Rejoice — if that is possible in these strained times. The inflation hump is decidedly behind us and the price line could settle below the Reserve Bank of India’s target of 5 per cent for March 2009. The principal reason for the optimism is falling crude oil prices, which fed into the latest inflation numbers through a cut in fuel prices at home. Another cut could be less than a week away. Reason number two is the winter harvest, which by the looks of it, is bountiful. 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 over 1 percentage point in the weekly wholesale inflation figure in the first week of December brings home the point far more tellingly.
The cheer could travel to the next fiscal year if crude oil does not spike again. The high base between June and November — when inflation rose to a peak of 12.63 per cent in August — will keep the rate of increase in prices suppressed for the first few months after the new government takes over. This will be key to continuity in efforts to pump prime the economy over the next 12 months. Monetary and fiscal expansion should now gather speed with the government and the central bank not having to continuously look over their shoulders at the price line.
More money can be thrown at banks to bring interest rates lower and public expenditure can be bumped up to pick up the slack in demand. The rupee, which has taken a hell of a knocking as our trade deficit zoomed to $73 billion till October, could get some respite if the price of crude oil, our biggest import, heads further down.
To the typical consumer, who has been reducing his spending on everything from cars to toothpaste, the respite is significant. Official data shows that over half of the average villager’s spending was on food in 2006-07. The figure is 39 per cent for the city dweller. Energy prices, meanwhile, command a hefty 14 per cent weight in the wholesale price index. One arm of the pincers, prices, has relaxed its hold. The other, cheaper credit, must follow if the buyer has to return to the market.