The Hindu Business Line : The inflation conundrum

Nowhere is the old adage about lies, more lies, and statistics more apposite than in the real measure of current inflation in the country. While the Wholesale Price Index shows the price rise to be no more than 4 per cent on average, thus satisfying the Government's contention of a policy-controlled inflation, the prices of essentials, as measured by the Index of Primary Articles, show disturbing trends. Indeed so alarming have they been that questions in Parliament about runaway retail prices have goaded the Government into putting forward a more realistic picture of the price movements than is reflected by the WPI. The idea of a price index covering all the segments of the urban population with a host of new product prices should go a long way in reflecting the real picture of the impact of price movements on varying households.

Even while the Government pursues this project, the news on the price front is anything but pleasant. Data for July do show a decline in the Index of Primary Articles from a high of around 7 per cent to 4.58 per cent; this trend is also reflected in the Food Articles Index, a statistic that perhaps motivated the Finance Minister to observe that the anti-inflationary measures put in place — the curb on wheat exports and reduction in Customs duties on grain imports — were paying off. But the WPI data on primary articles do not bear this out convincingly because the last fortnight of July witnessed an uptrend that could well continue till the end of the monsoons especially if one factors in the prices of a major component of the Primary Articles Index — fuel and oil. The index of these prices has maintained an even keel at 7 per cent, well above the other indices. The effects of the oil price rise are kicking in and will continue to do so into the next year. The West Asian scenario is fluid, and Nigeria, the other major supplier of crude, is sinking into violence in the run up to presidential elections next year.

The recent spurt in food prices and the possibility that the value of essential goods will continue to rise force a major policy review of the anti-inflationary strategies. Revisions in repo rates to curb excessive credit, and therefore demand are measures for an overheated economy. The Reserve Bank of India has so far encouraged banks to raise lending rates and thereby maintain margins; still credit growth is robust. But given the RBI's concern for curbing credit as an anti-inflationary tool, future spikes in repo rates may impact the cost of funds and affect growth especially the housing market. The Indian economy is not overheated; it is still a shortage economy.