 per cent in September and 4.0 per cent in August. The inflation rate based on consumer price i ndices for agricultural labourers (CPI-AL) and rural labourers (CPI-RL) were -3.16 per cent and -3.53 per cent respectively for the month of November 2000. These indices have turned negative since September 2000. While the picture is somewhat distorted b ecause of the high weightage given to food items in the consumption baskets of these indices, there is no denying that the depressed prices of agricultural commodities will lead to depressed rural demand for the products of the industry.

Thus, the recent pick up in the inflation rate is unlikely to benefit the industrial sector which is reeling under the rising energy costs. The industrial sector which was showing signs of a turnaround last year after a prolonged slowdown lasting three y ears, is once again passing through a phase of deceleration this fiscal.

The industrial sector is experiencing demand recession in many crucial sectors including industrial commodities. Capital goods and intermediate goods largely on account of the slump in investment demand both in agriculture and infrastructure sectors over the past few years.

Many industries that had created huge new capacities in the early years of liberalisation hoping for a sharp rise in demand are still nursing huge unutilised capacities. The significant drop in public investment in infrastructure, agriculture and some of the social sectors without a commensurate increase in private and foreign investments, has resulted in a slowdown in the investment-driven demand in the economy.

The rising competition from cheaper imports has only added to the woes of the Indian industry. All these are worrisome signs of stagflation.