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Gird up for a difficult ride

The UPA government's welfare projects may be undone by the runaway price line.

india Updated: Jul 17, 2011 22:40 IST

Inflation has been perilously close to 10% in each month of the first quarter of 2011-12, which flies in the face of government reassurances that it will come down. Food is 9.1% dearer in April-June 2011 after an eye-popping 20.9% climb in the same three months a year ago. Likewise, fuel trotted along at 12.7% over the quarter, again on the back of a 14% rise a year ago. These are gloomy numbers. What they mean is R100 fetched you a quarter less of provisions at the grocer and fuel at the pump in May this year than it did in May 2009, when the UPA returned to power. If these trends continue, R100 will be worth R60 in May 2014 as the UPA completes its second stint. The scary bit is the government can do precious little to check either food or fuel prices.

The hike in fuel prices at the end of June is yet to make its impact fully felt in headline inflation numbers. The bigger worry is the government has run through most of its budgeted fuel subsidy. If crude oil prices are to be passed on entirely to consumers, the inflationary pressure will be thrice as much as it is now. The alternative is a ballooning fuel subsidy bill. Anyway, food subsidies are likely to hit the roof once the government unveils its plan to dole out grain to three-quarters of the population at below market prices. The effects of government spending on such a scale are bound to show up in the price line through the fiscal deficit.

Factory prices — which lie at the core of an economy’s inflationary expectations — clocked in at a 7.2% rise in the quarter, up from 6% in the same period of 2010. This is where policy-makers have some hope. A series of interest rate hikes that began in 2010 has taken some edge off consumption. But demand for goods and services is still strong enough for producers to be able to pass on increases in material costs. The Reserve Bank of India is likely to persist with its rate tightening cycle for much of this year till it feels it has managed to put the inflation genie back in the bottle. These efforts, however, need to be accompanied by some serious belt-tightening in the government. A remote prospect with a string of states going to the polls between 2011 and 2013. Heading towards the halfway point, the UPA needs a reality check on whether its ambitious welfare credentials could come unstuck at the price line.

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