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INFLATION ON A SLOW BURNER

THE FIRES OF inflation no longer burn as strongly as they did in the mid-1990s, but they have certainly not been fully controlled. The recent trends have been particularly disturbing. Over the past couple of months prices have been demonstrating a stubborn upward rise, so much so that it is now almost certain that the current fiscal year will end with wholesale price inflation above the target of 4 to 4.5 per cent. The official wholesale price index (WPI) for the week ended February 14 placed the annual rise in prices, on a point-to-point basis, at 5.8 per cent. Inflation has drifted down since early January when it crossed 6 per cent. However, the level is still too high for comfort and the slow pace of decline should be worrying a government that hopes to be re-elected to office.

It is unusual that wholesale price inflation, on a point-to-point basis, is now higher than what it was this time a year ago. It is just as unusual for inflation, when measured taking into account the average level of prices during the past year, to rule at 5 per cent, compared with a mere 2.5 per cent in February 2003. The fiscal year 2002-03 was affected by a drought while the harvest has been bountiful this year; the positive impact on prices should therefore have worked itself through the economy. It is, however, not food articles that are pushing up prices. As the Reserve Bank of India has pointed out in its most recent issue of Currency and Finance, the surge in wholesale prices has been confined to just four sectors — petroleum, iron and steel, edible oils and cotton — all of which are now registering a double-digit percentage growth. But because these are important sectors in the economy, the result has been a jump in overall inflation. Global trends have pushed up domestic petroleum prices, which should have been even higher but for the Government's election-eve directive to the oil companies that they should not raise rates any further. Iron and steel prices, according to the WPI, are currently 31 per cent higher than last year. The Government has moved to neutralise the impact of rising global and domestic demand: customs duties on steel have been reduced, excise is to be cut, and export benefits are to be frozen. The impact of these decisions will be felt only over the next few months. The categories of raw cotton and cotton textiles are suffering from the effect of a shortfall in domestic production of the basic raw material. Cotton is the one major crop that was not blessed by the monsoon last year. Finally, the rise in prices of edible oils, where the inflation rate has recently declined but is still over 11 per cent, is a mystery. Oilseed production has been at a record high and there have also been large imports of the finished product. Rising incomes are apparently boosting consumption demand for edible oils.

The alarm bells tend to ring only when inflation crosses 10 per cent. But even with the recent stubbornness, a double-digit spike in prices seems an unlikely development. What, however, should begin to make the Government and the RBI nervous is the fact that consumer price inflation has begun to rear its head. Retail prices usually react to changes in the WPI after a lag of some months. Yet the latest index of consumer prices for industrial workers shows a jump in point-to-point inflation from 3.7 per cent in December 2003 to 4.3 per cent in January 2004. There has been a similar even if marginally smaller rise in the consumer price indices for agricultural and rural labourers. Consumer price inflation is still low, but the pace of increase should cause concern.

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