The Hindu Business Line : Inflation measures: Incomplete, irrelevant?

The RBI Governor, Dr D. Subba Rao, is a worried man. Recently, when asked, he thought there was no room to further loosen monetary policy and interest rates, despite the inflation benchmark, the Wholesale Price Index (WPI), collapsing below zero.

That has a strange ring to it. For one, the Consumer Price Index (CPI) is near double digits. Second, thanks to successive Cash Reserve Ratio (CRR) cuts, the daily money market surplus is well over Rs 1 lakh crore. Third, the Government is set for a record fiscal deficit. Its debt is mounting and is becoming a debt mountain.

Enough, one would think, to guarantee sleepless nights to economic policymakers.

Between consumption and investment, the concern should be more on the investment (of the capital formation variety) front.

It is now pretty clear that the growth figures are more arithmetic than real, arising from the statistical inclusion of sharply rising government expenditure in GDP. It has overwhelmed the GDP-subtracting steep fall in product and service exports.

The WPI’s best behaviour is probably past, considering the latest increases in fuel prices. But that doesn’t necessarily mean policy must be immediately reversed. In a way, the RBI can take comfort from the weak pass-through of its low rates. The economy is actually subject to much higher cost of money than implied by the RBI’s repo benchmarks. Thus, premature policy tightening could setback an already poor investment climate, not so much because debt would cost more but because of a possible adverse fallout on equities.

New project boom

Much of the boom in new projects was the result of easy capital-raising in the stock market at high premiums to intrinsic value. With the appetite for IPOs gone, projects are unable to reach financial closure.

Inflation in manufactured goods will stay subdued given tepid global demand and competitive pressures.

The household consumption basket is significantly costlier but it hardly seems the result of shortages. On the contrary, the supply side is more than keeping up. Demand elasticities have turned inelastic.

Where inflation hurts most is in areas not even captured in any manner in the indices — house rents, the cost of education and healthcare. Vulnerability to these starts with the poorest and extends right up to the middle classes.

It is a telling commentary on the quality of our data that the neither the WPI nor CPI contain them, the biggest expenditures in the typical household budget.

Monetary policy can do nothing to control inflation in the prices of such vital services.

They are matters fit only for the appropriate Government policy.

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