Why inflation is skyrocketing in India?

[anant1a]

Why inflation is skyrocketing in India

By Awanish K Mishra
Inflation has crossed the psychological barrier of 12 percent. It has breached 13 year old record defying bandobast by policymakers. But there is silver lining in the cloud. It has started consolidating, it’s loosing its momentum. Interestingly, the debate of inflation has now shifted to another level. People are more worried about inflation peaking out around 12 percent than the rate itself.

Has Inflation Peaked Out At 12%
Finance Ministry is of the opinion that inflation is consolidating around 12 percent. But it is hesitant to say, whether it has peaked out or not. Peaking out means the rate of inflation will not increase further. Our policy makers are non committal for the short term. They hope to see inflation at 8 percent level by March 2009.

Saumitra Chaudhary, Member, PM’s Economic Advisory Council has recently said, “Inflation may peak in November-December and slip into single-digit by March 2009. Going by the current price situation, there may be another round of monetary tightening.”
Finance Ministry’s Chief Economic Advisor Arvind Virmani is cautiously optimistic. At a CII conference in Chennai, he said, “The uncertain oil prices make it difficult to make short-term predictions, but in the next 12 months, the inflation rate would return to normal levels of 5-6%.” In my opinion, moderation in oil demand by developed countries, growing strength of dollar and near normal monsoon may bring inflation below 10 percent by November-December 2008.

It’s Cooling Down!
Let us see which components of wholesale price index are fueling inflation. As regards to inflation data dated 26th July, out of a total of 98 articles in primary article group, 18 articles have shown a decline in prices as compared to July 19, 2008. Another 53 articles have shown no increase in prices. Prices of 18 articles (out of a total of 19) in commodity group ‘fuel and power’ have not shown any increase.

In the case of ‘manufactured products’, out of a total 318 commodities, a large number, 299 in all, have shown no increase in prices over the last week. In the case of 4 commodities there is a decline in prices. The annual inflation rate for the group of 30 essential commodities at 6.66 per cent was marginally lower than the inflation of 6.67 per cent recorded in previous week. Only 15 products, particularly the cotton and woolen yarn, woolen cloth, groundnut cake, white printing paper, ball bearings, caustic soda, cement, newsprint and sugar witnessed an increase in prices. This indicates that inflation is more or less stable.

Global Forces Fueling Inflation
Indian inflation has much to do with global developments. It’s due to soaring oil and commodity prices. It has its root in the Gulf and Western countries. In a span of 5-6 months the rate of crude oil almost doubled to 145 dollar per barrel. Budgetary estimates made at 100-110 dollar per barrel went haywire.

The Government was compelled to take unpopular measure of hiking petro prices. Consequently wholesale price based inflation jumped from 8 percent to 11 percent alarming consumers as well as market participants. The fact remains that Indian inflation is very much a result of growing demand led by increase in per capita income. It is, therefore, that stiff monetary tightening by RBI is taking time in delivering desired result.

Who’s Responsible?
Who is responsible for inflation? The government, the global developments or the people. All of them are responsible to some extent. The Government because it didn’t foresee the spurt in oil price and didn’t increase the rate of domestic petro prices in consonance with rising oil prices; it didn’t book oil in futures market to buffer any upswing in prices.

Global developments like Iraq oil syndrome, Israel –Iran imbroglio, monopoly of OPEC countries on oil supply and poorly regulated oil future market have worsened the situation. The rise in per capita income has equipped people with surplus money to spend which has led to spurt in demand leading to demand-supply mismatch.

Ray of Hope
Oil prices have declined from the peak of 145 dollar per barrel to below 120 dollar per barrel. Slowdown in global economy, increase in production by OPEC nations and proposed tightening of regulatory mechanism governing oil futures may bring it further down. Normalcy of monsoon may ease pressure on food grain prices. Hike in CRR and Repo Rate will start showing their impact in coming days. These factors will keep a check on inflation and stabilise it further.

Government Should Act Tough
In the meantime, Government should act tough on hoarders. This will dampen bullish sentiment in commodity futures market and result in fall of prices. It should resort to purchase of oil options keeping in view further escalation in oil prices. The fact that the Government is ready to compromise with GDP growth rate in order to contain inflation and curb inflationary pressures is enough to indicate its seriousness, but this must be combined with prudent foresight and coherent action.

Courtesy: PIB, New Delhi.

[anant1a]

How long will India's double digit inflation last?

By S Sethuraman
India is battling a double-digit inflation, like many other emerging economies, largely resulting from the surge in global commodity prices, chiefly oil, food, metals and fertilizers. Overall, the international commodity prices are yet to moderate to an extent that would help countries including India to arrest the steady uptrend in inflation, already in double digit, and stabilise domestic price levels. Moving in that direction, the Government has announced further measures to strengthen availability of essential articles of daily consumption.

Supply management must have high priority along with demand control. Progress in the anti-inflation strategy, however, would depend much on whether the recent downtrend in global oil prices and some softening in cereal prices would become durable. Oil prices dropped from an all-time high of 147 to around 120 dollars by mid-August though it is still double the 60 dollars in March 2007. Oil prices are influenced by geo-political tensions and the US dollar’s exchange rate.

Cereal prices also eased in the second quarter of 2008 and this should be of some relief. With maximum wheat and rice procurement and a good kharif crop to be harvested, India is better placed with its food economy.

How Long Double Digit?
Reflecting world prices and domestic demand pressures, the annual rate of inflation began surging and entered double-digit in the new fiscal year. At 12.63 per cent in the week ended August 9, the annual rate of increase in the wholesale price index for all commodities was the highest in a decade and a half, a matter of utmost concern to Government, which has been tackling inflation through an array of fiscal, administrative and monetary measures on a continuous basis. While inflation which hurts the poor the most has to be brought down as early as possible, Government’s efforts at the same time seek to ensure that there is no disruption in the growth momentum.

According to the Finance Ministry, the current rate of inflation has also to be looked at the “base year” effect as the wholesale price index is measured on an annual point-to-point basis. That is, if the rate of price rise was too low in the relevant week of the previous year, even a small increase in WPI of the corresponding week in the current year would show up in a larger rate of inflation point-to-point. While prices of some articles may have softened, there are also significant rises in some other commodities, on a year to year comparison.

.The current expectations are for inflation to remain in double digit for some months to come but Government hopes that at least the rising trend could be halted by November, even if the annual rate does not revert to single digit before the end of the fiscal year, as predicted by economists. The Reserve Bank of India has been tightening lending rates in order to contain excessive liquidity and reduce aggregate demand.

Since monetary policy has a greater role in the present context to contain build-up of inflationary pressures and eventually to bring the rate of inflation down to single digit early in 2009, there could be further tightening of policy rates. This is to keep in check inflationary expectations, and additional demand pressures, emanating from salary increases to central government employees.

Containment of inflation is imperative for macro-economic stability and sustainable growth but a dramatic improvement can come about only if domestic measures are complemented by a sustained fall in global oil and other key commodity prices, as pointed out by the Prime Minister’s Economic Advisory Council.

Supply-Side Measures
With a record procurement and build up of reserve stocks in excess of buffer stock norms, Government has decided to offload upto six million tonnes of wheat in the open ‘market at intervals. It would include additional allocation to states for the requirements of the ‘above poverty line’ population, retail sales and for meeting needs of bulk consumers like roller flour mills. It is one of the measures to enhance availability especially during the coming festival season when prices tend to rise in the open market.

The Government has extended the ban on export of rice, wheat and pulses till April next. Although India needs to import edible oils – a sensitive item in price rise – exports are banned. For consumer benefit, a scheme for the supply of edible oil with a subsidy of Rs.15 per kilogram has been introduced. Ten lakh tonnes of edible oil are being imported and would be distributed to states for public distribution. Also, an additional quantity of five lakh tonnes of non-levy sugar (ex-factory) is being released for the festival season. In addition, the Government proposes to supply four lakh tonnes of pulses, a commodity always in short supply, with a subsidy of ten rupees per kilogram.

Among manufactured products category, steel price rises have also contributed to the inflation flare-up. After raising prices in the first half of the year, in line with international trends and the rising costs of iron ore and other inputs, producers have agreed to restrain themselves and hold the price line for three months. Government had imposed export duty on steel to augment domestic supply and later withdrew it when steel manufacturers agreed on restraint. With global prices falling recently, they have been urged to reduce prices correspondingly.

Growth Outlook
Global economic slowdown and unprecedented levels of inflation are impacting on emerging economies including India, slowing their pace of growth. India had gone through a five-year phase of high growth averaging 8.5 per cent. The Economic Advisory Council has projected a 7.7 per cent growth in 2008-09 as against the 9 per cent last year with a possible return to above 8 per cent in the following year.

Growth in USA, European Union and Japan, among the major industrial economies, has considerably weakened this year in view of the continued financial market turmoils, tight credit markets, US housing slump and elevated energy and non-oil commodity prices. Stability in the global financial system is unlikely to be restored in 2008, according to US economists.
Relatively faster-growing Asian economies, notably China and India are well-placed to absorb external shocks though they cannot avoid some fall-out such as a possible decline in capital flows and in external demand for their products in 2008-09. Altogether, a major challenge for Government to bring down prices while keeping economic growth intact in a pre-election year. ( Courtesy: Press Information Bureau)

[impriyankaa]

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[rahul.goyal]

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