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A tightrope walk

The government has to balance the need to rein in inflation with the necessity of keeping the GDP growth rate healthy. Result: Prices will continue to pinch for a few more months, report Sanjib Kr Baruah and Abhijit Patnaik. See graphics

delhi Updated: Jul 21, 2010 02:15 IST

Parbhat Lal Saini, 58, is a worried man.

“I wanted to buy a kilo of tomatoes. But at Rs 60 a kg, I will have to make do with just 250 gm. I’ll ask my wife to make it last as long as possible.”

Saini, a farmer, lives in a shanty at Yamuna Pushta, one of the least sought-after addresses in Delhi. Sitting on a charpoy, he says: “Customers complain about my prices. But I, too, have to pay high prices for everything and have to earn enough to make ends meet.”

Spiralling food prices are biting everyone. With food inflation levels still ruling at 14 per cent, many items are already out of reach of the poor.

The million-rupee question

Will inflation spoil India’s party and dampen its robust recovery from the global slowdown?

N.R. Bhanumurthy, professor, National Institute of Public Finance & Policy, a think tank, attributes the high food inflation to three factors:

A large permanent component due to the increase in the price at which the government buys food products from farmers (known as minimum support price);
A rise in input costs, mainly labour;
Two years of bad monsoons.

“This has led to a permanent rise in overall prices,” says Bhanumurthy.

Recent figures peg the wholesale price index-based June inflation rate at 10.55 per cent. And there is a possibility of this being revised upward in the coming months.

Non-food manufactured inflation—RBI’s core inflation measure—surged to 7.3 per cent from 6.6 per cent in May. Fuel inflation increased to 14.3 per cent from 13 per cent in May, mainly on account of the recent fuel price hike.

Some experts worry that the worst is yet to come. Matthew Joseph, senior consultant, Indian Council for Research on International Economic Relations, sounds ominous. “Inflation has not peaked. It will cross the 12 per cent mark. The softening (fall in the inflation rate) will take place only after September, though it will not fall to 5-6 per cent by the year-end as the government is claiming,” he predicts.

However, Joseph is in a minority.

Government inaction

Policy makers and most independent experts are confident that inflation will begin to fall very soon. But by betting heavily on a good monsoon and a bumper crop this year, the government is simply waiting.

Happily for it, the India Meteorological Department has forecast a normal monsoon this year.

“The long-term average inflation, at around 4.5 per cent over 2008-10, is well within RBI’s comfort zone,” says Pronab Sen, until recently the government’s chief statistician.

Food inflation over this period, at more than 11 per cent is almost double the range seen over the preceding two years. “The pain has come from food,” said Sen.

Economists say there is little to worry about from a macroeconomic perspective. But there is a problem from the consumers’ point of view.

And this is where questions arise. Despite data showing rising sales of motor vehicles, consumer durables, residential housing and a host of other items, this can quickly taper off if prices continue to rise. That’s precisely what happened in 2008.

“Future growth depends on the investment momentum and how quickly consumer demand rises. Rising inflation has put a question mark on both,” says Sen.

Deficiencies galore

Indian agriculture suffers from several structural and infrastructural deficiencies, which can be fixed only over the long term. Primary among them are the absence of adequate refrigeration and storage facilities, poorly functioning food distribution chain and policy roadblocks to an efficient price discovery mechanism.

“We are focused on these long-term measures. We’re also taking measures like cutting customs duties and banning future trading in some items (to help bring food prices down),” says Mohan Prakash, Congress spokesperson.

Monetary measures

The RBI, meanwhile, is trying to tackle rising inflation by increasing interest rates. This will raise prices, temper demand and, hence, growth rates. But it is unclear if this will work since food inflation had started rising even when the growth rate had slowed in 2008-09.

“The government has been saying for long that prices will come down after a few months, how a good monsoon will bring down prices. It is playing the waiting game even as the common man suffers,” fumes Nirmala Sitharaman, BJP spokesperson.

Despite the gloomy short-term price situation, the economy remains robust.

The IMF has predicted a 9.4 per cent growth in 2010 calendar year. Finance Minister Pranab Mukherjee, however, is betting only on growing at a slightly lower (but still steroid-charged) 8.5 per cent during the current financial year.

Mukherjee and the RBI will have to walk a tightrope over the next few months to keep inflation in check without disturbing the overall growth momentum.

Meanwhile, common people like Parbhat Lal Saini will continue to complain for a few more months, but their pain is expected to ease before it becomes unbearable.