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HindustanTimes Thu,31 Jul 2014

Inflation dips, but so what?

HT Correspondent, Hindustan Times  New Delhi, August 14, 2012
First Published: 13:18 IST(14/8/2012) | Last Updated: 02:15 IST(15/8/2012)

India’s overall wholesale price inflation may have fallen to a 32-month low of 6.87% in July, down from 7.25% in June, but soaring food prices fanned by stubbornly high potato prices have knocked up the cost-of-living sharply.

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Vegetable prices, despite a fall from the previous month’s growth of more than 40%, still remains high, partly explaining the high restaurant meal rates. With rains playing truant, it could get worse. The devil of the fresh price indices lay in its detail.

On a year-on-year basis, vegetable prices clocked a slower rise at 24.11%, while that of milk and allied products shot up 8.01%. Potato prices grew 72.96% during the month.

Lower food output, a possibility if rains don’t pick up in the next fortnight could fan prices further, adding to the government’s worries already strung in by sliding growth, a heavy debt burden and growing criticism of policy paralysis.

“The dip is welcome but inflation is still above the comfort level,” said Planning Commission deputy chairman Montek Singh Ahluwalia. “Five-6% is the tolerable level of inflation.”

Surging food costs have shrunk household incomes, as consumers have to pay more for the same goods. Such high inflation means the average middle-income Indians are making expenditure adjustments to keep afloat.

In the last three years, home loan equated monthly installments (EMIs) have only gone up. Home EMIs cannot be compromised, so the budget is squeezed by cutting down on the usual monthly expenses and even on items such as clothing and consumer durables. In other words, higher prices and need to find additional money for EMIs have forced a cut down on purchases of televisions and cars. The resultant fall in demand hits companies, hurting their revenues, already boxed in by rising input and borrowing costs.

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