Early signals suggest that the worst is yet to come. A large part of our inflation is ‘imported’ and the global marketplace looks anything but soft.

It would be rather premature and, possibly dangerous, if the information that the wholesale price index is down to just about 3 per cent (November 10) creates a smug feeling in New Delhi that all is well on the price front. Indeed, it is time to stay alert. Food inflation is still considerably high. Consumer food prices are far above what the wholesale price index indicates.

Early signals suggest that the worst is yet to come. A large part of our inflation is ‘imported’ and the global marketplace looks anything but soft. Crude prices are ruling close to $100 a barrel. The ever-tightening demand-supply fundamentals have set the market on fire; and, contrary to popular belief, the non-commercial or speculators’ position on the bourses is limited. Even if a technical correction were to occur, it would be temporary.

The market consensus is that crude oil would well continue to trade at $85-95 a barrel in the first quarter of 2008. Metal prices are softening on concerns of a slowdown and rising inventory, but robust Asian demand is expected to lift the market in first quarter of 2008 when current inventory is drawn down. Selectively, base metals face an upside risk sooner rather than later. Agricultural commodity prices have hit the roof in the last six months. Wheat, corn (maize) and vegetable oil markets have nearly doubled from last year’s levels. Negligible relief is expected in the coming months. Burgeoning biofuels demand and the resultant competition for acreage among crops would continue to be the theme for 2008. At home, the Rabi crops prospects are a matter of concern. Planting of major crops — wheat, pulses and oilseeds — is behind schedule. Soil moisture conditions, especially in the agriculturally-important States of Punjab, Haryana, Uttar Pradesh, Rajasthan and Madhya Pradesh, are less than satisfactory. Weather would be a critical crop determinant over the next eight weeks. There is nothing to suggest that the country is going to harvest a bumper crop. It is highly likely that New Delhi is now shoring up wheat stocks through imports at fancy prices possibly to face an eventuality it has foreseen. In any case, the market is keeping a close watch. Prices will begin to spike as information on crop conditions begins to flow in. How much more can the rupee strengthen to make imports cheaper? The poor are the worst hit in these times of high food-related inflation.

A strong public distribution system and a transparent welfare programme (food-for-work) are practical ways to deliver food at reasonable prices to the under-privileged. In addition to rice and wheat, pulses and edible oil should be included for supply under the PDS since protein- and calorie-deficiency are pervasive among genuine PDS consumers.

Related Stories:
Wholesale price index seen at 2.9-3.1% in Nov
A tale of two ‘low’ inflation episodes
Inflation: The real measure
Inflation rate rises on costlier fuel, manufactured items

(This article was published in the Business Line print edition dated November 27, 2007)
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