Overall inflation based on WPI (wholesale price index) for all commodities soared to 8.56 per cent in January from 7.31 per cent in December last year, thereby breaching the Reserve Bank’s projection of 8.5 per cent by the end of the current fiscal two months ahead of official expectation.
With the Union Budget 2010-11 slated for presentation within the next fortnight on February 26, Finance Minister Pranab Mukherjee has another reason to seriously mull over the pros and cons of timing the withdrawal of the fiscal stimulus measures from the beginning of the new fiscal itself even as the industry has pleaded for a status quo at least for six more months.
In its third quarter monetary policy review earlier this month, the RBI had raised the CRR (cash reserve ratio) by 75 basis points to 5.75 per cent to render it mandatory for banks to park a larger quantum of funds with it so as to suck out excess liquidity of about Rs. 36,000 crore from the banking system as a measure to check rising prices.
Alongside, however, while indicating that the fiscal stimulus measures should also be gradually withdrawn by the government, the apex bank made it clear that monetary measures alone were not the answer to controlling food price inflation as it was a supply-side problem.
At the same time, rising food inflation, if left unchecked, has a tendency of seeping into the manufacturing sector and contribute to overall inflation, it said.
The WPI inflation figures for January reveal that the seeping may already be happening and may surge well over 10 per cent by the end of the fiscal if adequate steps are not taken.
The official data reveal that the current bout of rising food inflation was led by higher prices of sugar and potato which were costlier by 58.96 per cent and 53.39 per cent, respectively on a yearly basis.
On a monthly basis, while wheat prices were up four per cent, pulses such as masur were dearer by nine per cent and arhar by 6 per cent.
The index for the fuel group also rose by 1.8 per cent owing to higher prices of naphtha (up 21 per cent) and furnace oil (up 6 per cent) while bitumen, non-coking coal and light diesel oil rose by three per cent each.
With the rising inflation numbers coming in the wake of surging industrial growth, which is likely to lead to an overall economic expansion projected at around 7.50-7.75 per cent for 2009-10, the government’s dilemma would be to choose between sustaining high growth and containing inflation. In the event, the Finance Minister is expected to tackle the tricky issue by taking the middle path in his budget provisions.