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Surge in inflation

The sharp increase of 0.5 percentage point in one week in the most widely-watched inflation measure, the wholesale price index (WPI), might have been unanticipated but there is no doubt at all that the price situation has been causing all-round concern for quite some time now. For the week ending January 6, the annual rise in the WPI was 6.12 per cent, the highest in two years. There is some substance in the argument espoused by, among others, Union Finance Minister P. Chidambaram, that the sharpness of the latest increase is due to the base effect: last year during the same period the WPI was marginally declining. But that does not in any way mitigate the pervasive nature of the price increases of food and articles of everyday consumption as well as those of a range of manufactured goods including steel. The Primary Articles group, which has a 22.03 per cent weightage in the WPI, has gone up by 9.28 per cent on a year-on-year basis, with food articles having a weightage of over 15 per cent increasing by 9.6 per cent. What is particularly worrying this time is that the price rise is primarily attributed to domestic shortages of essential items. Although as part of recent policy measures to minimise the supply side shocks, imports of certain items such as wheat and cereals have been allowed, there is no doubt that long-term solutions to price stability lie in increasing production of agricultural articles of mass consumption.

Ironically, what has until recently been considered to be the most important factor fuelling inflation in India and elsewhere — the high global oil prices — no longer finds a direct mention now, although it is naïve to discount their impact on the Indian price situation at any time. Because of the opaque retail pricing policy for petroleum products, it has not been possible to reduce the prices even when global oil is trading at around $52 a barrel. The Government has acted swiftly by lowering import duties on a range of commodities such as steel, cement, and capital goods. Measures to tackle the latest surge in inflation will have to involve demand side measures too. The Reserve Bank of India, which has been warning against overheating in certain sectors — especially real estate — is expected to signal higher interest rates when it submits its third-quarter review of monetary policy by the month-end. It might be a good time to follow the RBI's lead and devise new indices to measure the price situation. Neither the WPI nor the consumer price index fits the bill any longer with the changes in the structure of the economy.

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