S Gangadharan

Inflation is stalking the nation; at 6.68% for the week ended March 15, 2008, the wholesale price index has hardened by 76 basis points in the span of a week and has surpassed the year ago rate of 6.56%.

So, the price environment is no longer benign as we were led to believe when the year-on-year increase was as low as 3.9% during the third week of January and ruled well below the ceiling of 5% set by the Reserve Bank of India.

Dissecting the price index, there is a disturbing pattern evident.

The price rise is not merely confined to primary articles, with the recent hike in key petroleum products also instrumental to some extent.

Now, even “manufactures” (the term statisticians and economists use to describe the whole class of manufactured products) have emerged as a main driver behind the surging prices —- a group where the rate of inflation had decelerated from 5.8% in the first week of April 2008 to a low of 3.5% during the week ended December 22, 2007. Since then, there has been a general flare-up in this group as well.

On a year-on-year basis, the primary articles group has hardened by 7.76% and the fuel group is up by 6.56%.

But, the index for manufactures has surged by 6.27%. In fact, over the week, while the general index has been higher by 0.80%, in the case of manufactured products, the increase has been of the order of 0.93%.

Among the constituents of the primary articles group, rice, condiments and spices,milk, fibres and oilseeds have also witnessed a steep climb over the year. And food-related items in manufactures have registered strident increases over the 12-month period. Edible oil pries have hit the roof, with a spurt of over 19%. But, manufactures appear to have stolen the thunder.

In iron and steel and tyres & tubes, the increase has been of the order of 26.86% and 11.28%, respectively, over the year.

During the latest week also, several manufactured items have turned costlier, including joists and rolls, heavy light structurals, bright bars, pig iron, steel sheets, plates and strips. Consequently, basic metals and alloys were up by more than five per cent; among them, iron and steel rose by 5.32% and machinery & metal products by 3.82%.

If in the case of primary articles, the main impetus to inflation has emanated from supplyside shortages, for manufactures, it appears to be cost-driven, both indigenous and imported. Seen in this context, the upsurge in the prices of manufactures —- and the respectable growth rate of industrial sector has recorded of late despite higher input costs, suggestive of keen demand - is easily explained.

Policy makers have to contend with this ugly reality —- the price chart makes a disturbing reader.

From the supply side, the ban on edible oils and tinkering with customs duty may mean a semblance of action to battle inflation; but, they amount to no more than token gestures.

For some relief, we have to wait till the rabi arrivals next month when the new crop of wheat, pulses and oilseeds may beef up availability to some extent. But, for a more enduring respite, much hinges on the outcome of the kharif operations, which is months away.

From the RBI’s perspective, the latest inflation numbers may be a source of embarrassment.

Its objective of keeping it within five per cent this fiscal has proved elusive and more importantly, its hope of dampening inflationary expectations has taken a knock. But, one should be realistic.Monetary policy cannot do much when the villain of the piece is the operation of a “shortage syndrome” in the economy.

The RBI’s hands are tied in the matter of moderating liquidity —- the heavy overhang of which has an inflationary potential —- as capital inflows continue unabated. Its policy response will be forthcoming only when it articulates the annual monetary and credit policy in about a month or so. But, if the price situation continues as it is, RBI is unlikely to change its stance. So, it looks like a goodbye to a softer interest regime for now.

Source : DNA