In what is the most significant economic data release ahead of the national elections, the government announced on Friday that wholesale price-based inflation (WPI inflation) eased to a nine-month low of 4.48 per cent in February. At the same time last year it was 7.28 per cent, while in January 2014 it was 5.50 per cent. The new data closely follow the faster-than-expected moderation in retail inflation based on the consumer price index (CPI inflation), which fell for a third consecutive month to a 25-month low of 8.10 per cent in February. The decline in overall inflation is attributed to a sharp fall in food and fuel prices. Wholesale vegetable prices fell by 10 per cent from January. Welcome as the February inflation data are, they may not be sufficient to influence the Reserve Bank of India’s next credit policy announcement, due on April 1. This is because for policy purposes the RBI has shifted its focus from WPI to CPI inflation which, despite the recent decline, is still high. The changed emphasis is also in line with the recommendations of a high-level RBI panel which in January suggested consumer inflation to be the main monetary policy anchor. It also suggested moving to a retail inflation target of 4 per cent in three years with a 2 per cent band on either side. That, in turn, suggests that the RBI might at best hold the interest rates in its forthcoming review.
Moreover, core WPI inflation, which excludes volatile food and fuel prices, went up to 3.15 per cent from 3 per cent in January. Elevated core inflation prompted a rate hike by the RBI in January. The fear is that any pick-up in growth or a cut in interest rates would fuel a price rise. Besides, seasonal declines in vegetable prices which are behind the fall might be reversed, stoking inflationary pressures again. Already unseasonal heavy rains and hailstorms in parts of Maharashtra and a few other important vegetable-growing States have damaged crops. For the government, fighting a grim electoral battle, the recent inflation data cannot bring much cheer. Inflationary expectations, which are based primarily on retail inflation, remain elevated. High retail inflation perversely affects the poor and is bound to have an impact on the ruling coalition’s electoral prospects. Despite the decline in February, inflation remains a big worry for the government which has had very little to cheer from recent economic data. After receiving confirmation of a sub-5 per cent GDP growth for the current year, factory output figures for January are not at all encouraging. Persistently high inflation limits policy options to encourage growth, such as through a cut in interest rates.