Every number tells two stories | india | Hindustan Times
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Every number tells two stories

india Updated: Jun 19, 2009 23:01 IST
Hindustan Times
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The Indian government has been quick to say that the fact that the year-on-year inflation rate has turned negative for the first time since 1978 does not signify a drop in domestic demand. This is certainly the case. The drop in inflation is largely a statistical mirage, a consequence of the unusually high price of commodities last year. The price of crude oil, which has fallen by nearly half in the past year, is the single largest reason that inflation has dropped off a cliff. There is no threat of a deflationary cycle. Those who have raised this bogey are more interested in inspiring an interest rate cut, for which there is a case but not in the inflation numbers.

What the government has glossed over is that inflation remains a problem. Especially for food prices, which hurt the average person the most. Prices of food items on the consumer price index are still rising. Unfortunately, the worst-affected items are exactly those which dominate the diet of the poorest. Rice, wheat and other cereals are on average 13.6 per cent more expensive than last year. Pulses and legumes are up a shocking 17 per cent. The continuing rise in food prices is a product of a number of different factors. One is that as Indians get wealthier, their consumption levels rise. Global prices for edible oil have been heading north for years and India imports as much as a third of its supplies. The government’s own policies have contributed to the price problem. By raising the minimum support price of wheat to 40 per cent more than production cost, it has, in effect, set an absurdly high floor for wheat prices. Thus the country has a combination of record stocks, and record high prices, of wheat.

Much more needs to be done to augment agricultural production, especially in pulses and edible oil. But if this is not combined with some degree of price flexibility, the gains will all be for producers and not the much larger population of consumers. Given that crude oil and steel prices are likely to begin rising again, once Chinese manufacturers run through their present commodity stocks, the evidence is strong that even when it is falling, inflation remains a cause for concern.