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Inflation worries

On Friday, the day after the Government announced a package of measures to counter the rising prices, the weekly data on inflation confirmed what was widely anticipated. The wholesale price index (WPI), the most widely used measure to track inflation on a year-on-year basis, breached the psychologically important mark of 5 per cent for the first time in 50 weeks to touch 5.24 per cent on June 10. The previous week, it was 4.72 per cent; a year earlier 4.5 per cent. As Finance Minister P. Chidambaram was quick to point out, the current spurt in inflation is due to "the pass through" of high petroleum prices. Indeed it is the first time official inflation data have captured the recent rise in the prices of transportation fuels. On June 5, the retail prices of petrol and diesel were increased by Rs.4 and Rs.2 per litre. The index for fuel, power, light and lubricants, which has a weight of 14 per cent in WPI, rose by 1.7 per cent. The higher transportation costs are reflected in the higher prices of food and other items of everyday use. Primary articles (including food), which have a 22 per cent weight in WPI, rose by 0.2 per cent. Even the index for manufactured goods recorded an increase of 0.2 per cent. The ripple effects of the higher petroleum prices will be felt for a long time. Equally ominously for India, despite the recent increase, consumer prices of petroleum products are still out of line with international prices, which have been marked by a great deal of uncertainty.

This rise in inflation is a global phenomenon. Along with many other countries, India is learning that there are no simple solutions. Restraining credit growth by raising interest rates has not always been feasible. Although the Reserve Bank of India recently signalled higher short-term interest rates, by and large it has preferred to restrain an explosive growth of bank lending only in certain sectors where bubbles are seen to be developing. The central bank has to strive for a balance between the imperatives of holding the price line and meeting genuine credit requirements. For policy makers, supply side solutions involve the balancing of conflicting interests. The Government has decided to allow the import of wheat, pulses, and sugar under certain conditions while temporarily barring the export of pulses. Evidently the Government would have tried to balance the interests of domestic producers and consumer. Policy makers already face this dilemma in fixing procurement prices, minimum support prices, and the price charged for wheat through the public distribution system. The import of food items is a temporary solution. The way forward is stepping up investment in agriculture to improve its growth rate from the present 2 per cent level. The Government expects inflationary expectations will come down with the imports and one hopes it is proved right. However, the major threat of higher petroleum prices will not go away.

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