Keep that genie in the bottle | india | Hindustan Times
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Keep that genie in the bottle

india Updated: May 14, 2013 21:48 IST

Hindustan Times
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The more than one percentage point fall in India’s wholesale prices-based inflation rate in April to 4.89% follows a similar trend in shop-end prices captured in the retail inflation data that was released a day ago.

Both indices broadly mirror what the government’s macro-managers have been arguing, if not hoping, over the last few months. The steep downward gradient in the inflation curve underpins the point that prices have been growing at a slower clip and the government, battling a slowdown, would like to keep it that way.

Food inflation — an approximate measure of how costlier the platter has become over a 12 month period — is now just above 6% from high double-digits not too long ago. Vegetable prices have fallen this April compared to last spring and it is only logical that it will show up in the broader food price index.

Any textbook primer would tell us that prices of most commodities are largely determined by the laws of demand and supply. Abundant supplies or a flood of provisions will usually pull down prices of goods and vice versa.

This is precisely the scenario what seems most likely to play out in the coming months in India as a bumper crop — following an expected normal monsoon — will only help temper prices down further. This, however, is only one side of the equation. In a slowdown, the rapidity at which goods are sold from shops and showrooms, serve as a handy lead to gauge the economy’s health.

Weaker demand for an item will pull down its price and its opposite is true as well. Industry-wide surveys have shown that new orders for goods fell in April in a sign of further slowdown in domestic demand implying people are putting off purchases to adjust for low income growth.

The larger question, however, is on what it would take to keep the inflation genie firmly bottled up. There are a few signals that the government would do well to keep a constant vigil on. Economists have rightly underlined the role of global commodity costs in India’s domestic prices. The value of the rupee, among other things, provides an early peek into future price movements.

A weaker rupee makes imported goods such as crude oil and gold expensive. Costlier crude oil and the resultant increase in fuel prices can knock up prices of most goods. So far, all indicators, however, point that India is headed towards a period of relatively moderate inflation. That said there is no gainsaying the fact about the wider significance of prices in an election year.

Conceptually inflation may be an economic construct, but politicians always try and keep one eye on the price movements because an untamed inflation monster can have grave electoral implications.