The Hindu : Inflation could undermine feel-good factor

Online edition of India's National Newspaper
Sunday, Jan 18, 2004

National

National

Inflation could undermine feel-good factor

By Alok Mukherjee

NEW DELHI, JAN. 17. A sense of unease is developing in the Finance Ministry about the creeping inflation rate which has gone up to 6.09 per cent in the first week of January. The fear is that unless this rising trend is quickly controlled, the well-laid-out plans of the Central Government to woo the voters during elections could come unstuck.

The main concern of the Government is that a rising inflation could seriously undermine the ``feel good factor'' which has practically become the election slogan of the National Democratic Alliance (NDA). The fear is that not only will inflation make the cost of living expensive, but it would also erode the savings of the middle class since most deposit rates are currently below the inflation rate. In other words, the return on investments such as bank deposits and debt bonds have turned negative which could, in turn, negate the feel-good factor in the coming weeks.

For the middle class, inflation has systematically been eating into its savings since last year. The annual rate of inflation was 6.7 per cent in April 2003 and after that it continued in the range of 6.3-6.9 per cent for nearly two months. It did decline to around four per cent in August but soon climbed back to five per cent and more since September. In fact, inflation has risen further since November last year and has now gone back to the six per cent plus range.

For the salaried and middle classes, returns on savings are a big concern since most households now have some disposable income for savings and for investment towards a secure future. With the small investor continuing to stay away from the stock markets despite the unprecedented rise in the Sensex, savings and secured returns continue to be the mainstay for this section of the population which also happens to be the largest vote bank of the Bhartiya Janata Party (BJP).

The Government's worry arises from two factors. While the rise in inflation in the last two months has been mainly on account of fruits, vegetables, mineral oils, fuels and cotton textiles, the official expectation is that this rise would subside in line with cyclic behaviour. But what is out of the Government's control is the firming up of international oil prices.

The average price of the OPEC (Organisation of Petroleum Exporting Countries) basket had reached $29.5 per barrel at the end of 2003 while U. S. prices are hovering around $ 32 a barrel. Thus, global oil prices are about 10 per cent higher than what they were in early November and what is worse, the outlook for oil prices in the short term remains uncertain.

Secondly, a possible upward pressure, led by increases in commodity prices, has replaced the fear of deflation in the advanced economies. Therefore, these international developments enhance the possibility of `international transmission of inflation,' as the RBI Governor, Y. V. Reddy, put it recently.

Against this backdrop, the Finance Ministry has promised some corrective measures. One could be the flooding of the market with agricultural produce once the harvesting season begins and the second could be to keep a lid on petrol and diesel prices till elections are over.

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