Inflation has yielded ground neither to the RBI’s monetary policy aggression nor to the pious entreaties of the Government. The public has reason to worry.

India's annual wholesale price inflation has fallen below 7 per cent in July, the first time it has since November 2009. That provides some relief, at least from a narrow statistical standpoint. But there are caveats to this. For one, the 6.87 per cent figure is a provisional estimate subject to revision. In most cases, such revisions tend to be upwards. Indeed, the inflation rate had even earlier – in January, February and March – provisionally dropped below the seven per cent mark, before getting revised upwards by as much as nearly a percentage point in the final estimates. The only consolation is that the gap between the final and provisional estimates has since narrowed down: It was zero, in fact, in May. This would give some hope that we are ‘finally’ in sub-seven territory now, which gives some elbow room for the Reserve Bank of India (RBI) to cut its policy rates. But even that is not a problem-free assumption on at least two counts.

The first has to do with electricity. The official wholesale price index (WPI) for electricity has gone up by a mere 4 per cent between January 2011 and July 2012. This is a little difficult to believe when many States – from Tamil Nadu, Karnataka and Andhra Pradesh to Delhi, Rajasthan and West Bengal – have hiked tariffs by up to 40 per cent in the last one year. To the extent these are not captured in the WPI data, they understate the overall inflation number. The second, too, relates to energy, though not in terms of understating as much as suppressing inflation. This arises from the Government actually not raising diesel, kerosene and LPG prices for well over a year now, while not doing so for almost 2.5 years in the case of urea. These four controlled commodities have a 7.9 per cent combined weight in the general WPI. In the event of their prices going up – which cannot be postponed too long – the effects on inflation will be both direct as well as cascading. That would again undermine the sustainability, if not credibility, of the current sub-seven per cent inflation figure. Either way, it may not be enough to convince the RBI to reverse its hawkish monetary policy stance.

All this only reinforces the stickiness of inflation – statistical or otherwise – in the recent period, for which the Government or even the RBI seem to have no answers. The last time that the country had a benign inflation spell was in 2009, which saw an average annual WPI increase of 2.4 per cent. But that was a year when industrial growth, too, averaged a mere 0.3 per cent. Whether such a protracted slowdown would be needed to tame inflation again is a Hobson's choice that policymakers will have to engage with in the days ahead.

(This article was published on August 14, 2012)
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