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Inflation to sub-zero levels in three decades! |
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The wholesale price index (WPI)-based inflation went sub-zero for the first time in 35 years for the first week of June, but top policy makers and economists dismissed it as a short-term statistical phenomenon, with no real implications for either the country’s growth or its monetary policy.
According to data released on Thursday last, the inflation index fell by 1.61% for the week ended June 6 over the year-ago period, after hitting 0.13% in the previous week. Officially, the benchmark inflation based on wholesale prices has tuned negative, but high inflation seems to be on the horizon, with economists seeing the figure rising to 5-6 per cent by the end of 2009, up from the current minus l.6 per cent and a steep 12 per cent in the third quarter of 2008.
The government has been quick to say that the fact that the year-on-year inflation rate has turned negative for the first time since 1978 does not signify a drop in domestic demand. The price of crude oil, which has fallen by nearly 50 per cent in the past year, is the single largest reason that inflation has dropped off a cliff. There is no threat of a deflationary cycle.
However, inflation remains a cause of concern. Especially for food prices, this hurt the average person the most. Prices of food items on the consumer price index are still rising. Unfortunately, the worst-affected items are exactly those which dominate the diet of the poorest. Rice, wheat and other cereals are on average 13.6 per cent more expensive than last year. Pulses and legumes are up a shocking 17 per cent.
The continuing rise in food prices is a product of a number of different factors. One is that as Indians get wealthier, their consumption levels rise. Global prices for edible oil have been heading north for years and India imports as much as a third of its supplies. By raising the minimum support price of wheat to 40 per cent more than production cost, it has, in effect, set a high floor for wheat prices. Thus the country has a combination of record stocks, and record high prices, of wheat.
Much more needs to be done to augment agricultural production, especially in pulses and edible oil. But if this is not combined with some degree of price flexibility, the gains will all be for producers and not the much larger population of consumers.
Retail inflation in India, as measured by various consumer price indices, still hovers around 8% while in economies such as the US, it has dipped into negative territory, currently at -1.3%.
Finance secretary Ashok Chawla described the trend as “unusual”, but ruled out any major policy shift. “Our assessment is that the WPI-based inflation is likely to be in the negative region for sometime to come,” he said.
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