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Inflation worries unabated, though inflation loses momentum at 7.82%

	May 26, 2008

Annual inflation rate topped 8 per cent in March for the first time in 3-˝ years, revised data showed on Friday, and analysts said a looming fuel price rise could push it closer to double digits. Preliminary data for May 10 showed the wholesale price index rose an annual 7.82 percent, close to the previous week's annual rise of 7.83 percent and market forecasts.



But the reading for March 15 was revised sharply upwards to 8.02 percent from 6.68 percent, making it the highest inflation rate since September 2004, and fuelling expectations the Reserve Bank of India (RBI) would take more steps to try to contain prices.



Finance Minister P Chidambaram on Friday last told reporters the government was watching the situation closely and may take more steps as and when necessary. Inflation, hovering a notch below 8%, is way above the central bank’s comfort zone of 5.5% for the fiscal year.



For the week ended May 10, food prices moved both ways while prices of manufactured products like textiles and cycle tyres rose. Aviation turbine fuel price shot up sharply by 10%. Home budgets will feel less pain as the prices of fruit and vegetables have declined noticeably. The prices of pulses, milk and sugar too have shown a decline. The prices of grains, cereals, eggs, meat, tea and fish, however, moved up.



Meanwhile, finance minister has urged patience while promising further measures to rein in inflation, if needed.



“As it stands now, for another 3-4 months, inflation will remain high even though it would show a tendency to decline at around 6%. Inflation may reach even 5.5% by end of the fiscal,” council chairman C Rangarajan told reporters on the sidelines of a seminar on the 13th Finance Commission.



“March was the worst inflation-affected month. Inflation rate is unlikely to reach that far in near future. We are seeing price stability in most products, particularly food items. Cement and steel prices too have cooled down,” Prime Minister’s Economic Advisory Council member Saumitra Chaudhuri said.



The unacceptable level of price gains is preventing the government from passing on part of the global fuel price rise to the consumer despite pleas from public sector oil companies. A hike in fuel prices could further fan inflation.



A weakening rupee and soaring global oil prices are putting pressure on inflation. It is important for the government to pass on some part of the high global fuel prices to the consumer. This will also encourage oil conservation and efficient usage. Crude oil prices have doubled from a year ago and touched an all-time high of more than $135 a barrel on May 22, raising concern that oil import costs will rise. India relies on crude oil imports to meet three-quarters of its energy needs.



“Indications of a normal monsoon this year point to the softening of food prices. Inflation is however likely to hover around 7.5% in near future. Despite inflation rate remaining above the RBI’s acceptable levels, economists feel that RBI is unlikely to raise interest rates as raising interest rates could adversely affect industrial output.



Oil Secretary, M S Srinivasan told reporters on Friday last that the government is working on a proposal to raise retail prices of gasoline and diesel, cut import duties on fuels and give bonds to oil companies to narrow losses. The government had raised gasoline and diesel prices for the first time in 20 months in February. It also persuaded cement and steel producers to cut prices.



Steel makers agreed early this month to lower prices for the second time since April. The government also scrapped import duties on edible oils, steel products and banned export of cement, pulses, rice, wheat and edible oil to contain prices.



Prime Minister Manmohan Singh has also expressed confidence that these steps would help moderate inflation in 8-10 weeks.



An internal assessment by top government officials, shared with Prime Minister Manmohan Singh on Friday, projects inflation as measured by the wholesale price index to slide to a comfortable below 5% by March 2009—just in time for the 2009 Lok Sabha elections.



These projections were discussed at a meeting convened by the Prime Minister on Friday, the third such meeting in two weeks, attended by finance minister P Chidambaram, Planning Commission deputy chairman Montek Singh Ahluwalia and agriculture minister Sharad Pawar.



The projections, which factor in rising oil prices, projected food production as well as the monetary and fiscal measures taken in recent months, indicate that in a best-case scenario, inflation could actually cool off to as low as 3.5% by next March. The projections come at a time when the government is facing serious flak from allies and opposition parties over rising prices.



While inflation will fall to acceptable levels by September and manufacturing will grow at double digit rate since, in the second year of the XI Plan, the infrastructure sector will receive Rs. 4,20,000 crore of investment as a result of which the infrastructure GDP spending ratio will go up to 9 per cent in the XI Plan from 5 per cent in the X Plan.



While delivering a keynote address at the interactive session with the industry and its ‘Vision 2020’ organised by Associated Chambers of Commerce and Industry of India (Assocham) on Wednesday last, Dr. Ahluwalia also asserted that the slowdown, being witnessed by industry, would certainly end by the end of the current calendar year as economic uncertainties of 2008 would have resolved themselves by then.



Mr. Ahluwalia said that inflation was a serious concern and the short-term measures taken by the UPA Government to tame it would start yielding results in the next four months.



Referring to the gross domestic product (GDP) growth, Dr. Ahluwalia said the GDP for fiscal 2007-08 would be higher than the officially projected level of 8 per cent plus as agricultural production which increased in the recent months had not been taken into account in the revised GDP projections.



He exuded confidence that foodgrains production during the XI Plan would accelerate by 2.5 per cent each year.