India’s retail inflation rose sharply to a nine-month high of 11.24% in November from 10.17% in October. Vegetable prices grew 61.6% during month from 45.7% in October while overall retail food inflation in November stood at 14.72% from 12.56% in the previous month, showing how costly food has forced millions of Indians to make expenditure adjustments to stay afloat.
Wholesale prices-based inflation also rose to a 14-month high of 7.52% of high food prices. Industrial output contracted 1.8% in October from 2% in September, mirroring tepid sales of consumer goods such as cars and televisions even during the festival month. It could get worse with the Reserve Bank of India widely expected to announce another round of interest rate hikes this week to tame galloping inflation.
The toxic mix of high inflation, low investments and falling rupee could not have come at a worse time for the ruling UPA government. The price rise was a major issue in the recently concluded assembly elections in which the Congress party returned with a poor showing. The prices of almost all everyday products and services — from food to footwear and movie tickets to medicines — have surged in the last 12 months, partly stoked by a falling rupee.
But there is a silver lining. Inflation, at least vegetable inflation, is showing signs of bottoming out. Over the last three weeks there has been a sharp fall in onion prices — from about Rs. 80 a kg to about Rs. 40 currently — hammered down by arrival of fresh supplies. This partly explains that the rise in food prices was due to an ‘extraordinary’ increase.
Likewise, on the industrial output front, a normal monsoon and consequent pickup in rural incomes could push up consumption growth. Finance minister P Chidambaram is right when he says that monetary policy or using interest rate hikes is a rather “blunt instrument” to tame inflation. A more lasting solution to inflation control is to increase supplies and to “radically transform the manner in which commodities and food articles are stored, transported, distributed and sold in various markets.” The key to most of these are with the state governments.