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Inflation a global problem

Governments and policymakers across the world are confronting the same challenge on the back of a sustained spike in global commodity prices, reports Gaurav Choudhury.

business Updated: May 16, 2008 22:12 IST
Gaurav Choudhury

It's not India alone, where authorities are battling to keep growth on track while reining in price. Governments and policymakers across the world are confronting the same challenge on the back of a sustained spike in global commodity prices that is stoking inflationary expectations.

While India’s wholesale price-based inflation rate rose to a a three-and-a-half-year high of 7.83 per cent per cent for the week-ended March May 3, China's consumer price index, the main gauge of inflation, rose 8.5 percent year-on-year in April.

Finance Minister P. Chidambaram hopes prices would ease with time, once the measures taken by the government, including a recent move to persuade steel and cement makers to cut prices, start kicking in.

“For the time being, we simply have to remain a little patient and hope that what has happened in the primary articles group, will be reflected some time later in the manufactured group as well,” he said. “Our expectation is that inflation will moderate. We are waiting for steel and cement price cuts to come into force. You have to be patient,” Chidambaram told reporters shortly after the government released the price update on Friday.

The surge in inflation has forced the Reserve Bank of India to persist with a tight money policy, much in line with what central banks have done in other parts of the world. China has raised interest rates six times and the reserve ratio, the amount of funds that banks mandatorily have to park the central bank, 14 times since 2007.

Inflation has been a major concern in the European Union (EU) as well. The average forecast for 2008 inflation from experts taking part in the ECB's Survey of Professional Forecasters (SPF) rose to 3.0 per cent from 2.5 per cent.

A high rate of inflation could have a significant bearing on Indian economy’s overall growth through lower aggregate demand of manufactured items and low investment growth, economists said on Friday.

Besides, a fear of a possible recession in the USA could worsen matters further. Prime Minister’s Economic Advisory Council headed by former Reserve Bank of India (RBI) governor C.Rangarajan, had projected an 8.5 per cent gross domestic product (GDP) growth for India in 2008-09.

Economists now believe that the growth could fall further as policy focus shifts from high growth to price control. After growing at a blistering 9.6 per cent in 2006-07, government’s own estimates said it grew by 8.7 per cent in 2007-08.

“The high rates of inflation would have a bearing on the India growth story. It would also depend how long the situation of high inflation persists. The pressure on inflation is likely to persist due to high crude oil prices,” said principal economist of credit rating and consulting firm DK Joshi.

“It will certainly affect demand and eventually growth of the broader economy,” Delhi-based economist TK Bhaumik said.