BUSINESS

Inflation overrides all other concerns financial scene

BALANCING ACT: A shopkeeper arranges pulses for sale in Jammu. The Government scrapped import duties on crude edible oils and banned exports of basmati and non-basmati rice amid a raft of measures to stem rising inflation.

BALANCING ACT: A shopkeeper arranges pulses for sale in Jammu. The Government scrapped import duties on crude edible oils and banned exports of basmati and non-basmati rice amid a raft of measures to stem rising inflation.   | Photo Credit: — PHOTO: AP

Price rise is always a highly sensitive issue in a political sense. More so, when the country is in a pre-election mode



The Government’s efforts so far have involved fiscal and administrative measures to ease the supply of certain articles and commodities whose high prices had contributed to inflation.



For quite some time inflation has been the most pressing concern of the macro economy. Even so, when the data for March 15 showed inflation at a 13-month high of 6.68 per cent on a point-to-point basis, alarm bells started ringing.

The rate has since gone up to 7 per cent in the next week. After an emergency meeting of the Cabinet committee on prices on March 31, a number of new measures to dampen prices were announced.

These were in addition to the measures announced over the previous two weeks. In fact, given the gravity of the crisis, it is most likely that the Government will try to tackle the price situation on a daily basis.

Supply side measures

The Government’s efforts so far have involved fiscal and administrative measures to ease the supply of certain articles and commodities whose high prices had contributed to the inflation. Exports of steel, cement and certain minerals were made less attractive so as to increase their supply in the domestic market.

Earlier, the Government had slashed the import duty on edible oils and banned their export. These steps were expected to give temporary relief.

Over the medium term it will be necessary to remove bottlenecks and strengthen the supply chain in these commodities.

After the March 31 meeting, the Government effected further import duty cuts — on butter and ghee and edible oils. In a few other cases, duty was brought down to zero.

There are besides other steps aimed at persuading producers — as in the case of steel and steel products — whose demand on a global scale far outstrips supply. But there are limits beyond which persuasion will not work.

For the government, imposing price controls is an extremely difficult option. Among others, it involves taking sides.

For instance, the interests of ore producers differ from those of steel makers. There are then end users of steel such as auto component manufacturers.

Politically sensitive

Both economic and political factors explain why inflation has assumed such menacing proportions. Price rise is always a highly sensitive issue in a political sense. More so when the country is in a pre-election mode.

The Communist Party of India (Marxist) held its 19th party congress at Coimbatore last week. Price rise naturally figured prominently in party deliberations.

The party decided to launch an agitation against price rise and made a number of suggestions in its declaration for reining in prices of essential commodities. Not to be left behind, other main political parties too raised their protests.

There is no way the price rise can be delinked from contemporary politics. Not that the economics of it is any less important.

The March 22 WPI inflation at 7 per cent (over the corresponding week last year) represented a 0.32 percentage point increase over the figure for the previous week, one of the biggest increases recorded for a week.

Second, last year, at the same time, inflation was 6.54 per cent. Hence one cannot cite a “low base effect” to explain the latest price rise.

On the contrary, inflation which was already high at this time last year has gone up even more this time. Three, inflation has been above 5 per cent — the RBI’s tolerance level — over the previous five weeks.

Measurement issue

Assessing the price situation in India calls for an understanding of the way in which it is measured. The Wholesale Price Index (WPI), the most commonly referred to index to measure inflation, is released every week. There are four variants of the consumer price index — the CPI-UNME (urban non-manual employees), CPI-IW (industrial workers), CPI-AL (agricultural labourers) and CPI-RL (rural labour). The figures for these are released once a month.

Efforts are on to ‘harmonise’ the indices and arrive at one that is more representative of the price situation. The WPI index, though not an ideal one, is the most frequently referred to indicator. It should be noted that the WPI and the various CPI indices involve the choice of appropriate baskets of commodities.

Weights are thereafter assigned to them. Thus primary articles are given a 22.02 per cent weight in the WPI index, the category fuel, power, light and lubricants account for 14.23 per cent and the balance 63.75 per cent cover manufactured articles.

The classification given in the index and the weightage accorded to each group (and sub-groups) are obviously very relevant to understand the price situation and the remedial measures taken.

It is easy to blame food articles for the price escalation but that is only partly justified. There is no denying the fact that there is food inflation at a global level and to the extent we are importing wheat and a few other food items, we are in a sense importing inflation .The prices of many other commodities have also risen in the global markets.

It is in the non-food primary articles group that there is a high price rise. In the second category — fuel, power ,light and lubricants (with a 14.23 per cent weightage in the WPI index — the price rise has been muted, an obvious reason being that through administrative action global oil prices are not fully reflected in consumer prices for petroleum products in India.

Prices of manufactured products have increased on top of a rise in edible oils, metals and metal products. But the price rise is not uniform for all the items in the group.

But because manufactured articles have a large weight in the index, a rise in a few items translates into a disproportionately large rise in the index as a whole.

Since global prices of agricultural commodities, especially of the staples, are soaring, importing them to douse price pressures is not a worthwhile proposition though justified to build buffer stocks.

Inflation is bound to figure right at the top of the agenda of the annual credit policy statement due to be unveiled at the end of the month. Price stability versus growth has been a difficult dilemma for the central bank, especially now when the economy is slowing down. But in an election year, the price situation will claim all the attention.

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