The Hindu Business Line : Inflation worries

Today, you may be just despondent over higher food prices pushing inflation to the highest mark in 17 weeks at 5.26 per cent. The worst is yet to come on the price front. Commodity prices, including of critical energy products, metals and foods, are readying to spike sooner than one may realise. Notwithstanding the recent softening (from the July high of $78.40 a barrel to a low of $58 early this month), energy prices have a strong upside potential. Tightening demand-supply fundamentals are set to propel crude oil prices beyond the October 27 level of around $61.40, the highest for the month. The outlook for other commodity markets is equally bullish with overseas funds betting on strong upsides.

After the market mayhem in May, metals complex, led by base metals such as copper, nickel and zinc, is on the rise. Global economic growth, in general, and Asian housing and infrastructure boom, in particular, could see demand picking up for industrial and base metals. Supplies are a bit skewed with the markets turning vulnerable to such disruptions as labour disputes and dipping inventories worldwide. As if this is not enough, agri-commodity prices are getting charged up. Bulls dominate the global wheat market with price spikes of $30-40 a tonne. Despite higher production and stocks, vegetable oil prices are firming up triggered by a strong biodiesel demand. It is no different for other grains such as corn (maize), pulses and sugar.

With the domestic commodity markets bridging with their global counterparts, it is impossible for India to escape the effects of price actions in other parts of the world. Perhaps, most worrisome is the risk of higher prices for mass consumption goods, given the extremely fragile nature of the kharif crop. The prospects of rabi (early-summer harvest), the plantings for which will begin soon, are none too encouraging given the soil moisture conditions. Worse, three essential food crops — wheat, pulses and oilseeds — are likely to compete for acreage. In all likelihood, the country will have to import 50-60 lakh tonnes of wheat next year too while massive purchases of pulses (over 20 lakh tonnes) and edible oils (over 50 lakh tonnes) are a foregone conclusion. Such imports will obviously be at international prices that will be steeper than at present.

As is well known, rising markets attract speculative funds. Commodity markets are no different. The Indian economy could get constricted by a combination of firm international prices, tight domestic supplies and funds chasing limited stocks of commodities. Consumers, especially the vulnerable and needy in the rural areas, will be squeezed. Whether in the cash market or derivatives, the political risk that commodity market players are susceptible to cannot be wished away. Inflation fears are for real.