Could the economy be overheating?

The UPA government, which safely steered the economy through the downturn, is perhaps grappling with its biggest economic crisis: persistent high food prices, which rose 18.3% in the week ended December 25 from a year ago.

Prime Minister Manmohan Singh and top Cabinet ministers on Tuesday prepared to grapple with what looks like an "overheating economy", as rising food prices pose for the UPA government a major political risk.

An economy is said to overheat when rapid growth pushes up demand, and thereby, inflation -- a phenomenon looming over most of the so-called high growth BRIC (Brazil, Russia, India, China) nations.

Food inflation remains concentrated in a clutch of commodities, such as fruits, vegetables, meat, fish and eggs, while prices of staples such as wheat and rice are stable.

Changing consumption patterns due to rising incomes have resulted in higher demand for protein-rich foods. Poor supply and distribution amid rising demand for better quality food in rural households have pushed up prices, experts say.

Food items have a weight of 14.3% in the wholesale price index while manufactured food products have nearly 10% weight in the index.

The government's top economic managers are yet to take a view on whether  India – which has been an engine for global recovery after the financial crisis – was witnessing overheating.

The government's top economists are expected to closely monitor key data, like the Index of Industrial Production (IIP) due to be released Wednesday for more clues. "The IIP data that will come in tomorrow will give us a better idea (of whether the economy is overheating)," one of them said, requesting anonymity.

The IMF last week predicted that the Indian economy would grow 8.75% in the year ending March 31, and 8% in the following 12 months, propelled by high consumer demand and strong industrial growth.

Not all of the price rise could be because of domestic short supply.

"Rising food and commodity prices especially in South Asia are a cause of concern as they hurt the poor most. To some extent these are being transmitted from abroad due to interconnected commodity markets," Nagesh Kumar, chief economist of the UN's Economic and Social Commission for Asia and the Pacific said.

Food inflation may stay on the higher side and it no longer looks temporary.

"Actual prices will not come down because food inflation has acquired a large permanent component, like higher crop prices and production costs,"said N.R. Bhanumurthy, an economist with the state-owned National Institute of Public Finance and Policy. Higher wages could alone combat inflation, he said.


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