The Hindu Business Line : The dark cloud of inflation

The failure to ensure an adequate growth of the farm sector and curb the growth in asset prices has been responsible for the breach in the so-called tolerance level of inflation.

A belated recognition of rising prices and their origins is better than a blind refusal to believe anything could tarnish the growth prospects for an already Shining India. All through the first half of fiscal 2005-06, policymakers pointed to crude oil prices as the cause for the slight edging up of inflation; in the latter half came the first recognition from North Block that prices of essentials were climbing on account of supply shortfalls, a problem that could be tackled through imports. But prices continued to rise despite the July 2006 policies and the RBI's interventions through repo rate hikes. Both North Block and the apex bank insisted that inflation was under control and well under five per cent, defined as the upper tolerance level. But inflation's sting cannot be ignored anymore and so comes probably the most frank admission of the spectre haunting the economy.

At the recent FICCI meeting in New Delhi, the Finance Minister called inflation "the only dark cloud in 2006". That cloud indeed was quite big if the numbers are anything to go by with prices rising alarmingly between July and November. What should have got North Block particularly worried is the rise in the prices of manufactured goods that have a weight of about 63 per cent in the WPI. That index breached the upper tolerance mark of 5.5 per cent several times. The more realistic consumer price indices rose to eight per cent in October. By November, the inflation rate for wheat had zoomed to 20.8 per cent from 7 per cent in July 2006; so much for the July measures. Unlike earlier, the prices of manufactured goods also began their northward march, from 1.7 per cent in July to 4.8 per cent in November.

The story of rising prices over the latter half of calendar 2006 should convince policymakers that there are no quick fixes to the current inflation whose origins do not lie in temporary shortages but in an unhealthy mix of systemic shortages and speculative play within the domestic economy. While the fall in crude oil prices may ease the pressure somewhat, clearly, the failure to ensure an adequate growth of the farm sector and curb the growth in asset prices has been responsible for the breach in the so-called tolerance level of inflation. The need for inclusive growth now brooks no delay even as monetary policy shifts lending away from retail trade to the more productive sectors. That is a good sign and banks must be encouraged in this direction with the right incentives that enable them to view the farm and the road leading to it as worthy credit options. There is no other way to stabilise prices than extensive growth.