Inflation is spoiling the government's celebration of India's quick recovery from the effects of the global crisis. The Wholesale Price Index (WPI) figures for May point to three worrying trends. First, for the fifth month now, the aggregate annual rate of inflation as reflected in the month-on-month increase in the WPI has been near or well above double-digit levels. The figures for May put inflation at 10.2 per cent over the year. Secondly, the current inflation is particularly sharp in the case of some essential commodities, as a result of which the prices of food articles as a group have risen by 16.5 per cent and of foodgrain by close to 10 per cent. Finally, there are clear signs that what was largely an inflation in food prices is now more generalised, with fuel prices rising by 13 per cent and manufactured goods prices by 6-7 per cent.
The government's response is that while this is a matter for concern, the trend is likely to reverse itself with the onset of the monsoon. To the extent that any policy response is being spoken of, the reference is mainly to a tightening of credit and an increase in interest rates by the Reserve Bank of India. This ignores important structural influences on the pace of price increase in the current conjuncture. One is the long-term neglect of agriculture, which has affected the level and pattern of agricultural production to an extent where supply-side constraints are leading to inflation every time growth picks up. The sudden and sharp hike in the support prices for pulses announced recently is an acknowledgement of this problem by the government. However, given the likely lag in output responses, the immediate fallout of that price increase could be an aggravation of inflationary trends. A second structural influence is the effect the policy of reducing subsidies, raising administered prices, and dismantling price controls has on the costs of production. Even when inflation is ruling high, the government is contemplating deregulation of the pricing of universal intermediates such as petroleum products. Finally, inflation is high and persistent, despite expectations of a normal or good monsoon, because the decision to give private trade a greater role in the markets for essentials has provided the basis for a new bout of speculation, which the government seems unable or unwilling to control. It is to corrections in these areas that it must turn when looking for a solution to the inflation problem — rather than merely look for relief from monetary policy adjustments.
