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IN THE BOOKS of the rulers inflation rate has dipped to a 20-year low at 1.5 per cent but not so for the ruled. Price tags at retail shops seem to tell a different tale, and this is confirmed by the wide variation between the wholesale and consumer price indices. For long, the RBI has been remarking on this dichotomy. Inflation rate at the retail level moved up to 4.9 per cent in November 2001 from 2.7 per cent in November 2000 and has been swinging in the 2.5-5.5 per cent range in 2000-01, "reflecting", as it says, "mainly the upward trend in the prices of food items". While computing the WPI, the services sector, forming some 50 per cent of GDP, does not figure — that is trade, hotels, transport, communication, software and financial services are left out. The drop in fuel prices could be another influence on the WPI. Fuel inflation may have "dropped significantly to 8.6 per cent as on December 15, 2001 from 25.2 per cent a year ago" but hides the fact of government playing with the huge deficit in the Oil Pool Account. With elections coming up in Punjab and Uttar Pradesh, the Centre has got the banks it owns to fund the cash flows of oil companies against low-coupon oil bonds, so that consumers of LPG, kerosene, diesel and petrol do not have to bridge the oil pool deficit.

Theodd behaviour of the inflation curve could also be putting to rest the popular axiom of a good agricultural season leading to a surge in rural demand. Seemingly, a good crop has not enhanced incomes at the farm-gate, with surpluses keeping down prices. Yet, this happens when the terms of trade, going by the RBI's Report on Currency and Finance, have remained in favour of agriculture vis-a-vis industry or services sector through the 1990s. If the inflation rate is as low as claimed, real interest rates (deposit and lending) are surely on the high side and admits of some sharp pruning. Bank managements have cleverly shaved off a few percentage points from deposit rates and kept lending rates unchanged. Going by the third quarter results, public sector banks are showing off sizable profits made in the treasury rooms or by mulcting depositors and borrowers. There has not been any growth in asset creation when capital investment is interest elastic. By any number twisting, a 1.5 per cent growth in inflation rate should have brought down lending rates to single digit. This is not happening. Bank profits seem to be at the cost of growth — a view, however, bankers refuse to admit.

Forsome in the Finance Ministry the way out is simple: Make capital investment in infrastructure attractive for public and private sectors. It makes no sense to allow private parties generate power and then distribute it through the electricity boards when the transmission losses are 30 per cent. If the political system persists with its bizarre stance, a point could come when State-owned electricity boards, transport corporations, the Railways, ports and roads will be non-existent, unable to generate any cash profits. There is a strong feeling that matters are coming to a head and when that happens the illusion of a low inflation rate could vanish. A high fiscal deficit and excess liquidity in the system, as at present, should satisfy supporters of pump-priming and its futility sans policy changes. Policy reforms today have become a must to sustain the growth benefits induced by the first reform impulse in the 1990s. If not, one is asking for trouble.

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Low inflation, high illusion

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