For a government caught in a pincer attack of rising prices, sliding economic growth and sagging political stock, the latest price data gives an occasion to rejoice in strained times. Wholesale price index (WPI)-based inflation, India’s most commonly watched cost-of-living index, grew 5.96% — its slowest pace in 40 months.
The government’s macroeconomic managers have, perhaps rightly, lost no time in pointing out that the inflation hump is decidedly behind us and the price line could settle below the Reserve Bank of India’s (RBI’s) comfort zone of 5%. Falling global commodity prices including crude oil, combined with a potentially bountiful summer harvest, are the principal reasons for this optimism.
As the new crop enters the market in a month’s time food prices should stabilise. Precisely what policy-makers have been telling us for some time now, but the drop by nearly 1 percentage point in the monthly wholesale inflation figure between February and March brings home the point far more tellingly.
The cheer could travel to the average consumer, if the RBI, sprinkles water on these little green shoots by slashing interest rates next month. The RBI uses monetary tools to stymie demand and cool prices. Rising inflation — which had forced the central bank to keep interest rates high — has hurt consumption demand, a strong edifice of the India growth story.
The inflation trend, if it holds its line for the next few months, will enable monetary and fiscal expansion to gather speed with the government and the central bank not having to continuously look over their shoulders at the price line. Besides, the rupee that has taken a knocking on the back of the widening current account deficit, which effectively means that India is buying more from the rest of the world than what it is selling, could get some respite if the price of crude oil, our biggest import, heads further down.
As earnings rise, the proportion of income spent on food falls, even if actual expenditure on food rises. Economists caution that inflation is perhaps far more deeply embedded in the Indian economy than what official price indices reveal amid an ongoing debate about the efficacy of India’s price control measures.
Inflationary expectations — or the view among consumers and businesses of where prices are heading — are above 11%, which implies that households expect the cost of living to remain high partly because of costlier services. Time was when price rise was about food staples like onions. Over the last decade or so, the causes of the tears have gradually moved elsewhere. Inflation, thus, is not what it used to be.