The Hindu Business Line : Inflation: The real measure

With the Credit Policy barely a few days away, the Reserve Bank of India will feel a certain sense of satisfaction that its monetary policy in the recent past has paid off in the form of a drop in the inflation rate from a high of around 7 per cent in mid-February to 3.2 per cent in October. For the central bank, with inflation at or below 5 per cent, one of its key concerns seems to have been met with considerable success. But has it?

One sure measure of how effective its intervention for price stability has been lies in New Delhi’s response. One would have expected any ruling party to have played up the considerable achievement of bringing down inflation in a country as much prone to price rises as floods and other natural calamities. Barring occasional references to the falling price index by the Finance Minister, most key economic ministries and the ruling party’s high command have hardly paid it any attention. In an environment where price stability is an assured stairway to popularity by ruling parties, especially as elections draw close, it is intriguing at first glance that New Delhi should ignore the drop in the inflation rate. Strange as it may sound, the reasons for that studied silence are closely tied to the reluctance of the UPA government to throw the gauntlet at the Left over the nuclear deal and plunge into early elections. Inflation as measured by the Consumer Price Indices has not slipped below the RBI’s tolerance level of five per cent. And what matters to the Government most today is that the CPI-measured inflation rate for agricultural labourers and industrial labour was still around 8 per cent for September 2007. This dichotomy between the WPI- and CPI- based inflation rates exposes the limits of monetary policy intervention in the recent past.

A strong rupee has seen lower import prices of manufactured goods that have a weight of over 60 per cent in the WPI; is it any surprise that the inflation rate has dropped over 3 per cent points this year itself? On the other hand, with the CPI indices measuring domestic prices — and scarcity — of essentials, inflation for the poor persists like a virulent fever. The real test for the government began last year when the CPI zoomed on the back of food scarcities. More than temporary shortfalls in foodgrains production, stagnant investment in the rural sector has kept inflation on the boil despite all the pious intentions of the Eleventh Plan. Dr Singh’s team should act fast to clear this cloud in its silver lining, whether it lasts its full term or not.

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