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In negative territory

The real significance of headline inflation, as measured by the Wholesale Price Index, turning negative after three decades is largely statistical. Headline inflation stood at -1.61 per cent for the week ending with June 6, as against 11.66 per cent in the corresponding week of 2008. The “base effect” is clearly in evidence. Compared with 2008, the rate of price rise looks very low. Petroleum prices were sharply on the ascendant around this time last year. The Indian basket of crude oil, which was at $127 a barrel last year, has declined nearly 50 per cent to $68.68 a barrel in the week ending with June 6, 2009. Consequently, the fuel component of the WPI which was at 16.25 last year has come down to -12.83 per cent. Manufactured goods inflation has fallen from 10.28 per cent to zero. The descent of the WPI into negative territory was expected. Inflation was at 0.13 per cent on May 30 and has been hovering below the one per cent mark for nearly 12 weeks. Senior government officials are right in maintaining that the sharp decline in the weekly WPI and the distinct possibility of it remaining negative over the next few months are not a cause for worry. They do not connote deflation, which is characterised by a fall in demand. Economic growth continues to be reasonably robust, with the CSO recently estimating a higher-than-expected 6.7 per cent growth rate for 2008-09.

The sharp fall in headline inflation — primarily due to the base effect — can obscure the fact that food items such as cereals and pulses have continued to post double-digit inflation rates, providing no relief to the common man. Consumer price inflation remains high. For policy makers, even WPI inflation might once again become a matter of serious concern when the base effect wears off by September. Prices of commodities including oil have already started climbing. The government has hinted at the possibility of hiking the retail prices of petrol and diesel, a move that is sure to fuel inflation. The rather contradictory signals from the inflation data — negative inflation as measured by the WPI, with a strong possibility of a spike a few months hence — pose a new challenge to monetary authorities. The build-up of huge fiscal deficits over the last two years and the difficulties in effecting fiscal consolidation are major concerns, though the existence of excess capacity in many sectors should provide some cushion. There is a strong case for evolving a single harmonious measure of inflation for the use of monetary authorities. It is time India switched to the practice of developed countries in tracking headline inflation through the consumer price indices.

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